Before we plunge into the world of ESG, let us start by dipping our toes. And, where better than the definition?
ESG, otherwise known as environmental, social and governance, are a set of criteria that set a company’s standards in regards to their behaviour, used by socially conscious investors to screen and vet investment opportunities.
- The “environmental” factor: considers the company’s relationship with the environment and its efforts in environmental preservation. It includes corporation policies addressing climate change, waste management and more.
- The “social” criteria: considers the company’s relationship with its employees, suppliers, customers, contractors and surrounding societal communities.
- The “governance” criteria: considers the company’s role in leadership, executive pay, audits, internal controls, and the types of shareholders.
In recent years, investors have grown increasingly mindful of where they are putting their money. As a result, ESG now continues to gain momentum in the corporate world. Understanding how far corporate boards are willing to prepare and address ESG goals is critical for companies today.
An investigative study by Willis Towers Watson, a professional consulting firm, interviewed 170 board members in more than 20 countries. In 2022, they conducted a Board of Directors Survey, researching societal issues, feelings towards climate change, as well as long-term sustainable values among companies.
Five main themes were identified and highlighted.
1. An overall increase in ESG awareness and issues
Maximising shareholder value should not be all that ESG is about. A company should have genuine integrity and purpose. That is how a company can differentiate itself from its competitors. Purpose transforms into a competitive advantage, which in turn becomes tangible value for the company.
It was found that incorporating ESG into a well-defined company mission, vision and values helped empower employees and keep them with the same goal in mind. This reflected externally onto consumer behaviours, which was found that consumers naturally shifted towards brands that kept social and environmental aspects in their value proposition.
In light of the COVID-19 pandemic, it was found that many companies were focusing more heavily on ESG. Employee physical health, mental health and resilience were also increasing priorities for companies.
More specifically and recently, with the Roe v Wade protests across the United States, corporate America has been pressured to take a more vocal and active stance against societal issues plaguing the nation. According to Harvard Business Review, “Corporate leaders enter this conversation amid historic highs – and growing expectations – of business action on societal issues, such as racial equity and climate change.”
This can be seen in the stances that some of the largest companies in the world. For Amazon, the company will pay up to US$4,000 in travel expenses for those who have to travel out of state to get an abortion and other non-life threatening medical procedures. Apple’s health insurance provider has said that the company will cover the cost of employees who want to get an abortion and need to travel out of the state to do so. Various other tech companies, such as Meta, Bumble, and Alphabet, as well as a string of other prominent organisations like Patagonia, Citigroup and JP Morgan, have also taken similar stances.
2. A stronger emphasis on diversity, equity and inclusion (DEI)
There is an increased awareness of DEI and the necessity to honour a more diverse and inclusive workforce. It was shown that directors believe that CEOs should incorporate DEI values into their hiring practices. DEI must be infused into the company’s values, starting at the top, with the Board, and naturally trickling down to the different departments within the organisation.
It was found that 66% of survey respondents replied that the full board is most likely to oversee efforts in their companies, while 18% of respondents admitted that they are working on it, seeking change within three years. With DEI as part of the company’s value statement, it sets the scene for it to become a part of the organisational culture.
“DEI success in the Boardroom is achieved when there is a well-designed and robust analysis of existing skills, backgrounds and life experiences that meet the current and future strategic needs of the organisation,” explains Conscious Governance’s Steven Bowman. “A Board Skills matrix should be designed to measure and monitor these.”
3. Caring for the environment is the top priority
During the survey, the majority of directors voted that the issues pertaining to the environment and climate were their priority. With an increase of awareness around the world and research done on global climate shifts, information on climate change, greenhouse gases, carbon footprint, waste management, energy consumption, and more are readily available to the public. Stakeholders of an organisation would be much more aware of these figures, and therefore it becomes a priority. Directors admitted that environmental impacts are the top priority for their business and strategy. They have been working on creating a balance between managing risks and creating opportunities. For example, how to minimise energy consumption yet also shift towards using renewable energy.
4. ESG to incentivise executives
ESG goals need to be incorporated into management and executive incentives in order for them to grow fully and be embraced. However, there is some debate among directors about pursuing ESG priorities, as some directors do not agree that ESGs should warrant additional incentives.
There have been a few surveys throughout the years showing how companies have been incentivising their executives, such as in the 2020 Willis Towers Watson survey on “Aligning ESG and Executive Incentives.”
The research showed that an incredible 78% of respondents were planning on changing how they use ESG within their executive incentive plans over the next three years. A high percentage of respondents also agreed that they would introduce ESG measures into their long-term incentive plans.
ESG goals are looking up, as having an ESG agenda incorporated into the company’s values could help accelerate and drive a caring social and cultural mindset within the company and its policies.
3. Supporting long-term value creation
It is no surprise by now that a company’s operating in the 21st century that is focused on creating long-term value is greatly affected by its ESG goals and sustainability priorities. Several directors have reported that their company has been able to generate stakeholder interest, organisational purpose and ESG goals.
Companies are a well-balanced internal and external game. Whilst the company must generate income, they also recognise that long-term value aids in maintaining stakeholder interest.
Striking a balance between both allows the company to maximise their value and keep every aspect of its operations in line with its ESG principles. With solid ESG goals and a good reputation, the company earns reliability with their stakeholders. These benefits, both direct and indirect, include increased capital and valuations from investors focused on sustainable investing, as well as improved company culture.
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