As all stakeholders – investors, employees, consumers and the broader community increasingly call on companies to focus on environmental, social and governance (ESG) goals, the role of the board of directors in ensuring business sustainability has grown more critical. Boards are ultimately accountable for the strategies and actions their organizations take to meet the needs of such a wide range of stakeholders. They can’t simply delegate responsibility for ESG.
The demands of multi-stakeholder capitalism
Stakeholders are calling on companies to adopt the ethos of “do good, do well, do right.” Investors want a business to generate sufficient returns (do well) but they also want the organization to do so in a way that aligns with their values (do good) while addressing the needs of all constituents (do right). Regulatory requirements have also grown, especially in terms of disclosures.
Employees are increasingly seeking companies with values that are more consistent with their own. And customers are “voting with their wallets”—purchasing products and services from businesses with values more like their own. Regardless of whether the focus is decarbonization, ensuring diversity, equity and inclusion within the workforce, or treating employees and business partners fairly and ethically, multi-stakeholder capitalism sets high expectations for businesses.
Meeting these demands falls to boards of directors, who must find the right balance between short-term returns and longer-term sustainability. Failure to discharge duty-of-care responsibilities could impact the business (litigation risks, erosion of shareholder value, loss of brand equity and challenges attracting and retaining talent) as well as create consequences for the directors who could lose their seats.
How boards of directors can get ESG right
Though boards may be challenged to meet a wide array of rising expectations, there are several steps boards can take to meet these expectations and set their organizations on the path to success:
1. Embed ESG into the overall business strategy. Rather than treating ESG as an initiative or an activity, make it central to everything the organization does. And understand that ESG is not corporate social responsibility (CSR). CSR is what an organization does with profits, while ESG relates to how the profits are earned in the first place. Boards must ingrain ESG and sustainability into the fabric of the organization.
2. Acknowledge that sustainability is one of the board’s specialist responsibilities. Board members need to quickly get up to speed on the science behind ESG and sustainability. Directors need to be climate literate if not climate experts. Just like audit, risk management, remuneration, nomination and governance, consider setting up ESG or sustainability committees to deep dive into these complex issues.
3. Set science-based, meaningful and ambitious targets. This is an evolving discipline, but it’s important for companies to start evaluating their current state and setting improvement targets. You can set aspirational 10-year goals and also establish short-term targets to keep you on track. Don’t let perfection be the enemy of the good.
4. Build support across all levels of the organization, starting with the C-suite. Share the company’s ambitions internally as well as externally and use that to rally the organization to align behind ESG goals. For example, carbon emission reductions or increasing the proportion of women in leadership roles. Be transparent about initiatives, realistic in the external narrative and avoid concerns regarding greenwashing. Link ESG targets to executive and general employee compensation. Establish clear expectations for management and hold them accountable – a proven way to accelerate change. What gets rewarded gets done.
5. Recognize that ESG is much more than disclosures and regulatory compliance. Companies should meet the evolving disclosure requirements and standards (e.g., Task Force on Climate-Related Financial Disclosures and the Securities and Exchange Commission’s climate disclosure requirements). It’s also important to focus on the considerable opportunities for financial and nonfinancial benefits, including higher valuations, lower cost of capital, better customer retention and a better employer brand, to name just a few.
Meeting ESG and sustainability goals can be challenging, requiring the commitment and focus of the board as well as management. Successful companies will be those where management sees ESG as a critical business imperative and drives the change agenda with strong support from the board.
Indeed, one of the more important responsibilities of the board is to assemble a management team that is committed to the business benefits of a well-defined ESG agenda. ESG is clearly a business imperative, and the board plays a critical role in holding management accountable, advancing ESG, and balancing risks and opportunities—both in the short and long term.