This year has seen the management and oversight of ESG strategies and practices become increasingly complex for boards and senior executives. There have been mounting claims of greenwashing, challenges to the current regulatory regime and accusations that a focus on ESG prioritizes political goals over investor returns. Some observers have even called this latest chapter “the end of ESG.”
Against that backdrop, corporate directors and nonprofit board members are overseeing ESG commitments and initiatives with unprecedented rigor. The responsibility falls squarely within their fiduciary duties, and comprehensive and robust educational programs developed by governance organizations and leading academic centers are fueling a sense of urgency.
While many organizations may now avoid the term “ESG,” their focus on the fundamental concepts is not surprising. As was reported in the PwC report, Asset and Wealth Management Revolution 2022: Exponential Expectations for ESG, 90% of investors believe that integrating ESG factors into their investment strategies will improve their returns, and, as of 2022, 18% of U.S. investors planned to increase their allocations to ESG products over the next two years. The ongoing energy transition will only heighten investor pressure on companies to focus on ESG practices.
The year 2023 was marked by a refinement of ESG strategy in the boardroom, informed by policy and regulatory developments as well as a natural evolution of the three pillars (environmental, social and governance issues), individually and collectively. As board members and governing bodies prepare for 2024 and seek out new information about this evolving area, here's what they should keep top-of-mind.
Recognize that ESG is not only a spectrum of risks, but also a cohesive set of strategic imperatives. ESG isn't just about risk. It can also help achieve business goals. Auto manufacturers have committed to changing their entire business models to electric vehicles after decades of largely ignoring the internal combustion engine's role in climate change. Clothing manufacturers, meanwhile, have begun developing more ethical and environmentally conscious supply chains.
Similarly, boards should integrate ESG holistically into their strategic decision-making and ongoing oversight. For instance, the social dimension of ESG, including the core concepts of corporate responsibility and DEI, has become a North Star of sorts for many organizations. Corporations are increasingly held accountable for human rights abuses and forced labor in their supply chains, as well as for staff and employee well-being — including cultivating an organizational culture that prioritizes diversity at all levels and nurtures an internal environment that is equitable and inclusive.
Follow emerging best practices to ensure effective oversight of ESG initiatives. As board members undertake to fulfill their fiduciary duties, they often struggle with respect to effective oversight of the development and execution of ESG strategies and work streams. Senior leadership and directors bear joint responsibility in this area.
Management, for instance, can facilitate more effective board oversight of ESG by allocating sufficient discussion time in board meetings, preparing crisp and transparent meeting materials about the leadership team's strategic challenges and priorities, and eliciting feedback from the board as the plan is crafted and executed.
For their part, boards should also undertake educational initiatives to ensure fluency in key ESG areas and delegate ESG oversight to a committee that regularly informs the board regarding significant developments.
Over the last several years, the trend has been to delegate ESG oversight to board nom/gov committees. In those instances, the focus has been less on corporate and social responsibility and more on effective governance of the organization, but the proliferation of ESG has led to a gradual expansion of those committees' chartered responsibilities. Monitoring of “ESG performance” should involve more than a metric or two in executive compensation.
Investors are frequently alarmed by boilerplate board evaluations that do not change over time. Boards should conduct a robust annual board and committee self-assessment and use the results to develop and oversee action plans for the board, its committees and individual directors.
Focus on board composition intentionally, and with a sense of purpose. According to a recent Conference Board survey, most C-suite executives believe their boards are meeting minimum expectations — though there's room for improvement, especially when it comes to increasing board member diversity.
A mix of backgrounds, skills, knowledge and experience is essential in supporting ESG practices while aligning with the company's broader mission and business objectives. The most effective boards use self-assessments in active recruitment initiatives to enhance, if not transform, their composition. Such transformations may require boards to broaden their priorities beyond the historical focus on CEOs and CFOs to a much more inclusive range of executives and business leaders.
Measure success. For many organizations, the next phase of ESG will advance the implementation of a company's strategy, while also striving to measure success through sophisticated data analytics.
These should already be in the conversation, in light of the latest guidance. The European Financial Reporting Advisory Group, for instance, is developing new ESG requirements under its Corporate Sustainability Reporting Directive — but current metrics for ESG effectiveness can include quality and integrity scores, board-membership diversity statistics, surveys of ownership and shareholder rights, indices of compensation incentives for ESG efforts, and transparency in auditing and financial reporting.
A corporation's ability to produce a robust and auditable ESG dataset will help not only to achieve its ESG goals, but also to build trust with stakeholders and, ultimately, drive the company's growth — in 2024 and beyond.