Boards & Effective Governance
In a recent joint study by the INSEAD Corporate Governance Centre (ICGC) and BCG, 91% of board members said they want to spend more time on strategic reflection about sustainability. Yet 70% indicated that their boards are only moderately or not at all effective at integrating ESG into company strategy and governance. 43 % of directors said the ability of the company to execute ESG strategies is one of the biggest threats to achieving ESG goals.
Not why, but how
These findings show that the biggest challenge to driving the ESG agenda is not about “why” ESG is important, but rather “how”, Corporate boards struggle with ESG due to two main reasons. One is the skills gap whereby those with board-ready credentials may not have the necessary ESG expertise (and vice versa). The other is the convergence of the high speed of change and complexity of change in ESG issues.
Six possible board structures
Six core governance models and complementary practices that support the ESG agenda. The Models include full integration, the appointment of ESG committees, ESG representatives in committee or board champions, and no formal embedding. The panellists, with a collective wealth of board experience across industries and geographies, agreed that the business conditions and environment can influence the choice of model – there is no one-size-fits-all solution.
In some instances, an influential director who is passionate about climate change can raise relevant issues to the agenda, but it is not always plain sailing. Directors need to stand up for what they think is right – even if they are the lone voice – in the face of not getting support.
Do not wait for the perfect
With current global trends, the “how” of ESG has changed fundamentally. Businesses are faced with skyrocketing energy prices, the unavailability of certain markets and the need to take care of affected employees. How companies address the geopolitical agenda can also have a less tangible – but no less important – impact on their reputation.
In today’s challenging conditions, boards will be working with incomplete and imperfect information. But leaders cannot afford to wait; they must adapt.
The ESG landscape is far from perfect. without a set of standardised frameworks standards and ratings, it is hard to compare sustainability hygiene, control, and practices. Volkswagen: The automaker’s reputation was tarnished by “Dieselgate” despite being one of the most highly rated in the industry.
Ultimately, the choice of standards and frameworks depends on what is material to the company, although this can also change. The choice hinges on what is most relevant to the company’s operations, where it operates, and the local regulatory requirements. It is critical to maintain a mindset of continuous evolvement.
Due to the speed of change and moving KPIs, boards need to recalibrate how they see materiality and what could have a crucial impact on the business regularly.
How to prioritise
Given the complexity of each pillar of E-S-G, “How do you prioritise the asks, demands and expectations of different stakeholders?”. With external pressures from regulators, stock exchanges and sovereign wealth funds among others, boards should not be overburdened.
With increasing expectations from a diverse pool of stakeholders, boards can expect competing demands and ultimately, not everyone will be satisfied, Boards need to be “courageous” in prioritising, arbitration and explaining their decisions. The growing pains of ESG will lead to more effective ESG governance.
Companies should prioritise issues that are most applicable to them, the region where they operate and where the biggest material risks lie. For instance, companies with heavy production would focus on the environment and energy, while pharmaceutical companies would focus on social aspects such as access to healthcare. Boards should highlight the importance of social.
“Environment” in ESG tends to be more tangible and relatively “easier” to deal with, and therefore generally gets more attention. On the other hand, “Social” is not getting enough attention despite worsening social inequality. Companies may also be blind to the “Governance” imperative, as they fail to see how it relates to the environment or responsible business. However, recent geopolitical developments have shown that companies need better governance to prepare for any unforeseen challenges. These can affect decisions such as which markets to operate in, where to locate production sites and how to improve employee welfare, among others.
Walk the ESG talk
Boards should incorporate ESG targets into business strategies and consider how they affect the organisation, operations, people, and community they operate. The focus on ESG should be a corporate purpose and not just an agenda item. Consistency is imperative to integrating ESG into the heart of strategy, the need for consistency between the ESG ambition and the business strategy, such that ESG is reflected across the organisation, from innovation to communication, remuneration, capital allocation and investment.
Thankfully, boards do not need to reinvent the wheel. They could adapt from best practices such as the World Economic Forum’s climate governance principles, which serve as a framework for corporate boards.
Boards should challenge themselves to look beyond the company’s performance and consider a value-chain perspective, considering the upstream and downstream impact of the business. This holistic approach presents an opportunity to take a deep dive into operations and innovate across the entire ecosystem.
One might say Boards need a mindset shift and see ESG not as a risk to be mitigated, but as an opportunity.
