ESG & ethical mandates
In the latest of our series of articles with business leaders, Moon Executive Search talks to Paul Clegg, Non-Executive Director, about the increasing importance of an Environmental, Social and Governance (ESG) framework to all shareholders, how implementing an ESG framework should be driven at Board-level; and the potential repercussions of not having an ESG strategy.
Not only is the corporate governance code moving towards the Board being responsible to all stakeholders – shareholders, employees, customers, suppliers, worker representatives, the community and environment, etc - but the way in which society views a company’s role and responsibilities and, therefore, how shareholders look at public companies board mandate is changing.
Having an ESG framework is not mandatory, it is a soft policy, but as more shareholders make impact assessments on the companies they own it would seem logical for companies to implement a robust ESG framework so they can provide their shareholders with the hard evidence needed to prove that they are investing according to their own ESG mandates.
In addition, there is more of a focus on the ethical nature of companies and as a strong ESG framework can influence all company stakeholders, its impact goes beyond the ability to attract investors, it will affect the cost of capital, the customer base, market perception, and staff attraction/retention as well as many other factors.
Previously, a lot of ‘green washing’ in annual reports has focused on having fantastic diversity, training, and CRS policies or a great H&S record, and companies have been able to create a favourable image without needing to provide tangible metrics. By focusing on ESG, companies will need to provide data on and have functioning objectives, in relation to a range of different categories which could include waste generated per sale, carbon emissions, climate change policy and training spend and many other operational data points. This, in turn, will provide greater transparency to the company’s stakeholders and enable them to make informed investment decisions or work with/for a company whose values match their own.
Adopting a robust ESG observance, therefore, would seem to be an obvious choice. However, several companies have yet to make a positive move in this direction because there is a lack of understanding of the requirements, how to execute an ESG strategy and because ESG policy isn’t yet being driven at Board-level.
For an ESG framework to succeed the strategy needs to be developed and driven at Board-level, have Board responsibility, and the ownership is allocated amongst board members in the same way as Remuneration, Audit, Nomination, Risk or SID. Once this Board function is in place it is then important to understand what material framework is needed for ESG in the company.
Consider what the big issues for the company are. Do they have a material and wide-reaching influence? Can they be addressed from a company function point of view? And, can they be changed through a process of action?
Be focused and map out key material objectives for the categories – environmental, social and compliance – which are common to each division or department. Dynamically execute functional change which delivers demonstratable results that can be built upon and broadcast. Develop a cascade of material objectives which, as they become embedded in the company culture, reinforce the ESG framework and are viewed by the shareholders as relevant and working.
We may be at the early point of companies moving towards having an ESG framework, but it will become standard practice. Why? Because the implications of not implementing an ESG strategy are wide-ranging and will impact companies broadly. These impacts could include fluctuations in the cost of capital, reductions in sales as more customers move to ethical buying, being able to attract top talent, and the ability to retain shareholder interest. Consider the millennial workforce who are increasingly driven by ethical decision making, not only are they are not going to join a company that doesn’t match their principles, but they are not going to engage with that company at any level.
Now is not the time to be passive or to treat ESG as a nice to have which doesn’t need to be pushed at board level. For any company that wants to do business in the modern age, a robust ESG framework is going to be essential to shareholder engagement.
In fact, Larry Finks’ recent letter has highlighted the need for all companies to address this issue now https://www.blackrock.com/uk/individual/larry-fink-ceo-letter
With 20 years’ experience of undertaking executive and non-executive search campaigns, Moon Executive Search is well placed to help ensure that the right level of board expertise is in place.
If you would like to discuss any upcoming requirements or future plans with us please contact Vanessa Moon, Director, Moon Executive Search on +44 (0) 1275 371 200 or vanessamoon@moonexecsearch.com