For corporate directors, the current climate around ESG has been feeling like a rock-and-a-hard-space situation. On the one hand, a wave of regulations in the U.S. and European Union requiring, or soon to require, enhanced disclosure by publicly traded companies on climate-related and other social and environmental risks, all of which is likely to require boards to deepen their understanding of these issues and their implications for business risks and opportunities. On the other hand, U.S. investors are withdrawing billions from sustainable funds amid a rising ESG backlash, even as employees and customers continue to demand visible corporate commitments to sustainability. And anyone involved in the global supply chain can’t discount the importance of it.
The Chicago Network CEO Maria Doughty described the challenge as “a whiplash effect” noting, “the board is stuck in the middle trying to figure out how to make sure that they balance all of these considerations and making sure that they don’t alienate any stakeholders.” At the recent Boardroom Summit, Doughty moderated a panel of experts brought in to offer board members some guidance on how to navigate the current fraught landscape.
1. Balance ESG and DEI goals without overcorrecting. “ESG fundamentally is about risk management and driving value, which every company wants to do and is focused on,” said Lisa Boyd, co-head of the ESG practice and managing director for Joele Frank. She reminded directors to focus on the practical value ESG initiatives can deliver beyond the charged political discourse, and cautioned against hasty changes driven by backlash. “Companies should exercise caution, but not overcorrect. There’s risk in overcorrection, especially when the discourse is so charged and the pressure is so strong.” She suggested companies take a step back and “audit [their] initiatives and get even clearer about how they are driving value, or not.”
Pamela Marcogliese, partner and head of U.S. transactions for Freshfields Bruckhaus Deringer U.S., agreed, warning boards not to abandon their DEI and ESG commitments in response to external pressure. “Just because we have backlash against DEI and we have this anti-ESG that is mounting, it doesn’t mean that DEI or ESG isn’t important and that you don’t have stakeholders that think it is extremely important.” She recommended boards work closely with management to assess “how each of the constituencies that are key to that company feel about these issues,” noting that there is no one-size-fits-all solution.
2. Rely on the data. Boyd recommended a “more frequent flow of key insights and data points” to enable boards to ask more informed questions about the company’s human capital strategy. “A lot of companies have a few key indicators that tell them if their human capital management strategies are producing…but just a handful,” she said, noting that companies with the best outcomes would “enhance their understanding with better insights and better metrics around human capital management at the board level, management level and overall.”
3. Prepare for varied global ESG requirements. Boards with international operations must be mindful of the differences in ESG regulations between regions. Amy Rojik, managing principal for corporate governance at BDO, noted that “the global train is moving full steam ahead” on ESG regulations, particularly in the European Union, and suggested companies pay close attention to developing standards like the CSRD (Corporate Sustainability Reporting Directive). “They’re not just looking at the impact on the company, but they’re looking at the impact on the environment, so [with] the dual materiality lens.”
Marcogliese advised boards to carefully manage how they approach these global standards in the U.S., where the regulatory environment differs, and to ensure that those preparing CSRD reports have “an eye towards how this is going to play out in the U.S.” Boards should ask management, “Who is in charge of this process and how are we making sure that whoever’s putting that together is complying with the requirements, but mostly has an eye towards how this is going to play out in the U.S.?”
Recalibrating Comp: Aligning ESG Metrics with Strategy
While the backlash against ESG and DEI has included ire over metrics in incentive plans, Darren Moskovitz, partner with Meridian Compensation Partners, said boards should not expect a dramatic retreat from their use. “About 67% of the S&P 500 uses an ESG measure within their incentive compensation plans,” he said, adding, “We would be foolish to say that number will significantly change in the near term. Might it come down? Yes. But will it fundamentally shift? I’m not so sure of that.”
Instead of abandoning ESG metrics, Moskovitz advised refining their application to align with the strategic priorities of the business. “When this first came about, I think we overreacted and everybody just threw something in the scorecard of the assessment,” he explained. “Now we’re starting to advise companies to refine the language slightly within the plans to be a little bit more bespoke to what they are trying to accomplish strategically.”
If you are using those metrics in comp plans, make sure you understand the company’s rigor around measurement. “Ask your management folks, how are you tracking that? What data are you using? Can we set reasonable targets?” Many management teams would admit they are “average” at this today, he said, and “to make it a metric within the incentive compensation plan, we need to be better than average at measuring it, tracking and being able to report on it.”
Looking ahead, Moskovitz predicted that advancements in AI and analytics will enable a significant shift in how companies approach ESG-related metrics. “The metrics that we are going to look at four years from now are going to be totally different than what we look at today,” he noted. He envisioned a transition from lagging indicators, such as turnover rates, to leading indicators that provide more actionable insights. He also suggested that ESG metrics, traditionally tied to annual incentives, could begin appearing in long-term performance plans, particularly in areas like environmental and social measures. “We already see it in the utilities industries. A significant number of utilities use environmental measures in their long-term plans. We’ll start to see it a little bit more in the social component.”
Moskovitz framed these adjustments as opportunities for strategic alignment and risk management rather than mere reactions to criticism. “The people that are against it are much louder than the people that are for it, but your shareholders are still for some of this stuff,” he pointed out, acknowledging the nuanced pressures boards face. “There is no perfect solution. Not everything’s a yes or a no. We have to find that balance.”
