As reporting and consultants pour into the ESG space, are boards and companies losing sight of what it actually means?
Where did ESG come from? Many attribute a 2004 United Nations report called Who Cares Wins as the first mainstream use of the concept. It raised awareness for something many boardrooms had been working to incorporate, albeit under different names or forms.
“At first, there was Corporate Social Responsibility. Eventually, businesses adopted some of the United Nations’ Sustainable Development Goals as part of that. These tended to be easy decisions for boards to make,” Ms Turid Elisabeth Solvang, Founder and CEO of FutureBoards, recalls. “Currently, this has evolved into ESG. That covers how the company is affecting and being affected by environmental changes, social criteria and its governance structures.”
Ms Solvang adds that despite criticism of ESG as being ‘woke’ capitalism, it is a top priority for large institutional investors as well as a rapidly growing part of the capital markets at large. Reporting has become a byproduct that allows investors to monitor and track efforts.
The challenge, though, is that even if ESG has been a driving factor for many companies and organisations, research found it is not always fully understood. In addition, ESG reporting has grown to such a level that it is now possible to lose sight of how the latter is being accomplished.
“Reporting is complex but a required component. Investors need to know what businesses are doing. Board members understand financial and annual reports, and for a long time, these reports have been separated from sustainability reports,” Ms Solvang says. “Fortunately, both regulators and organisations are working to integrate financial and non-financial parameters in one understandable and comparable reporting framework.”
She cites the adoption of the Corporate Sustainability Reporting Directive (CSRD), the interlinked European Sustainability Reporting Standards (ESRS) and the International Sustainability Standards Board as a paradigm shift for corporate reporting.
“Ultimately, everything is connected,” Ms Solvang notes. “It is crucial not to devalue actions and impact, however. Reporting shouldn’t be so overwhelming that it misses those. Boards need to have a mindset that sees the bigger picture.”
At the end of the day, ESG needs to be sustainable. Ms Solvang believes this is not a new concept, but it hasn’t stopped corporate sustainability from coming up short on certain occasions. That goes back to the meaning of ESG being lumped together as one entity instead of separated into three unique areas.
“ESG are very different things individually. The ‘E’ is well-known and probably the easiest for boards and companies to process. For example, if a company sells skis, they need snow. Less snow is bad for sales. This leads to discussions around environmental impact. Questions are then asked about what they are doing to cause this issue and if they could do anything to change the situation,” Ms Solvang explains.
Meanwhile, the ‘S’ concerns people with issues such as workers’ rights and conditions at the forefront.
“Are employees happy and how can their situation be improved? We have started to see more and more issues arise as it relates to working conditions. It is a global issue to respect worker’s rights. Boards must understand local regulations and the societal standards of the countries where they operate. It is a challenging dynamic that can’t be overlooked,” Ms Solvang details.
She continues, “The ‘G’ addresses the decision-making process and the chain of command. Who is deciding what? Is your proverbial house in order? These are where discussions about competency, diversity and boardroom composition occur.”
The pressure is on boards to decode each aspect of ESG and understand how a company works toward reaching its stated goals. A lack of diverse views and skills in the boardroom makes it difficult for them to put ESG in the proper context.
“Perspective is required in the boardroom and that means the involvement of different backgrounds and generations. It allows for an increase in core competencies and knowledge,” Ms Solvang says. “The basic tenant of understanding challenges is to have diverse perspectives to provide a holistic view of current and future challenges. A board must be mindful of what is happening around us.”
This has coincided with a shift in focus. According to Ms Solvang, institutional investors are pushing companies to move away from the traditional shareholder focus and embrace a stakeholder focus.
“The shift in focus is a major change from even a few years ago when shareholders were paramount. Board members are elected by investors, and they are chosen to carry out their wishes,” Ms Solvang points out. “We are making small steps every day when it comes to ESG. Board members are hopefully looking for more information about the issues and stepping up their core competencies in line with shareholder expectations. That is crucial.”
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