As we prepare for the Western Balkans ESG Summit, we have been talking to numerous regional leaders about the role of corporate boards.
These leaders:
● show an understanding of the importance of governance in implementing ESG standards
● share a determination to seize the challenges and opportunities this agenda presents
● see the ESG agenda as something that can really help their bottom line. (None of them sees ESG as window dressing.)
And they see their boards as having a crucial role in driving their company’s ESG agenda.
Why is the role of the boards crucial?
There are three issues where boards bring particular value:
● focussing the strategic agenda
● bringing expertise
● driving corporate reporting
Focussing the strategic agenda
Boards have a unique ability to integrate ESG objectives into overall company strategic goals. ESG objectives cannot be discussed in isolation from the other strategic goals. Boards can ensure that conflicts with other strategic goals are identified and considered in the round. Boards can set ESG considerations in the wider context of corporate risk. Boards can understand and decide the necessary trade-offs.
Risk management poses particular issues, not least because in the current climate breaches of ESG standards constitute a fundamental risk for almost all businesses. The risks related to ESG issues –resource dependency and scarcity, social licence to operate or the potential disruption from extreme weather events – are some of the most profound and challenging questions facing today’s businesses. It is crucial that boards identify precisely the ESG risks their organisations face. Boards can work to ensure that robust internal controls and governance frameworks are in place in order to mitigate risks. Of course, investors too keep a sharp watch on how companies are responding to ESG risks – which puts all the more importance on the board’s role in identifying and managing risk.
Bringing expertise
Boards have a particular role in bringing expertise and experience. In practical terms this means looking at the composition of boards, the skills and experience of board members and their ability to work together, not least as strategic partners to management. The right skills at board level can help companies navigate a sustainability-related transformation. (Currently more than half of S&P 500 directors and one-third of the Russell 3000 have some form of ESG experience.) The sustainability agenda raises the bar for boards and makes their task even more challenging. It does not fundamentally change the line between the roles of the board and management.
We see the most successful boards as investing consciously in raising their own performance and capability. They review their composition, making sure they have the right blend of skills, that they are diverse. They also invest time in their own culture, working through how they can make the best use of their own skills and experience, defining with management how they can work together most effectively. They ensure that their own house is in order when it comes to the practical mechanics of Board activity (so often the basics – meetings cycles, papers, management information get in the way of improved Board performance). Finally, a mark of a strong board is that it will formally review its own performance and capability on a regular basis, often using an outside party to give an objective view.
Corporate reporting
Boards have a particular role in driving the demand to improve their company’s ESG reporting. Corporate reporting is increasingly expected to include enhanced and material ESG disclosures alongside other information to show how a company drives value for all stakeholders. All stakeholders, including investors, insurers, lenders, asset managers, as well as customers, want more detail on ESG factors to assess the full impact of their decisions.
This is difficult territory where there may be many different expectations to fulfil. Boards must ensure that reporting is accurate and realistic. It is the board’s responsibility to ensure that the company can live up to any ESG claims it makes and to communicate to management that all claims need to be specific, accurate, and supported by credible evidence.
Overall our conversations with business leaders have gone to reinforce the importance of the role of their boards in driving the ESG agenda, ensuring that strategic goals are carefully identified and that accurate reporting is in place. They show that there is an even greater premium on boards having the right skills and experience and working effectively to deliver on this agenda.