Environmental, social and governance (ESG) boardroom questions

What's the issue  |  Regulation & frameworks  |  Boardroom questions  |  Board actions

Natural resource depletion and environmental degradation are contributing to water, food and energy crises. Weak governance, lack of infrastructure and rising inequalities are limiting economic and social development. And the economic and geopolitical impacts of extreme poverty – such as hunger, disease, unemployment and conflict – are becoming ever more apparent.

Focusing on environmental, social and governance (ESG) is not only about “doing the right thing”. It’s imperative for organizations to grow and profit in a sustainable way. For that reason, ESG issues have become an important parameter for investors to evaluate companies, as they offer a lens through which they can see a company’s resilience, adaptability and sustainability. They want to understand which issues are of greatest risk or strategic significance to the company, how they are embedded in the company’s core business activities, and whether there is strong executive leadership behind the ESG efforts, as well as enterprise-wide buy-in.

Businesses who get it wrong risk:

• competitive disadvantage, as companies driving sustainable development gain first access to new markets and opportunities;
• loss of security of access to natural resources, including land, water and energy; and
• brand and reputational damage, which could result in the loss of support from customers, clients, investors and governments.

Despite the need to get it right and the risks of getting it wrong, we have not developed within our planetary bounds^[1]. To help get us back on track, the UN set 17 Global Sustainable Development Goals (SDGs)^[2] – clear economic, social and environmental goals – to achieve by 2030. The SDGs are an opportunity for businesses to grow and profit by collaborating with others to create a world which is more prosperous, inclusive, sustainable and resilient.

Boards should encourage their management teams to reassess the scope and quality of the company’s sustainability strategy and ESG reports and disclosures.

In December 2019, the European Commission (“Commission”) issued a communication^[3] setting out The European Green Deal^[4] (“Green Deal”). The Green Deal provides an action plan to tackle climate change and environmental challenges, boost the efficient use of resources by moving to a clean, circular economy, restore biodiversity and cut pollution. The plan also outlines the investments needed and financing tools available, and explains how to ensure a just and inclusive transition.

To reach the objectives of the Green Deal and direct investments towards sustainable projects and activities, we need a clear definition of what is ‘sustainable’. This is where the EU taxonomy^[5] comes in – the EU taxonomy is a tool for classifying sustainable activities and will aid in the prevention of “greenwashing” of investment products. This has implications though beyond the financial sector, as investors will want to know that a company is “investable”. If not, it could result in a higher cost of capital. 

As part of the Green Deal, the Commission committed to review the Non-Financial Reporting Directive (NFRD). On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. The CSRD amends the existing reporting requirements of the NFRD. “The proposal extends the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises), requires the audit (assurance) of reported information, introduces more detailed reporting requirements and a requirement to report according to mandatory EU sustainability reporting standards, and requires companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.”^[6]

This topic is continually evolving but there is a trend towards (and need for) more open disclosure and reporting. In this regard, there are a number of frameworks available to companies in their ESG journey, including:

• The Sustainability Accounting Standards Board (SASB)^[7], established in 2011, develops and helps organizations implement sustainability accounting standards. SASB Standards identify the subset of ESG issues most relevant to financial performance in 77 industries. The SASB is currently part of the IFRS Foundation to support the International Sustainability Standards Board (ISSB). SASB has merged with the Value Reporting Foundation (VFR), which has been consolidated into the IFRS Foundation.
• The UN Principles of Responsible Investment (PRI)^[8] are an international network of investors, which have put out six principles that investors should practice.
• The Global Reporting Initiative (GRI)^[9], which originated in 1997, is a disclosure standard that helps companies disclose their ESG information in a standardized manner. It’s now adopted by the vast majority of reporting corporates worldwide.
• The Task Force on Climate-related Financial Disclosures (TCFD)^[10] was created in 2015 to improve and increase reporting of climate-related financial information.

• Does the Board have the necessary skills and information to guide management on the way forward?
• Do our ESG criteria also cover governance matters such as board diversity, board performance and ethics?
• What type of assurance would improve our insight into our organization’s ESG practices?
• Are we reporting on robust and reliable sustainability information in the management report?

• How can we strengthen our value creation strategy so that we identify the business opportunity in addressing ESG challenges – and thereby increase our contribution to the SDGs?
• Do we have the processes and tools to integrate the identified ESG parameters into our vision, goals and metrics? And to communicate them with our stakeholders?
• Have we developed a strategy to “do no harm” and proactively uphold human rights across our sphere of influence? Have we issued a statement on human rights?
• Have we considered whether our procurement and employment strategies are aligned to the SDGs?
• How are we benchmarked against our peers?
• Which ESG reporting frameworks have been considered? 

• What processes do we have for the identification of ESG opportunities and impending risks?
• Do we comprehensively understand the material ESG risks and parameters?
• How are we managing our company’s exposure to water, energy, food, climate and social risks?
• Are risks explicitly stated and disclosure provided on how they are mitigated? 

• How embedded is ESG in our current investment process?
• Can we embed ESG into our debt financing and will it lower our cost of funding?
• Are we making the most of new tax incentives related to ESG?

• Does our workforce have the diversity, skills and attributes to innovate and succeed in our changing world?
• How are we fostering a culture of innovation and collaboration to seize new multi-stakeholder partnership opportunities?
• How can we increase our engagement on ESG matters both internally and externally? 

• How will progress towards the SDGs affect market opportunities and the competitor landscape?
• What opportunity do the emerging middle classes in high growth markets represent for our business?
• How can we innovate to reach customers/clients on low incomes in our home country and/or overseas?
• How do we collaborate with other organizations in our industry to develop and adopt good practice principles and standards to drive positive change?

• Conduct a (double) materiality assessment to identify the sustainability topics most material to the company;
  
• Determine which ESG risks and opportunities are of significance to your organization;
• Conduct a thorough refresh of your stakeholder, risk and value creation analyses to ensure your strategy reflects the changes social, environmental and policy landscape;
• Assess opportunities to collaborate with other businesses, governments, civil society, academia, etc. to drive innovation and shared value.

• Encourage integration of material ESG issues to business strategy;
• Review, and where necessary improve, systems to measure, manage and report the organization’s contribution to growing inclusive, sustainable prosperity;
• Protect and enhance your organization’s reputation by acting responsibly in pursuit of inclusive, sustainable prosperity.

• Shape the ESG communication keeping in mind investors and other stakeholders in the context of long-term value creation.

• Ensure that the board has the right composition, structure and processes to oversee ESG in the context of long-term value creation
• Ensure your organization has the values, resource, knowledge and capability to implement these actions

The Board Leadership Center offers non-executive and executive board members and those working closely with them (including CROs and Heads of Internal Audit) a place within a community of board-level peers. It also offers access to topical seminars and more technical Board Academy sessions, invaluable resources, thought leadership and lively and engaging networking opportunities.