5 ESG Questions Every Board Member Needs to Be Asking
If you’re a board member who is not yet hearing from your management team about its ESG (environmental, social, and governance) communications strategy, there’s no time like the present to get the conversation started. The importance of corporate ESG practices is expanding exponentially, driven in large part by millennials who won’t settle for less than responsible, sustainably-sensitive investments. Just five years ago, only 20% of the S&P 500 reported ESG metrics. By 2018 that number more than quadrupled to 81%. And today, one out of every three dollars invested has an ESG bend.
Given the incredible traction ESG has experienced in recent years, it’s no wonder that many companies and their boards have been caught off guard and feel less than prepared to put their best foot forward, especially when it comes to the E and the S. The good news is that with the right effort, it’s relatively easy to make significant gains in short order.
To get started, here are five questions to ask at your next board meeting:
1. Who’s in charge of sustainability?
Your company may very well already have an internal task force devoted to the topic of sustainability. As a board member, you can help make sure that this task force exists in more than name only. The person or people heading up the committee need to have both the seniority and the reach to gather necessary information on company practices, and they need the ear and support of high-level leaders so they can make recommendations. And make them stick.
If you don’t yet have anyone specifically charged with sustainability, it’s likely you’re behind the curve. Find out what your direct competitors and others in the industry are doing. Remember, a commitment in this area has to be more than just lip service. Today’s investors will easily see through half-hearted attempts to jump on the “green” or socially responsible wagons. Your company needs to put both thought power and muscle behind its sustainability efforts so it can take real action to move the needle on critical issues.
2. What are our ESG ratings?
You can probably talk in your sleep about what ISS and Glass Lewis have to say about your company’s governance. You need to be just as familiar with your MSCI and Sustainalytics scores. These two organizations are arguably the largest and most influential players in the ESG ratings arena. And even if you’re not familiar with them yet, you can bet that many of your current and potential investors are. Indeed, there is a growing trend in passive ESG investing which can be rooted in the scores handed down by these agencies.
If you don’t know your scores, you can request them, free of charge, directly from the agencies. You can also work with your financial communications partner if you want to learn how your competitors are being graded and see how your business stacks up.
3. Which ESG areas do we need to prioritize right now?
Obtaining and understanding your ESG reports is a great starting point for shaping your ESG strategy and allocating resources to the areas that are most important to your investors and where your score needs the most help. It’s important to note that there are different standards for ESG practices and communications depending on the industry in which you compete. Everyone knows that “dirty industries” like oil and gas and coal are under critical scrutiny when it comes to their environmental impact. But many other ESG factors are not quite as obvious. Tech companies, for example, often get judged on diversity because it is so historically low in this industry. And even companies that make the ‘greenest’ products can get dinged if their shipping and logistics practices are taking a toll on the environment.
As a result, many executives are shocked at just how low their ESG grades can be. By regularly reviewing your ESG rating reports, you’ll gain a much better understanding of what the agencies care most about relative to your industry. You’ll also see where you are strong and where your practices could use some attention. If you’re weak in areas that are weighted heavily in your overall score, these are obviously the practices you want to give the most attention to first.
4. Are we getting full credit for all our current ESG efforts?
Improving your MSCI and Sustainalytics scores doesn’t necessarily require revamping processes and procedures from the ground up. In many cases, your score will improve simply by improving your communications about the steps your company is already taking in key ESG areas. The rating agencies base your grade on the information your company provides directly to them as well as any information that is publicly available on your website or in your investor communications materials. By better communicating about your efforts, you can boost your score almost immediately.
Many companies publish an annual sustainability report, and they get extra points from MSCI and Sustainalytics just for making the effort, regardless of the content in the report or how truly sustainable their practices are. Other companies choose to integrate sustainability information into their annual reports; this can send a message that your organization is deeply committed to sustainability—it’s woven into the fabric of your entire organization as opposed to being its own separate initiative.
Whichever way you choose to go, the important thing is to get the word out about the various ESG initiatives in which you’re engaged, even if the company is just getting started or has more work to do in some areas. In general, the more forthcoming and transparent the company is about any and all ESG initiatives, the higher your ratings will be.
5. How can the board help?
Showing the company’s executive leadership team that the board is truly, well, on board with ESG can go a long way in helping companies make larger, faster strides in areas that matter most to investors. You may want to consider creating committees and subcommittees devoted specifically to E and S topics. If there isn’t anyone currently on the board with significant ESG experience, think about recruiting someone who’s well-versed in the area.
Talk about whether or not you need a charter or, at a minimum, a vision that you can share externally with all stakeholders to demonstrate the board’s ESG commitment. Work with your leadership team to get their ideas on how and where the board can deliver the greatest impact. For many organizations, ESG strategy is very much still a work in progress. The key is to be open to new ideas and to working collaboratively to develop an ESG plan and communications strategy that gets your company the credit it deserves.
Looking for additional insight into ESG?
At Clermont Partners, we’ve been at the forefront of ESG and have helped many organizations establish their initial ESG communications plans. From interpreting your ESG rating reports to drafting and promoting your board’s statement, we can help your board better understand its role in ESG. When you’re ready to get started, give us a call. And let us help craft the ESG story your organization needs to tell.