Environmental, social and corporate governance issues (ESG) continue to be central to so many business conversations. I hosted a roundtable on this topic with corporate affairs and sustainability leaders at World Economic Forum annual meeting in Davos, Switzerland.
The crises over the past two years have created a real-life demonstration of how social issues can affect companies, beginning with COVID-19 and now through to the ongoing conflict in Ukraine. Companies have had to reckon with the social impacts of lockdown and find ways to balance employee and public health with business continuity. Most recently, the conflict in Ukraine has presented corporates with fast and critical social, economic and political decisions to be taken. It has highlighted the importance of having clear purpose, values and social principles in times of crisis.
As the geopolitical landscape continues to get more and more volatile, during the roundtable participants discussed how ESG has changed over the past few years — and therefore the way businesses should respond is also evolving. Corporate affairs and sustainability leaders found themselves asking the question ‘how do we make sure this advice is relevant today and the future?’
Corporate affairs teams are strategic advisors to CEOs. It’s critical to make sure their advice is grounded — and founded — in reality.
How do we move ahead in today’s volatile environment?
The G in ESG
With ESG, the challenge is no longer about determining why change is important or what change is needed. In fact, I no longer see boards questioning why their businesses need to be nature positive, to be more inclusive or to set net-zero goals.
Today, it’s more about determining how companies need to work and evolve to hit their ESG goals. Based on my experience, and the conversations I had during the roundtable, the how is supported by one of the most critical — and overlooked — elements of ESG: governance. Good governance drives good decision-making, but as environmental and social issues gain traction, the governance element becomes ever more critical.
Governance has two fundamental components: corporate governance and corporate behavior. It involves the makeup of a company’s board and management teams as well as its auditing, reporting and disclosure practices. Governance is the foundation on which sustainable, long-term value is created, and it often underpins an organization’s ability to achieve its environmental and social ambitions. And when it comes down to it, the proper management of a company’s environmental and social risks is impacted by how said company is governed.
If the right corporate infrastructure isn’t in place, it’s easy to see how strategic decisions related to environmental and social matters could be affected.
What are the changes happening in businesses that the corporate affairs function must respond to? The following are a few examples of governance activities that help companies deliver on their ESG ambitions:
- Re-evaluation: It’s important to stay plugged in and understand where the trends are going with ESG. COVID-19 and the conflict in Ukraine have left an opening for companies to reflect on whether their pre-crisis ESG frameworks were robust enough to respond to these disruptions. For companies that struggled to react strongly, the moment is ripe for renewed efforts to safeguard against similar risks in the future.
- Accountability: If there are concerns a long-term ESG strategy may result in several quarters of underwhelming earnings, some companies are introducing measures to limit the risk of a backslide, such as aligning executive compensation with ESG metrics along with financial performance measures.
- Reporting: Good governance is essential in reporting on a company’s environmental and social impact, so there’s a need for more standardized reporting on ESG performance. When an organization measures and ranks its ESG activities, then the value of each activity can be acknowledged.
It’s important to make sure you have all the parts of the business involved in the decision-making.
Businesses leaders and corporate affairs teams should approach ESG as something more than what used to be a corporate social responsibility. Today, ESG is a business-wide ethos that should instruct all levels of decision making. Embedding this shift within corporations and striving to ensure that business leaders understand this difference is essential in helping to improve the efficacy of ESG.
Now is an inflection point for corporate affairs teams. How do they reconsider what tools and frameworks are needed to make sure they’re providing the right advice in an increasingly complex global environment? There’s more that corporate affairs leaders can do to enable businesses to make a significant impact in the world.