In August 2019, 181 CEOs committed to adopt a stakeholder-focused leadership model under the umbrella of the Business Roundtable (BRT). This action has been viewed by many as a tipping point, accelerating the business community’s focus on ESG (environment, social and governance) as a core business and strategic issue.
Now, as we approach the end of the first 100 days of a new Biden administration, we expect to see the formalization of more regulation across ESG business practices and disclosures — all of which come on the heels of the Biden administration’s proactive approach toward enacting ESG-centric policy, such as rejoining the Paris Climate Agreement and building infrastructure to address climate change.
Many businesses are wondering what to make of the evolution of ESG from a buzzword to a more scrutinized, rigorous business practice and, perhaps more importantly, how to calibrate their own ESG efforts. Clearly, change is coming, and it is likely that companies will need to comply with new requirements in the near-term. Below are three key questions that should be used as a guide to develop a more proactive approach — focusing efforts toward sustainable, short- and long-term growth in a manner that is compelling to all stakeholders.
1. What are the priority issues for your company? And how do oversight and leadership factor these topics into business operations?
It is important to understand current climate and sustainability trends, from net-zero carbon emissions goalsetting to climate justice, particularly as investors continue to signal their attention to such issues. However, it is also essential that companies do not lose sight of industry- and company-specific issues.
Ensuring your company understands the expectations of its stakeholders is a key initial step. Surveys can uncover issues that are top-of-mind among stakeholder audiences and help companies determine how to prioritize their efforts to avoid significant mission-creep (or sprawl). For organizations that may have conducted stakeholder surveys a few years ago, this is an opportune moment to reaffirm which priorities continue to be relevant, as stakeholder interests have shifted along with the rest of society.
Beware of what seem like easy solutions to complex problems. There is no one right way to organize and oversee sustainability issues, and the perception of green washing can undermine efforts and have significant negative reputational effects. Establishing meaningful goals that are tracked, measured, updated and funneled through the organization can help withstand the lure of the quick fix and foster confidence and trust among stakeholders. It is also helpful to create an oversight mechanism — such as laddering up to the Board (or a committee) as a best practice — to make it clear that ESG is a priority for leadership. Building this infrastructure will set a company up for success over the long term.
2. How do you operationalize stakeholder capitalism?
It is no coincidence that the latest ESG metrics from the World Economic Forum (WEF) and Big Four accounting firms are called the Stakeholder Capitalism Metrics. Developing and communicating business strategy that takes into account more than just financial performance is not new. However, the lack of historical direction has created an environment which fails to offer standardization, resulting in myriad new metrics and frameworks that often leave companies feeling uncertain about how they should be benchmarking their progress.
There is now a growing debate as to whether companies should report in accordance with the Sustainability Accounting Standards Board (SASB) and align with the Task Force on Climate-related Financial Disclosures (TFCD). The loudest proponents for adoption of these metrics are, critically, the largest institutional investors that own significant stakes of nearly every public company. However, there is a difference between a company that plugs its reporting into a framework and one that leverages a framework to guide its storytelling and progress on ESG work. It is important that frameworks enhance a company’s narrative rather than control how it is shaped. Regardless of which of the many frameworks are employed, stakeholder engagement can provide essential feedback to help influence the data a company collects and how it is presented to tell a story.
What is most important is building credibility through consistency. From quarterly earnings and website updates to annual and sustainability reports, telling a company’s story consistently helps to keep stakeholders updated and confident on progress and transparency. Stakeholders are more likely to reward companies that clearly convey long-term strategic plans, comprised of key sustainability and ESG measures, on a regular basis.
Lastly, companies must ensure that they are consistently disclosing positive work, even if it does not fit neatly within a framework. This might take the form of R&D, product innovation, or even internal campaigns – great ESG stories can come from across the organization.
3. What are the potential risks of inaction?
Just as stakeholders are looking to see what proactive work companies are doing related to ESG, an increase in attention is being paid to companies called out for silence or perceived lack of action related to issues like climate and equality. We have seen over the past year how the COVID-19 pandemic and rising social justice movements accelerated these trends.
Companies that are not making strides on ESG issues are vulnerable to other stakeholders filling the void. Activists and hostile counterparties have historically been willing to capitalize on weaknesses. Most recently, employees and supply chain partners have been publicly demanding companies make ESG commitments, while concurrently monitoring the actions taken as a measure for accountability
Similarly, investors are seeking and evaluating investments with an ESG focus, and poor risk oversight by management has always been viewed as a red flag performance measure. Value-creation in 2021 and beyond will increasingly be tied to a company’s ability to manage ESG risks and take advantage of opportunities.
It is easy to view the ESG space as a collection of silos, and many companies do so by solely focusing on specific topics such as diversity and inclusion, environmental sustainability and board oversight. But ESG success requires a holistic and integrated view of business planning and operations. Following the guidance provided above will help ensure leadership is aligned and that your company is prepared for heightened stakeholder expectations, variable industry metrics and new federal ESG regulations.
ELIZABETH K. BIEBER
COUNSEL, FRESHFIELDS BRUCKHAUS DERINGER US LLP
Bieber is Head of Shareholder Engagement & Activism Defense at Freshfields in New York. She advises boards and management on governance, shareholder activism and takeover defense preparedness, and crisis management and provides guidance on ESG issues.
EXECUTIVE VICE PRESIDENT, FINANCIAL COMMUNICATIONS, BCW
Okwu focuses in developing institutional investor and financial media related programs. Along with counseling companies, he has experience collaborating with boards of directors and leadership teams for their corporate brand and business model.
VICE PRESIDENT, ESG REPORTING, BCW
Patterson leads BCW’s ESG reporting team, working with clients to create annual reports and sustainability-related communications plans. She specializes in communications strategy, disclosure development and reporting.
VICE PRESIDENT, FINANCIAL COMMUNICATIONS, BCW
Connerat specializes in financial storytelling, executive positioning and thought leadership for clients within the financial services, technology, and consumer sectors.