The most important topic on which investors demand to engage their corporate boards is sustainability. When the most powerful stakeholder (investor) of a company demands priority be given to ESG (Environment, Social & Governance), one would expect boards around the world to be able to engage with investors. But unfortunately this is not the case. Only 56% of Directors understand their company’s carbon emissions and fewer than two-thirds of them admit their boards even understand their company’s climate strategy. Another BCG-INSEAD Survey says unfortunately 70% of board directors said their boards were ineffective at integrating ESG into strategy building and governance. This is at a time of monumental change driving the need for ESG integration in companies. Not just investors, but consumers and regulators are strongly pushing for sustainability integration in corporate policies. For change to happen at the top, ESG specialists need to be in the most powerful decision making body of the private sector.
Why is ESG important?
A company focusing on sustainability in the past would have had a competitive edge over the other in terms of marketing but today it has become imperative for corporates to integrate ESG into their strategy due to the overwhelming demand by all stakeholders which include the investors, consumers, employees, supply chain partners and government regulators According to Gartner, 85% of investors in 2020 looked at ESG factors when making important investment decisions. ESG is not just about doing the right thing but it is also profitable as a Deloitte report shows that an inclusive culture results in a productivity increase of 22%.
The demand from consumers for sustainability is ever increasing especially among millennials and Gen Z. A study shows that nearly two thirds of consumers are even willing to spend more if the product is from a company that values sustainability. ESG factors also affect talent acquisition as 49% of Gen Z in 2021 had made career choices taking personal ethics into consideration according to Deloitte. Lastly, government regulations on ESG are getting stricter since the Paris Climate Agreement with legally binding net zero emission targets being set by many European governments. The recent regulations by the Securities and Exchange Commission of the United States and the EU’s new taxonomy laws make it essential for any company around the world doing business in or exporting to Western countries to adhere to ESG commitments.
Why are ESG Specialists needed on corporate boards?
Fulfilling stakeholder demand – As discussed above, the business case for ESG rests within the rising demand from all stakeholders. Earlier this year, shareholder pressure on Apple saw Apple giving in to do a civil rights audit and the world also witnessed the world’s largest asset manager BlackRock backing the appointment of climate activists to the oil giant ExxonMobil’s board of directors. There is also pressure from the younger generations as they aspire to work for and buy from companies with greater ESG integration. Having ESG specialists on boards to influence ESG strategy integration to the overall corporate strategy is of urgent need. Relying on the C-Suite or an external consultant for ESG can be costly in the long term.
Addressing critical ESG knowledge gaps within Boards — An INSEAD Survey shows that less than half of board directors claimed they had the required ESG expertise and competence to exercise board level execution oversight. This is backed by a report which states that only 25% of directors on boards understand ESG risks in the first place. Urgent action is needed as earlier this year the Board of Directors of the oil giant Shell were sued as they failed to prepare the company for a net zero future. This further drives the urgency for ESG experts at higher levels of authority in the private sector.
Achieving regulatory requirements – Many ESG standards are likely to converge under a global standard and the likelihood of independent ESG auditors granting assurance is increasing. This will require board members to be able to meet the requirements. The US Securities and Exchange Commission’s recent regulations show that aligning financial statements with ESG disclosures will be needed. With the EU and even Asian countries moving in this direction, it will become a necessity for Sri Lankan businesses in this globalized world.
Mainstreaming ESG concepts into corporate strategy – ESG factors need to be integrated in the overall corporate strategy building process as sustainability similar to digital transformation is embedded in diverse sectors of a company. 81% of board members favor ESG integration operationally and strategically. This is needed to establish long term strategic partnerships and investment decisions. ESG Experts on corporate boards can make a board ready for the future in a fast evolving world.
Talal Rafi is a Senior Global Management Consultant at Deloitte Consulting focusing on corporate strategy and he was on Deloitte’s Global ESG Operations Team. He is a member of the Expert Network of the World Economic Forum and he Co-Chairs the Global Plastic Innovation Network Action Group of the World Economic Forum. He has given talks globally including at the NASDAQ Entrepreneurial Center, S&P Global and the Central Bank of Sri Lanka. His work has been published by the World Bank, International Monetary Fund, Asian Development Bank, World Economic Forum, UNFCCC, London School of Economics and Forbes.
