As boards become more engaged with issues of ESG--environmental, social, governance--what does it mean to have effective oversight of these areas?
Directors themselves are asking this question, as nearly 80% said their board is focused on some aspect of ESG, according to a report from the National Association of Corporate Directors that found 52% said they are working to improve their own understanding of their company’s ESG performance.
The report identified four challenges boards face in their quest to provide strong and meaningful oversight, and some ideas to employ in overcoming them.
The first task is to define what ESG means for your organization, and then use the company’s products and services to tie that definition to corporate strategy and performance. For directors, that means identifying what the company does that creates value, and using those things to anchor the definition of ESG.
The second challenge is actually to incorporate ESG into the overall strategy, and it’s a question gaining the attention of directors, as 49% said their board has talked about how to tie ESG to strategy in the last year. By linking the two, a company sends a strong signal as to its approach to creating sustainable, long-term value.
“ESG is not some thing you do on the side,” one director said in the report. “It should be part of the strategy.”
Next up is moving the board to active oversight, which means starting with initiatives that are good for people, the planet, and profits--the triple bottom line--and toward a more active stance of continuous learning about ESG trends, standards, and even the language of ESG.
There is much work to be done on this last point, as the NACD report states 24% of public company directors, and 13% of private company directors, said they took part in ESG educational activities in the past year.
The fourth challenge is to be prepared for increasing external expectations, as the public grows in its belief that environmental and social issues are more than altruistic aspirations, and more of a key responsibility for boards and management.
This is as true for private companies as public ones, as business risks such as climate change or the ability to attract and retain talent affect all companies, not just public ones.
“Boards need to continuously assess their effectiveness in addressing ESG risk, in terms of both their own fiduciary responsibility and their oversight of management’s activities,” said Peter R. Gleason, NACD’s chief executive.
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About the Author
Joined LRN in October 2018 after 30 years as a journalist, including seven years at The Wall Street Journal, including Risk & Compliance Journal and was a creator of the WSJ Crisis of the Week column. In 2015 was named one of the 100 most influential people in business ethics by Ethisphere Institute. Spent 14 years as a reporter in Hawaii, 11 with The Associated Press.More Content by Ben DiPietro