ESG Risks & Rewards: How Boards Can Lead Through Change - Boardroom News & Leadership Insights

ESG Risks & Rewards: How Corporate Boards Can Lead Through Change

How confident are you in your company’s ability to navigate ESG criteria? If you hesitate to answer, you’re not alone. Data released by Boston Consulting Group and the INSEAD Corporate Governance Center revealed that nearly three-quarters (70%) of directors are merely “moderately or not at all” effective at integrating ESG criteria into their organization.

That’s not to say that corporate leaders don’t place priority on ESG criteria. But over half (53%) of directors believe that they’re not effective at devoting time to ESG strategy. And 55% of directors at companies with a net-zero commitment admit that they have no published strategy for reaching this goal. 

These findings point to the need for boards to develop clear strategies for handling the most critical ESG risks and rewards. Here are some of today’s best practices for bringing your board up to speed.

Understanding ESG Risks and Opportunities

First, it’s important to understand that ESG brings both risk and opportunity. Positively, data from Pew Research Center indicates that Americans are eager to see companies develop a social conscience. 

How Should Boards Navigate ESG Risk?

Millennials and Gen Z stand out as advocates for climate change activism, and more than half of all Americans (56%) embrace DEI policies in the workplace. So on the one hand, ESG policies can aid companies in improving their corporate image.

But not all ESG criteria are created equal, nor does the public uniformly embrace every value represented by ESG. Recent controversies and boycotts have pushed companies to reconsider their stance on certain social policies.

Nearly half (48%) of Fortune 500 CEOs agreed that the pushback against ESG represents “a useful correction.”

At the very least, this data indicates that ESG adoption is a highly nuanced conversation. Companies may therefore face resistance regarding the adoption of certain social criteria while likewise fostering shareholder loyalty in the adoption of sustainability initiatives or transparent governance policies.

Building an ESG Strategy for Today

Corporate boards will need a new approach to ESG that considers both risk and challenge. The following principles can help executive teams develop greater confidence in their ESG preparedness.

Develop Clear Timetables

The above data highlights a disconnect between the stated priorities of corporate leaders and the actual strategies for accomplishing these goals. It’s up to executive boards to close this gap by developing clear plans for ESG implementation along with timelines and benchmarks to track progress.

This may be particularly important for companies that are adopting climate change commitments. Aiming for a net-zero carbon emission standard may be a lofty goal, but this goal demands a clear path forward. Setting smaller goals along the way (e.g., shifting to electric commercial vehicles) allows you to devise a multi-step strategy for adopting and integrating ESG initiatives. 

Develop Strategies That Impact the Bottom Line

Remember, some ESG goals may have more than one measurable result. For instance, switching to renewable energy and reducing waste may satisfy ESG criteria, but these diverse strategies can also help companies save money, which improves your bottom line. Additionally, maintaining compliance can help you avoid penalties or even lawsuits that can damage your finances as well as your reputation.

Stakeholders are better able to see the value of ESG strategies when you generate a measurable return on your investment. If any shareholders were cautious about your ESG approach, strong financial results can ease these concerns and demonstrate the benefits of ESG — for the planet as well as corporate stakeholders.

Pursue Transparency Among Shareholders

One of the current challenges facing ESG adoption is that shareholders aren’t clear on what it means. 

How Boards Can Respond to Shareholder Activists

This is especially true of “social” adherence, given that concepts such as “diversity” and “inclusion” have become entangled in the political culture war.

And now that Target has been hit with an ESG lawsuit, corporate boards recognize the need to tread lightly regarding ESG adoption.

As with any relationship, communication is key. Executive teams should strive toward total transparency regarding corporate decisions, especially among company stakeholders. 

This means identifying your ESG goals and outlining the exact steps you intend to take to reach these goals. Clear communication can short-circuit any possible rumors that could negatively impact your company’s reputation.

Explore Long-Term Goals

ESG goals have both a short-term and a long-term component. Corporate leaders should consider their immediate goals, such as sustainability and workplace equity, as well as think about the long-range implications of these initiatives. 

For example, how will you create and maintain a diverse workplace culture over the course of the next 10 years as one generation retires and a new generation enters the workforce?

This consideration, of course, connects back to the need to create a clear timeline. But it also prompts boards to define the kind of company they are as well as the kind of company they hope to become — and the steps needed to close this gap. Benchmarks become stepping stones as companies make progress toward their goals.

Stay Up-to-Date on Regulatory Requirements

ESG criteria are rapidly evolving. Companies will need to stay current on regulatory requirements and changes to mitigate risk. After all, non-compliance with ESG criteria may result in fines and other penalties, as well as damage to the company’s corporate brand.

Some boards might consider creating an ESG committee devoted solely to assessing the company’s risk and learning about recent changes to the regulatory environment. This will also help you keep shareholders up to date on regulatory changes and other challenges that may inform corporate decisions.

The Difficulty and Necessity of Change

Leading through change is never easy. Rarely do all stakeholders agree that the benefits of adopting a new system outweigh the costs. But regardless of the exact criteria, American businesses will continue to strive toward some form of ESG criteria. 

These changes are still in their infancy, which only further highlights the necessity and opportunity for boards to take the lead in communicating the benefits and possibilities of change. Change may be difficult, but facing these necessities can ensure a brighter and more successful tomorrow.

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