ESG, social equality and climate change no longer corporate side issues
Helle Bank J?rgensen, GCB.D, CCB.D and NACD.DC
CEO Competent Boards. #1 Amazon Bestselling Author, Global Keynote Speaker. Thought Leader & Corporate Advisor.
By Helle Bank Jorgensen and Marc Yegani, Competent Boards
This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.
For several years, corporate leaders have acknowledged that businesses should play a greater role in addressing urgent challenges such as climate change and social equity. Despite their good intentions, however, executives recognized environmental, social, and governance matters as secondary for themselves and their shareholders—and while all would agree that managing for the long term health and success of a business is important, the short term demands of the market and quarterly results often take precedence. The urgent trumps the important. This, however, is no longer the case.
Many long-held assumptions have been turned on their heads by the coronavirus pandemic and so has the notion that ESG and maximizing profits are mutually exclusive. Throughout the pandemic, companies with a strong ESG policy have performed better (or at least less poorly) than other companies with weaker or more superficial ESG policies. For instance, the S&P 500 ESG index, which tracks large US companies with high ESG ratings, has beaten the normal S&P index by 0.6 percent over the first four months of this year. [1] The important has become part of the urgent as purpose has become inextricably linked to profit.[2] As such, any executives or boards who do not recognize this new normal are in danger of violating their fiduciary responsibility to their shareholders.[3]
To respond to this new normal and growing necessity of effective ESG structures within one’s organization, Competent Boards recently held a global ESG dialogue session where they discussed the understanding, growing expectations, and relevance of ESG within the current marketplace.
The following are some of the insights from the dialogue:
- Investors are looking for focus, clear articulation, consistency, and transparency when it comes to ESG. In practice, this means that company reports should include a materiality analysis that identifies ESG issues that affect financial performance. Insufficient progress in this area has led BlackRock to place 244 companies “on watch” and took material action against management, including voting against board members and raising ESG governance concerns.[4]
- When the pandemic hit, most executives and investors expected ESG interest to subside—but it has gained greater momentum instead. According to Andrew Lee, UBS Global Wealth Management’s head of sustainable and impact investing, the health crisis brought on by the coronavirus has put into focus the linkages between sustainability issues, the economy, and corporate financial performance, and thus heightened investor focus on these issues.[5]
- Prior to the pandemic, the E component of ESG was the emphasis, but since the pandemic, the S component has been given the emphasis by investors and stakeholders instead. Federated Hermes, a leading ‘responsible investment firm’ maintains that “If you asked anyone who was in the sustainability or ESG space a year or two years ago, they would tell you that somehow the ‘S’ has not been given much visibility… Covid-19 has changed that substantially, and very, very quickly.”[6]
- If a company wants to attract high-quality talent and investors, they need to have high-quality ESG performance. A recent study by Marsh & McLennan Advantage looking at how ESG impacts employees’ workforce sentiment found that companies which score higher on ESG performance have more satisfied employees and are more attractive to Millennials and Gen Z talent.[7]
- ESG is not the only means for resilience but it is rapidly becoming one of the most important. Research conducted by BlackRock has found that companies with good customer relations and robust corporate culture are demonstrating lower volatility and greater financial performance.[8]
The following are Competent Boards’ recommended 10 steps towards embedding ESG within your company:
1. Determine if the Board of Directors (BoD) has the necessary insight on material ESG matters or if education is needed. For example, the Corporate Responsibility Committee (CRC) assists the BoD at Unilever in fulfilling their oversight responsibilities with ESG business. (we have exemplified these 10 steps by using Unilever as an illustrative example.)
2. Determine the company’s most material stakeholders from the board’s perspective, and understand those stakeholders’ concerns. At Unilever, the CEO and the Chairman are tasked with identifying and maintaining relations with the company's most major shareholders, stakeholders, and governments.
3. Determine the material ESG risks and opportunities and how they will impact the business strategy and plans. At Unilever, the CRC is responsible for identifying ESG risks and bringing all material issues to the attention of the Board or Senior Corporate Executives.
4. Ensure that ESG considerations are given sufficient attention across board committees. The CRC acts as a sounding board and provides guidance and recommendation to all ESG issues across Unilever’s board committees.
5. Ensure there are accountability measures in place. One of the CRC’s remits at Unilever is to review the effectiveness of Unilever’s operating model for Business Integrity and ensure accountability measures are in place.
6. Ensure ESG is integrated into strategic decision-making across the organization and its value chain. An example of such would be the unity of the management model at Unilever. It has always been a requirement of the company that the same people be on the Boards of both its parent groups (Unilever N.V. and Unilever PLC). This function has ensured that all matters are considered by the Board as a single intellect and avoids potential conflicts of interest.
7. Align ESG goals with incentives. Unilever aligns its incentives and other benefits with the company’s culture.
8. Ensure consistent and transparent reporting and disclosure. Again it is the CRC at Unilever who is responsible for ensuring appropriate communication. Policies are in place in order to effectively build and protect Unilever’s reputation internally and externally.
9. Ensure that the company’s response to ESG demands is aligned to the materiality and proportionality of the issue to the business. The CRC at Unilever is also tasked with identifying and reviewing external developments which are likely to have a significant influence on Unilever’s reputation and its ability to remain a good corporate citizen.
