What is the Role of Boards in ESG?

Businesses play a crucial role in meeting people’s wants and needs, but they are also key contributors to some of today’s biggest global challenges, such as climate change, biodiversity loss, and extreme inequalities in wealth, income, and opportunity. These challenges are no longer distant issues; they now create significant pressures and risks for the businesses themselves, demanding urgent action and sustainable solutions.

Arising from this volatile, uncertain, complex and ambiguous (VUCA) operating context, boards are increasingly finding themselves under pressure. Often seeing expanding areas of oversight; increased prominence and discussion about their role; as well as growing scrutiny of their performance. They are required to not only to respond effectively to these external risks, but also to understand and respond to stakeholder expectations, while remaining commercially viable in the short and long-term. That’s one tall order.

So, where does ESG come in? One of these expanded areas of board oversight is an increased focus on ESG and sustainability factors.

4 Biggest Attention Areas for Boards in ESG

One of most prominent areas of attention for boards is in relation to the need for reporting, and compliance with new legislation and regulations, which is being seen across multiple jurisdictions.

But, alongside compliance with new legislation there are three other areas of practice for effective management of sustainability:

1. board practice, including purpose, materiality, sustainability strategy and reporting, ensuring that the sustainability strategy is aligned with the company’s long-term goals and risk management strategy. This could include defining priorities such as carbon reduction, diversity and inclusion, or responsible governance

2. board membership, including structure, nomination of individuals as well as dynamics, especially as more and more jurisdictions set diversity requirements for boards

3. stakeholder engagement, which includes engaging with investors, customers, employees, and regulators, to understand their expectations regarding ESG practices and to ensure that the company meets or exceeds those expectations

4. and as previously discussed, understanding and preparing to meet legal frameworks in a range of jurisdictions that shape and underpin board practice, and that directly relate to sustainability. This can involve ensuring compliance with hard laws and reporting requirements, as well as putting soft practices in place such as ensuring company guidelines and codes of conduct are inclusive of ESG policies

So, where do boards start when thinking about how ESG relates to their company? What should they be asking themselves to direct the company? Here are the five central considerations to prompt thinking around ESG for the company:

5 Central Questions for your Board to Think About When It Comes to ESG

1. What is our point of view in regards to ESG? Boards should have a point of view on what it means to govern in a way that both maximises the potential of the business and contributes to a sustainable future

2. How do we ensure long term shareholder maximisation given ESG constraints? Boards must understand that they operate in a context where planetary boundaries and societal challenges can disrupt economies and cause social unrest, and must consider how to ensure long-term shareholder maximisation

3. What is our purpose as an organisation? Boards should be able to articulate the purpose of the company, its strategic contribution and the positive future impact it will have on society, the economy and the environment

4. Are we honest about what assumptions underpin our business? Boards must take a long hard look at the assumptions that underpin the existence of the company and be aware of how they shape decisions, with clarity needed over what might need to change in order to deliver business success, resilience and positive societal and environmental impact

5. How will we ensure we are future ready? Boards must understand what is needed to ensure that their decision-making is fit for the future

Conclusion

As boards move away from a reactive BAU CSR approach to an ESV approach, I expect to see more that support a more future-oriented practice in each of the above areas, through proactively anticipating significant trends and pressures. This will help those companies be better positioned to navigate associated risks and harness opportunities for long-term value creation.

However, boards that employ a Purpose-driven approach (top of the pyramid), that aligns fundamental value-creation goals with a sustainable future, are more likely to be future-fit in pursuing thriving societies and environments that in turn provide the optimum conditions for business, the economy and life on earth to flourish in the long term.