A board that is prepared to effectively manage and mitigate ESG risks will help the community and their organisation to develop differentiated and crucial customer outcomes and products and services focussed on the future as well as enhancing shareholder value. This lens and the associated programme of activity will contribute to competitive advantage, aid growth and ultimately business success.
When COVID-19 hit, the story around sustainability shifted to the idea that the ESG (Environment, Sustainability & Governance) priorities of boards and companies would be sidelined as businesses either fought to survive or focussed on adapting and innovating to the rapid changes the pandemic imposed.
In fact, the opposite occurred.
Consumers are demanding more when it comes to ESG – not just in terms of their expectations around what it looks like, but also the detail companies should deliver on in terms of clear and transparent reporting. Trust and transparency in this area has heightened in criticality.
Historically, businesses and, by extension, boards and their directors have been more comfortable with the tangible data – P&L, turnover, results, headcount, new products, and market shares.
There is a whole separate article on why this is so, but legacy processes and lack of diversity top the list.
Now, increasingly, intangible assets like brand, reputation and sustainability are taking their place on balance sheets as a critical measure of company value. A 2019 PwC survey found 56% of non- executive directors thought the board spent too much time on sustainability, but it’s role as an intangible asset that drives company performance and one that should inform corporate strategy is more important and more prevalent than ever.
Chairs and boards are now expected to have a sound working knowledge of not only what good ESG looks like, but exactly what’s right and what is not right for that company.
The rise of intangible assets
When pioneering organisations first described and reported on their brands as assets it still took many years for other ‘brave’ businesses to debate and determine how to calculate and put the value of their brand on their balance sheets. Many struggled with defining it as an equity asset rather than a cost. This is because it is less tangible, or actually totally intangible, to some people. A number of significant businesses and their Boards have now successfully made this thoughtful transition.
Today ESG is another one of these less tangible or even ‘intangible’ assets and boards are pushing the need for it to be a priority. It is, however, crucial to ensure that a company is not just saying it, or
being perceived to be doing the right thing, but that it actually has programmes and activities underway and they are being accurately accounted for and monitored.
ESG fundamentals and communication
The Ten Principles of the UN Global Compact states that sustainability starts with a company’s value system and a principles-based approach to doing business. This means operating in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labour, environment and anti-corruption.
Speaking locally, ASX100 companies have long been required to report on their ESG. This has flowed on to others on the ASX. Now this expectation is flowing to non-listed and privately owned businesses as consumers and stakeholders prioritise ESG to guide their buying decisions and their investing. The world has changed and expectations around the less tangible assets are no longer an “if” but a “how”. From social conscience to culture to people management and beyond, external and internal stakeholders in a business now care, and actually choose, based as much on the intangible as the tangible.
So how do Boards ensure the right focus on these items and how do they measure, monitor and account for outcomes, particularly when Covid has accelerated ESG as a priority and accurate, informative reporting is essential?
The foundation of any good ESG: do the right thing
With a long-term sustainability focus, wrapped within the requirements of ESG, there are numerous intangible aspects to be considered, however they are all underpinned by one critical component: ethics! And when I say ethics, I quite simply mean: a company genuinely doing the right thing.
In this space, it’s not for the board (or the company’s executive) to decide what is the right thing. The ‘right thing’ is defined and embedded in a company’s mission, vision and values, informed by employees, consumers, technology, innovation, data and research from other stakeholders and partners. It’s about the board knowing what the right thing looks like and steering the business to get there.
The role of a board today when it comes to ESG
As a starting point, all boards should know what a company does regarding ESG and where the business wants to get to in this domain. The other relevant and critical responsibility is not only understanding what consumers are demanding right now, but also what they’re likely to prioritise in the future. This is where it’s essential for boards to think more like a marketer would and evaluate the business’s ESG from the outside in – ask: “what do the people we serve expect from our business or brand”?
As directors we must now specifically contemplate these further questions: What do customers expect from us? How should we behave? What’s the organisation’s moral compass and stance on sustainability as it relates to our sector, geography or market channel? How can I and the business visibly and authentically live these values?
In this way, boards can view ESG like an external customer, ensuring the business’s behaviours are aligned and ethical.
The past 18 months have shown any board that consumer expectations can change almost instantly. This is a critical issue, but it’s also an opportunity for business and their boards. If a company is already doing the right thing, evolving consumer expectations won’t change what the business is doing to be responsible. What it will change is how the company communicates what it’s doing to ensure consumers are informed and trust the brand.
It is all about being proactive and contributing value to the discussion on any issue under your ESG umbrella. Compliance to regulation alone isn’t enough. It’s the board’s role to oversee what’s right for the future – ethically, morally, humanly and socially, while ensuring compliance. This strategic and ethical capability is essential for the Board of today to drive, measure, monitor and evolve accordingly. Supporting best practice and giving that ‘outside in’ perspective.