In the current ESG landscape, much attention has been paid to the Environmental (E) and Social (S) pillars of ESG while Governance (G) is often neglected or forgotten. But what’s the context for this?
For years, scientists have been talking about climate change and the toll modern living has had on the environment, leading to the prioritization of the E in today’s sustainability and ESG dialogues. In just the past year, we’ve witnessed the effects of the climate crisis in real-time with the recent surge of extreme, unpredictable weather and natural disasters.
In terms of the S, COVID-19 propelled this important pillar of ESG into the spotlight, as companies received greater scrutiny for their treatment of workers and workplace policies. The Great Resignation has been a shocking wake-up call for many companies that are starting to recognize that employees demand work that feels more purposeful while maintaining a better work-life balance.
It is critical for companies to remember that they cannot afford to neglect the G of ESG and its immense value a focus on governance will bring. Governance by definition starts at the top, so we’re referring not just to leadership, but also corporate boards, who are ultimately responsible for company ESG matters, such as addressing climate risk or DEI policies.
According to Sustainalytics, a company that provides ESG risk ratings, corporate governance is considered a “foundational element” to their ESG risk ratings and identified as one of three key building blocks, according to their ratings methodology. Other core examples of governance include board structure and diversity, ownership, business ethics, codes of conduct, and risk management. Because a company’s major decision-making takes place within the Governance pillar, and board directors have the opportunity to drive a culture of sustainability. Ratings agencies and investors are ultimately looking to identify sound operating practices which only comes when there is a commitment to ESG from the senior management team and the board.
So, what questions should corporate boards be asking its management? Here are a few to consider:
Question 1: How is our company communicating our approach to sustainability and the ESG issues most material to our stakeholders? With 92% of the S&P 500 publishing sustainability reports, the annual report has become table stakes. It is important for boards to know what else the company is doing operationally, how it is engaging different stakeholders, and where the opportunities lie for authentic impact, in order to mitigate any narratives around greenwashing.
Question 2: How is our company responding to changes in policy? Earlier this year, the SEC proposed a new rule that would require public companies to provide more detailed reporting around GHG emissions activity and response to climate risk, followed by ruling from the Supreme Court, which would curtail the EPA’s ability to regulate GHG emissions from power plants. This and other such rulings need to be top of mind for any board member.
Question 3: How prepared is our company for what’s to come as it relates to ESG matters? Scenario planning is key. The SEC’s recent climate disclosure ruling feels like a scratching of the surface of future developments, and companies will need to be equipped and ready to adapt.
In a time of growing skepticism and the growth of actions often perceived to be greenwashing, governance is increasingly critical. Boards, along with their management, can leverage communications to create sustainable and equitable company policies, which will increase their chances of successfully impacting all internal and external stakeholder groups.
At RF|Binder, we have helped many companies not only communicate their focus on ESG but also helped to shape their understanding of how to move beyond hollow promises and towards effectual action. While governance may not be as sexy as environmental or social issues, for organizations to be truly sustainable, ESG needs to be embedded within the organization. Boards have a unique opportunity to operationalize those principles and values and reap the benefits.