How Should Boards Navigate ESG Risk? - Boardroom News & Shareholder Insights

How Should Boards Navigate ESG Risk?

In April of 2023, Bud Light partnered with trans activist and influencer Dylan Mulvaney, triggering a backlash from critics and activists. By October 2023, Anheuser-Busch InBev had lost $27 billion of its market value

The damage to the brand’s reputation only highlights the fact that corporations are not immune to the culture war, prompting companies to wonder how best to handle environmental social governance (ESG) policies moving forward.

Bud Light is not alone. Also in 2023, the Target corporation was slapped with a shareholder lawsuit alleging that its ESG policies don’t align with the company’s customer base. Amidst a stream of lawsuits, boycotts, and other backlash, corporate leaders are seeking new ways to balance the risks and rewards of ESG criteria.

A War on Two Fronts

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

Much of the backlash surrounding Bud Light and Target has, admittedly, come from cultural conservatives.

Even conservative politicians have made jabs at companies like Target and Disney in the name of the culture war — a conflict concerning America’s shared values and priorities. 

For some, ESG criteria grant legitimacy to policies that don’t align with investors’ values. Diversity, equity, and inclusion (DEI) policies are assumed to be driven by ideology rather than traditional ideals of fairness or meritocratic achievement. 

Other investors are concerned that fund managers are basing decisions on ESG adherence rather than a positive rate of return to investors, which means ESG policies can potentially run counter to the shareholders’ best interests.

On the other side of the cultural spectrum, companies have been so overeager to emphasize their sustainability initiatives that they run the risk of “greenwashing.”

Greenwashing refers to the over-inflation of a company’s eco-friendly policies, often in an attempt to appeal to like-minded consumers.

How Boards Can Navigate ESG Risk

Given this controversy (and the potential for loss), how should companies think about ESG criteria moving forward? 

On the one hand, ESG policies remain an important value for American businesses. However, executive boards and leadership teams should take steps to mitigate risk and ensure that the company’s values align with those of shareholders.

Understand the Scope and Challenges of ESG

First, boards should become familiar with the scope and complexities of ESG frameworks. Compliance with ESG criteria may include environmental sustainability initiatives in addition to social/equity policies and ethical governance. 

These categories each contribute to an organization’s ESG compliance in markedly different ways, so it’s important for boards to recognize this complexity. For example, a company might satisfy the social aspects of ESG through a DEI program, yet still be lagging in environmental policies.

The complexity of ESG criteria also means that your risk profile may vary depending on exactly which of the three frameworks your company accents. In the recent examples of Bud Light and Target, the controversy arose from issues relating to the social aspects of ESG criteria. 

Companies will need to understand how their company’s actions may expose them to risk, which may inform the ways in which they prepare for public response.

Make Clear Policies Regarding the Social Aspects of ESG

Recent controversies have also placed corporate America under a microscope, with consumers and investors taking a greater interest in the values and policies of American businesses. Boards should learn from the above examples, as they show how social policies can have a direct, measurable impact on a company’s bottom line.

However, not all social policies are created equal. Social policies can include:

  • Policies on health conditions in the workplace
  • DEI policies and initiatives
  • Engagement with local communities
  • Workplace culture and employee engagement

Not all of these policies will generate a strong reaction among consumers or investors. But others will, which is why advertising your adherence to ESG criteria may foster the assumption that your company has embraced the other ideals whole cloth. 

Cut off any potential for rumor or assumption by clearly identifying what sorts of decisions or policies you’re enacting to satisfy the social aspects of ESG compliance.

Be Clear About Environmental Policies

With concerns about greenwashing on the rise, it’s equally important for companies to specify their plans regarding environmental sustainability. 

It may even start by educating the public that not all environmental policies are a reaction to the long-term effects of climate change. Instead, some policies can be a response to immediate weather patterns such as extreme heat, droughts, or even floods, fires, and other natural disasters.

Therefore, your environmental response may be twofold. You may highlight policies that show a commitment to the environment itself, such as using recycled materials or even electric delivery vehicles to reduce your carbon footprint. 

At the same time, you may highlight policies that ensure smooth business operations in the face of changing climate conditions, as well as contingency plans to maintain your supply and distribution networks even when facing environmental challenges.

Adapt to Changing Regulations

ESG criteria remain relatively new, which is why regulations surrounding ESG adherence are continually evolving. Your first priority should be ensuring you understand your regulatory requirements and commit to policies that satisfy them. 

If necessary, you may consider business consulting services that provide expert guidance on corporate policies.

Your next priority should be to communicate these commitments to the public. Present and prospective shareholders can use this information to evaluate and understand both the monetary and social value of your organization.

Stick to Your Principles

The Bud Light story serves as a cautionary tale for another reason. In Dylan Mulvaney’s eyes, the company failed to support the influencer in the wake of public outcry. This lack of support, Mulvaney said, “was worse than not hiring a trans person at all.” 

In an increasingly divided nation, it’s become impossible to please all types of shareholders. Companies might even expect backlash when wading into these sorts of topics. 

But as Mulvaney observes, there can be just as much damage if you fail to stick to your principles. That may also increase the need for legal counsel and guidance when facing the risk of lawsuits.

An Evolving Landscape

Business leaders can use these tips to mitigate the risk of ESG adherence. But as compliance standards continue to evolve, so will your risk profile. Boards should remain flexible and continue to learn more about these criteria so that they can thrive as they face the future.

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