10. Maintain regular proactive dialogue with peers, policymakers, investors, and other stakeholders. At Unilever, the CRC, the CEO, and the Chairman are all responsible for maintaining relations with the company’s most important shareholders, stakeholders, and governments.
Helle Bank Jorgensen, [email protected], is the CEO of Competent Boards Inc., which offers the global online ESG Competent Boards Certificate program, that helps leaders identify and proactively act upon material ESG, Climate and Sustainability risks and opportunities. She is an experienced board facilitator, board member and serves on His Royal Highness Prince of Wales A4S Global Expert Panel as well as WBCSD Governance & Internal Oversight High-Level Advisory Group. She is a business lawyer and state-authorized public accountant (CPA) by training.
Marc Yegani is currently interning with Competent Boards while working towards his masters degree in sustainability management at the University of Toronto.
[1] “Why ESG investing makes fund managers more money” (Financial Times, 2020). https://www.ft.com/content/1cfb5e02-7ce1-4020-9c7c-624a3dd6ead9
[2] “Purpose & Profit” (Harvard Law School Forum on Corporate Governance). https://corpgov.law.harvard.edu/2019/01/23/purpose-profit/
[3] Moral Money (Financial Times, 2020). https://www.ft.com/content/87e2a2d2-a7be-4a97-bc7c-33211c9d6329
[4] BlackRock voted against management at 53 companies over climate concerns
[5] “ESG passes the Covid challenge” (Financial Times, 2020). https://www.ft.com/content/50eb893d-98ae-4a8f-8fec-75aa1bb98a48
[6] “Time to Rethink the S in ESG” (Harvard Law School Forum on Corporate Governance, 2020). https://corpgov.law.harvard.edu/2020/06/28/time-to-rethink-the-s-in-esg/
[7] “ESG as a workforce strategy” (Marsh & McLennan Advantage, 2020). https://www.mmc.com/content/dam/mmc-web/insights/publications/2020/may/ESG-as-a-workforce-strategy_Part%20I.pdf
[8] “Sustainable investing: resilience amid uncertainty” (BlackRock, 2020). https://www.blackrock.com/corporate/literature/investor-education/sustainable-investing-resilience.pdf
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5 个月Great article, and reflects the pratical thinking I've found in the Competant Boards program.
3/ Meanwhile there are more genuine ESG trends taking hold. The oil majors have suffered extreme losses in value this year. Partly because of oil price depression early on (thanks to Russia and Saudi pricing games), but also because of falling demand during COVID - large parts of industry and transport systems virtually shut down. BP lost over half its value in a month and so far shows little sign of recovering. Tesla, also lost more than half its value, but after bottoming out at ~$360 is now at ~2000. Huge hubris around electric cars and batteries and Musk, no doubt, but a stark indicator maybe of longer term trends. So too is the rise of solar panel semiconductor company Solar Edge,rising from $70 to $216 since its low point after COVID. Though both companies are recording profits (not easy in COVID) it seems to be the promise of sustainable growth and future returns in a more carbon-averse world which is driving investment and growth. So ESG is complicated. There are definitely ESG based trends. Good governance, social responsibility and environmental sustainability will surely place companies in resilient positions. But it is still not a major driver of investment, I would contend.
2/ COVID has changed everything and distilling ESG signals from the wider changes is not easy. COVID has caused many companies to review their operational risks and resilience. This is washing out in various ways. One is cyber security defenses. With many more people working from home. The majority of companies, including large corporates, have been caught unprepared to protect systems and data, and this has stimulated wider concerns about their whole data security. Not surprisingly we have seen significant growth in demands for cyber security services and their valuations have risen rapidly. For example the ETF ISPY has grown 54% since bottoming out in March. These are 'clean' ESG companies, being maily software and hi-tech, but ESG has not driven their growth- risk management has. With the closing down of the high street millions of small companies have set up web-stores for the first time. The webstore company Shopify has seen its share price rocket from ~US$350 to ~US$1000 since April. The fintech company Square, which particularly supports SME online cash management, has gone from US$45 to $155 in the same period. These are 'ESG' companies without doubt but their growth has not been driven by that tag. > 3
1/ This article re-enforces familiar points to anyone who has been involved in advising companies on the strategic benefits of integrating EHS, sustainability, CSR, ESG, etc. policies into their culture, business strategy and operations. We have to be careful, however, when looking to 'justify' ESG or demonstrate its inherent innovative virtues. A few points to raise. Common simplifications: a) that shareholders look for only for profit and b) market indices are inextricably linked to profit. There are many different types of shareholder, looking for different things. Of course, profit is key to success for most companies and drives dividends and growth. However, apart from short-term traders, most investors are looking for sustainable growth in share value. Profit is too crude a measure to determine such potential. This is highly relevant for ESG investing, which would seem to be appealing more to investors who seek longer-term security by investing in companies with sustainable momentum and potential for surviving in a changing society. Important vs urgent may be one way of putting it. Another would be sustainable vs risky. > 2
Thanks for sharing, good information on #boardservice