ESG's next phase: Put your money where your mouth is

21 December 2020 Consultancy.uk
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A fundamental change is occurring in how environmental, social and corporate governance (ESG) issues are perceived, writes Claire Skinner, the Europe & Africa Leader of human capital consultancy Heidrick & Struggles.

The ever-present threat of climate change, the ongoing impact of the Covid-19 pandemic, and the expectation that businesses will take a stand on ethical and social issues are now significant concerns for non-executive directors (NEDs). In the not so distant past, boards saw the reputational risk of failing to act in these areas, but did not perceive ESG issues as core strategic priorities. There is growing anxiety among NEDs about the uncertain future businesses face, and the pandemic is increasingly seen as an opportunity to reset and pivot business models where necessary. 

While much of the heavy lifting is currently taking place at committee level, particularly within Audit and Risk, ESG is increasingly finding its way on to the main agenda at board level. NEDs who are ESG specialists within the investor community might influence the voting on some boards, but the true power lies with those who are managing the money and there is a question mark over how to engage with this group.

Claire Skinner, Head of Europe and Africa, Heidrick & Struggles

Today, we’re still finding that investors and boards who are generous with statements of support around the ESG agenda are slower to act when the time comes to put their money where their mouth is.

Chief Sustainability Officers take significant time to engage in belief building, which involves in-depth conversations with impacted businesses, aiming to appeal strongly to their own set of values, but also holding up the size of the prize, emphasising the opportunities, getting them engaged and then giving them the tools and the assurance that they can actually succeed.

In the past, one of the problems that boards had with sustainability was that it was seen almost as a function of the CSR agenda; but this has changed board and sub-committee level where considerable focus and energy has gone into integrating ESG as part of the core business. 

In some instances, boards can be encouraged to get the ball rolling by looking at initial cost savings; for major multinationals, implementing energy-saving or water conservation programmes across their global footprint can equate to significant savings. Some refer to this method of generating early buy-in from board stakeholders before moving on to more significant measures as nudge theory. 

Government guidance around the world along with regulators are also a significant influence, but nowadays boards more often want to be seen as ahead of the curve rather than being forced to focus on ESG through government and regulatory accountability. 

Board commitment

Integrating sustainability into core business models, and putting it on the main agenda for the board is an important and powerful step, because it means that NEDs see it as something they have direct ownership over rather than something that has been delegated onwards. This also means that the entire board needs to have more knowledge of the ESG space.

One solution that has functioned successfully is running masterclasses with the board where clients and scientists are brought together. This can mean creating an Advisory Panel where scientists, NGOs and clients are together in the room, and they have regular sessions to engage. 

Boards are hungry for knowledge and want real guidance on the lens through which they should be looking at these issues. They know that it now goes far beyond the carbon footprint report. The ESG agenda is now a business imperative and not a nice-to-have. 

However, while significant progress has been made, boards are often more reticent when it comes to discussing the more difficult tradeoffs that come with a commitment to ESG. Will shareholders take a smaller dividend to fund these initiatives? These challenging conversations and decisions will shape the ESG agenda through 2021 and beyond.

Claire Skinner is a partner in Heidrick & Struggles' London office and leader of the Europe & Africa region. She is a member of the firm’s CEO & Board, Industrial, and Private Equity practices.