ESG (Environment, Social, and Governance) continues to be a hot acronym and trending topic for boards and organisations. But there still is some confusion as to what it is and how boards should respond.<\/p>\n
In this article, we provide an overview of ESG and discuss the reasons why it should make its way into boardrooms everywhere.<\/p>\n
ESG<\/a> criteria are a set of standards for a company\u2019s operations that socially conscious investors use when deciding on potential investments. ESG hones in on \u2013 and measures \u2013 sustainability.<\/p>\n This CDC Group paper<\/a> breaks down the definition of the acronym.<\/p>\n The ENVIRONMENT<\/strong> component monitors how a company performs as a steward of the natural environment. Examples<\/a> of this would be:<\/p>\n The SOCIAL<\/strong> criteria looks at how a company manages its relationships within the entirety of its ecosystem, e.g. employees, suppliers, customers, and the communities in which they operate. Examples <\/a>of this would be:<\/p>\n GOVERNANCE<\/strong> tackles company\u2019s internal processes and leadership. It looks into issues such as executive pay, audit and internal controls, and shareholder rights. Other examples<\/a> include:<\/p>\n Corporate Social Responsibility (CSR) and ESG are often used interchangeably, but they are two different concepts for two different target markets.<\/p>\n CSR is internally driven with a focus to give back to the local communities in which the company operates and\/or serves. It\u2019s about engaging stakeholders (i.e. consumers, employees, clients, communities).<\/p>\n Examples of CSR initiatives would be sponsorships of community initiatives, volunteer hours, etc.<\/p>\n Therefore the target market of CSR initiatives is the company\u2019s stakeholders.<\/p>\n ESG has a broader purview. ESG, as best explained by this You Matter paper<\/a>, is used by investors in capital markets to assess corporate behavior and to evaluate the future financial performance of corporations by measuring their sustainability. Investors look into how ESG can impact profitability and the company\u2019s financial value in the short and long-term.<\/p>\n The target market of ESG initiatives are capital markets (e.g. shareholders, bondholders, financial regulators, rating agencies, etc.)<\/p>\n To put it succinctly, \u201cCSR is focused on values, while ESG is focused on value.<\/a>\u201d<\/p>\n ESG issues are no-longer optional concerns that board and leaders can afford to neglect. Companies who \u201cget ESG right\u201d properly identify ESG-related risks and opportunities and integrate them into their narrative for long-term value creation.<\/p>\n It is important to note that the emergence of a more socially conscious society has bled into employee, consumer, and investor behaviours. Many seek out \u201cpurpose-driven\u201d companies<\/a> whose values align with their own. That doesn\u2019t necessarily mean they overlook financial performance and long-term value.<\/p>\n Companies with solid ESG performance and strategies tend to mitigate future business risks. They keep watch over trends and changes, allowing them to respond and adapt more quickly to disruptions. These companies are also likely to have a more stable and loyal investor base. Studies<\/a> have reflected gains in customer purchasing behaviour and employee engagement as well \u2013 critical components of competitive advantage and profitability.<\/p>\n Strong ESG performance can lead to the following opportunities<\/a>:<\/p>\n An interesting example is presented by PwC <\/a>. It describes what a proactive ESG frontrunner looks like:<\/p>\n \u201cTake, for example, a logistics company. Shipping and delivering goods is carbon intensive, and labor intensive. By relying solely on traditional forms of energy, the company risks losing business due to inefficiencies, or facing rising costs when oil prices rise. The company could be targeted as a carbon polluter and face negative attention from consumers. These are ESG risks, but really, they are business risks. <\/em><\/p>\n So the company invests heavily in electric vehicles to reduce their carbon footprint \u2013 and as renewable energy sources continue to become more readily available and cost efficient, the company can capitalize on alternative sources of fuel, rather than being overly dependent on oil products. <\/em><\/p>\n The business is also labor intensive. The company is exposed to risks of labor shortages or disruptions, and its employees face additional risks, like injuries from driver collisions. So the company is investing in the development of driverless technology, in new technology available in delivery drones, and in collision mitigation systems in vehicles. These investments then pay off as deliveries become faster and more efficient.”