The New Environmental, Social, and Governance Imperative
December 14, 2019
Long-term value creation and the alignment of strategic objectives with financial objectives and overall success will need to remain the centre of the board’s agenda. In 2019, the issues that should be an integral part of corporate performance measurement are being driven by corporate social and environmental responsibilities and shareholder activism. Your board should understand the link between governance and corporate social responsibility (CSR) to support a sustainable organization.
North America is lagging behind the rest of the World in the aftermath of the U.S. decision to pull out of its commitments to honour the Paris Agreement on climate change. In November of 2018, scientists worldwide warned of global temperature increases that will ‘damage infrastructure, ecosystems, and social systems’ across the planet. In the absence of mandated regulations, shareholders, investors and partners in the private sector are beginning to demand policies and programs around environmental issues. And citizens are as well.
Corporations must address the physical, regulatory and financial risks and potential opportunities posed by climate change, in both how the business may be affected by global environmental patterns and how the business may be contributing to these changes – negatively and positively.
Physical assets and geographic locations will need to be assessed for resiliency to changing rainfall patterns, flooding, wildfires, the availability of raw materials and access to water and other natural resources. Businesses must be prepared to deal with existing and aggressive future government regulations and the disruption of technology advances in efficient energy consumption and production.
In Canada, proactive companies will need to consider how to protect or improve their reputations as champions of environmental protection, develop and disclose their own Environment, Social and Governance (ESG) policies and upgrade their boards—through both changes in director education and board composition—to ensure they are equipped to understand and mitigate ESG risk.
Pressure from activists, customers and employees has placed CSR into the news and into the boardrooms of high profile companies. As more social issues gain momentum, the pressure is changing from an expectation of understanding an organization’s position on issues to one where stakeholders expect an organization to take an active role in solving social issues.
Corporate responsibility programs with a goal to make a difference in the community, must align with the overall goals of the organization to get results that will engage employees, shareholders and investors. These programs should consider the diversity of the executive team and board members as representative of their stakeholder community and proof of action on the diversity and inclusion initiatives currently gaining momentum.
Communication should be transparent and authentic, internally and externally, and take a clear position on issues that are relevant to the mission and vision of the business and business leaders. This is true for corporate activism as well, where donation support and volunteering with charitable organizations supports the model of the organization.
The idea that CSR activities are marketing-focused or a drain on the bottom line is no longer valid. Businesses are beginning to measure the financial and non-financial gains from corporate social responsibility practices.
In 2018 there was a surge in high profile shareholder activism, such as the strong position taken by global investment management firm BlackRock for corporations to consider their impact on society and ensure ‘the prosperity and security of their fellow citizens’. Closer to home, The Ontario Teachers’ Pension Plan identified their focus areas to include the promotion of environmental, social and governance management and the adoption of frameworks to communicate risks to stakeholders and create a more open dialogue between stakeholders and the board in general.
As activism continues to increase and drive change, boards can be caught at a disadvantage. Some include: lacking time to research and understand shareholder expectations and increase engagement; lacking diversity of thought and experience to effectively deal with fast-paced change, and lacking the knowledge of exactly how the corporation creates value.
Boards must be prepared for activism, both from outside stakeholders and internally from employees and partners, and be clear and intentional in all communications around any issues.
And, it begins with the composition of the board itself. Directors should be knowledgeable about the business, diverse in experience, gender, ethnicity, education and training and willing to work with stakeholders for the advancement of everyone’s interests.
Being proactive in scoping and addressing the concerns of activists, from board composition to executive compensation, environmental and social impact to precise financial measurement and reporting, will protect the board from attacks that can damage reputations and results.
Today, organizations and board members are faced with the challenge to innovate, grow, compete, and govern, while operating in a state of unpredictable change. To address these needs, board leaders must continuously adapt, be more forward thinking, values-driven, and change enabling. They need to further develop their skills and learn to innovate and evolve.