Why leaders must adapt to evolving ESG demands

Earlier this month, I took part in a fascinating session with the World Economic Forum as part of the New Champion Dialogues 2022 series. Hosted by Olivier Schwab, Managing Director at WEF, I was joined by Anushka Bogdanov, Chair and founder of Risk Insights and Jason Jay, Senior Director at MIT Sloan School of Management.?

The discussion focused on the rapidly changing picture of environmental, social and governance (ESG) requirements for companies as they come under increasing pressure from stock markets to provide transparent, measurable and comparable data on their activities.?

And let's not forget pressure from employees, suppliers, customers and other societal stakeholders. ESG risks and opportunities are a fast-moving field, with new regulations and expectations coming thick and fast.?

For companies that want to effectively adapt to these evolving ESG requirements, including climate change, that process must start and end with the board of directors.

ESG and climate change are areas where board directors cannot provide oversight if they don't have the insight.

Unfortunately, today's boards are not as ready as I believe they should be if we want future-fit organizations.

It's been four years since I launched Competent Boards. Since then, our faculty and we have trained hundreds of current and future directors to have a strategic mindset that brings resilience and creates short-, medium- and long-term value.?

One of our Competent Boards alumni, Leslie Seidman, Non-Executive Director and Audit Chair at Moody's Corp. and General Electric, said after graduating that our program made her "feel better equipped to oversee ESG and sustainability issues in a boardroom."?

That is precisely what companies need now: directors who can oversee sustainability issues.

Our 500-plus graduates are still just a drop in the corporate ocean. There is massive demand — and need — in the business world for board directors and senior executives who can competently address these challenges and opportunities.?

It is our duty — our duty of care — as board directors and senior business leaders to ensure that we are informed as best as possible so that we can ask the right questions, evaluate the answers and then make well-informed decisions for the benefit of the companies that we serve, and their stakeholders.?

Luck favours the prepared.?

I see a growing interest from experienced and aspiring board members who want to be educated in ESG and climate change from different industries and regions. And I hear from more and more directors that they don't want to be accused of greenwashing. That is a huge reputational risk.

I also believe we will see a growing number of listed companies who want to ensure that their board's skills matrix shows that they have the competence needed to be successful in the 21st century. Having ESG-skilled directors on board is a must unless they want to risk being accused of "skills-washing."?

Think about the audit committee. Could you imagine an audit committee without financially literate directors? No - but can you imagine an ESG sustainability committee without ESG, including climate change literate directors??

According to surveys of committees overseeing ESG risks and opportunities, including climate change, I'm afraid we do have some way to go before we have board members serving on committees tasked to oversee sustainability, ESG and climate who are literate on those matters.

But not for long. Investors and other stakeholders increasingly want to see if companies have board directors with the right competencies and are fit to face the future. These board directors will need to go beyond current compliance requirements if they are to be successful. They will need to have a "beyond compliance mindset."?

Only focusing on being compliant will not set companies apart from their competitors. It will not attract talent to work with us, supply us, buy our products and invest in our company.?

The board of directors must focus on strategic material issues, the risks and the opportunities of today and tomorrow. To help us do that, we need to listen to all our stakeholders, even if we disagree with them. It's still free advice.

Stakeholders, from employees and shareholders to customers and activists, use ESG to test how well an organization can adapt now and then progress to thrive in the medium and long term.

We can learn how to strengthen our company's value proposition by actively listening to these concerns. We can learn to be better prepared for potential crises by thinking the unthinkable.??

To adopt an integrated mindset, board directors and senior leaders need to master the fundamentals of ESG, including climate change. That mindset is the key to genuine and trustworthy action and value creation.?

It sounds easy… I wish it were! But that is why I want to highlight the importance for board directors and executives of not only getting an education but also carrying out the implementation.

There is an apparent global demand for directors who are competent in ESG, including climate change. These are our stewards of the future.