<\/em><\/p>\n<\/blockquote>\n Skeptics of ESG believe it to merely be a soft\/branding initiative that is disconnected from core business processes. But nonetheless, a complacent approach to ESG presents significant risks.<\/p>\n ESG related failures <\/a>may result in events such as consumer boycotts, employee walkouts, or adverse proxy votes by institutional investors. Lawsuits can arise from inaction on issues such as unfair employment practises or cyber-attacks and security breaches.<\/p>\n Other risks<\/a> include:<\/p>\n Examples of ESG factors that resulted in significant financial implications for firms are cited in this ESG paper<\/a> by ESG Global Advisors:<\/p>\n “Wynn Resorts<\/strong> \u2013 In January 2018, allegations of sexual misconduct by the CEO, Steve Wynn, were followed by a 10% stock price decline and his eventual resignation in February 2018. While the company had policies in place on sexual harassment, an alleged lack of board oversight and enforcement of these policies allowed it to become a material ESG factor.<\/em><\/p>\n Energy Transfer Partners<\/strong> \u2013 From 2014 to 2017, opposition from the Standing Rock Sioux Tribe to the proposed Dakota Access Pipeline resulted in global media attention, protests related to environmental and social concerns, and significant delays. While the company adhered to laws and regulations, the total cost of the project ballooned to an estimated $7.5 billion, with the company\u2019s stock price declining by 20% over the period of the protests.<\/em><\/p>\n Facebook<\/strong> \u2013 In 2019, the Federal Trade Commission imposed an unprecedented $5 billion penalty, as well as operational and governance restrictions on the company, to settle its investigation of data privacy breaches. While the company had policies in place to protect user data, a lack of compliance led to a digital privacy breach affecting 87 million users.<\/em>\u201d<\/p>\n It becomes evident that poorly managed ESG activities can lead to crisis situations. To prevent these from happening, the board needs to take an engaged, proactive, future-thinking approach in the development of ESG strategies. The following are suggestions to help Boards stay on top of ESG issues. <\/p>\n ESG can no longer be merely on the periphery of issues for boards. There is much at stake. Sustainability issues are becoming core concerns not solely for ethical reasons, but because they affect the company\u2019s competitive positioning and value. ESG should, therefore, be part of the overall company strategy and integrated into the organisation with board oversight \u2013 just like any other strategic initiative that addresses long-term value creation.<\/p>\n Boardlogic<\/a> is a paperless, highly-secure board meeting software<\/a> that supports boards of directors\u2019 activities. Effective, efficient, and compliant, Boardolfio allows boards to focus on the essential matters at hand: strategic planning and implementation, and creative, collaborative thought-leadership \u2013 all of which drive organisational success and good governance.<\/p>\n For more information on the use of board portal solutions, <\/a>contact<\/a> us today.<\/p>\n","protected":false},"excerpt":{"rendered":" Some companies still view ESG as merely a brand or marketing concern. That idea won’t hold up for long. Here’s why ESG issues should make their way into the board\u2019s agenda.<\/p>\n","protected":false},"author":2,"featured_media":119,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[5],"tags":[],"yoast_head":"\n\n
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<\/li>\n<\/ul>\nDifference Between CSR and ESG<\/h2>\n
\nImpact of ESG on Companies<\/h2>\na. Proactive Approach to ESG<\/h3>\n
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b. Complacent approach to ESG<\/h3>\n
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ESG and the Board<\/h2>\n
a. Insist that ESG be addressed at the board level<\/h3>\n
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b. Integrate ESG issues into every board-level decision<\/h3>\n
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c. Track, communicate, flag ESG risks and\/or initiatives<\/h3>\n
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d. The board may want to link remuneration to ESG performance via \u201cSMART\u201d(i.e.specific, measurable, attainable, relevant, and time-bound)<\/i> key indicators <\/h3>\n
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In Conclusion<\/h2>\n
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