PREPPING FOR THE FUTURE

How to develop corporate ESG skills – Ralph Ward and Dr. Muneer Muhamed

Investors and regulators worldwide are pushing hard for solid, objective corporate ESG (environmental, social and governance) disclosures. The Securities and Exchange Commission (SEC) in the US has proposed that a task force examines ESG compliance and disclosure with more objective and comparable data.

Developing nations such as Sri Lanka will soon follow…

ESG regulations are already beginning to bite businesses. Last year, the EU launched its Sustainable Finance Disclosure Regulation (SFDR), which requires asset managers and advisers to factor sustainability data into their investments.

This will drive solid, objective disclosure metrics with penalties for failure.

Mainstreaming ESG in corporate strategy, operations and reporting is widespread and unavoidable, and business leaders have accepted that it will be an inevitable factor going forward. But most of the discussion and advice you encounter is still at the stage of preaching how crucial ESG has become – like pitching a sale but never closing it.

Board members are learning fast that ESG can’t be ignored. However, there’s very little tactical guidance on what they should actually do about it.

How does your board build practical ESG discussion and oversight into its structure, agenda, reporting and actions? And who are the ESG resource persons you’ll need in the boardroom? How can you assure relevant, actionable data on company ESG status? What ESG standards and reporting frameworks are out there, which should guide your board?

Most of the major concerns and activism agendas come under the environmental head­ing, and that covers a number of sub-concerns. Climate alone has many sub-sectors and any of them might be your company’s hottest issue.

Social matters bring controversies of their own and the continuous discrimination against minorities makes this a hot topic.

Governance is the last letter in ESG and it often tends to lag behind as a concern. But this is the area where items such as board makeup and structure, voting rights and shareholder powers are battled over. Governance also covers the proxy voting tools used to advocate for the environment and society, and activists know how to use these to good effect.

There are many important steps to take in making ESG part of board action and the first step involves the structure.

Begin by identifying the management players with responsi­bilities, powers and expertise on company specific ESG matters. Since ESG covers so much turf, you’ll want broad input. The CXOs – finance, HR, legal, investor relations and disclosure staff – will all have ESG responsibilities.

If you’re a closely held company, you may not have all these titles but you’ll still need the expertise.

An ESG shape up can be a good motivator for venture or private companies to formalise how these tasks should be allo­cated. Designating a ‘management’ ESG committee makes results more likely and tells your stakeholders that it’s being taken seriously.

We have always advocated for the use of a board ‘skills matrix’ to assess the talents a board presently has, what it lacks, and how succession planning and training can fill the gaps. Now add an ESG background and credentials to this matrix.

Every board doesn’t need a climate scientist, an environmental lawyer or a rep from a human rights organisation.

Begin by digging into the environmental and social skills your current directors have tucked away in their CVs. How can you tap this experience to shape ESG oversight and credibility? And what gaps can you identify in the board in terms of managing corporate ESG challenges?

And check the backgrounds of current and potential board members for ESG negatives. You don’t want shareholders or activists to be the first to notice that a director previously served on the board of a company that suffered a major environmental disaster.

The measures a board takes to shape itself to oversee ESG brings its own challenges. ESG should be integrated into the agenda of the full board but this can push towards an ineffective check box approach. Directors receive a brief report that all is well on ESG (with lots of numbers and charts) and they simply move on.

Start by reviewing the bylaws and agendas of existing committees, and ask how they can take on specific sections of the ESG spectrum. The audit committee can incorporate ESG materiality measures, risks and disclosures.

Compensation should factor ESG goals into pay measures and incentives, top executive and median employee pay balances, and stakeholder compensation concerns. The nominating or governance committee can serve as the board’s overall ESG wrangler, and also factor board skills and ESG education – and stakeholder communication – into its work.

ESG is a new language in most boardrooms but it’s the new thing your board must learn.