Along with the pandemic, last year brought to light a number of inequities in our society, which impacted and will continue to impact both our personal and corporate lives. It has also impacted many board conversations. Board discussions, not only focus on performance and operations, but equal weightage is also given to discussing diversity, employee wellbeing, training and upskilling needs and culture, which are increasing in importance for the company’s future growth. The pandemic has made us realise how interconnected we are and the fact that corporates cannot survive in isolation of nature and the world we live in. So, there’s a fifth P being added to the pillars of corporate governance – people, performance, process, purpose and PLANET.
As we start taking steps to come out of the various forms of lock-down, it’s a good place to make a commitment to the ESG (Environmental, Social and Governance) agenda. As we know, some of the big names in the fund industry have put ESG in the centre of their investment strategy. ESG focussed investing has experienced a meteoric rise and global sustainable investment is currently around north of $30 trillion as more and more institutional investors are incorporating ESG factors into their investment decision-making.
ESG has a broad definition and covers vast aspects of corporate governance and it is for the boards to identity which aspects of ESG is most likely to impact their business operations and growth and accordingly develop policies that are appropriate for their particular sector and more specifically the particular company.
The five top ESG issues for boards to address are:
- Climate change – how is it affecting the economy, the particular industry and specifically the company.
- Diversity and inclusion – how well are these defined and how does it get reflected in the day to day working of the company.
- Income equality including the CEO and staff compensation – how is the workforce valued by the company.
- Ethical implications of the evolving digital world – how does it affect the company’s operations.
- Stakeholder governance – how well does the board understand the company’s stakeholders and is the board reflective of them.
So how does the board zero in on the relevant ESG aspects? A good start would be to ask some relevant questions :
- How does the organisation define ESG and how is this communicated – both externally and internally.
- Which ESG issue will be of concern for the stakeholders (shareholders, management, employees, customers, suppliers, funders)? What is the management doing to address these concerns?
- How does the strategic plan of the company reflect the ESG considerations and how does the management identify ESG risks and opportunities?
- How is the board satisfied with the information it receives on ESG? Should there be any additional datapoints reported regularly?
- Is there a sector benchmark on ESG reporting? How does the company compare against its competition/peers?
- How does the board become more aware of the ESG issues being discussed widely? How often should these discussions be brought to the full board?
- What does this new level of transparency mean to the board and company?
- How does the financial statements disclose the ESG risks and opportunities and how does the company compare with peers?
As the new normal sets in and as the world gets more interconnected, the strategic direction and the operations of companies will have to shift and adjust to more transparency and more focus on issues other than just the financial metrics.