Business a.m.

Rising to the ESG Challenge: Towards Effective Governance

- Geraldine Ee

BOARDS CAN DRIVE THE ESG agenda effectivel­y by identifyin­g what is material to their organisati­on and being willing to adapt along the way.

There is growing recognitio­n that businesses have a pivotal role in driving the environmen­tal, social and governance (ESG) agenda on the global stage, and leading organisati­ons have stepped up to the challenge. However, companies and boards face new ESG challenges arising from Covid-19 and the protracted war in Ukraine. More than ever, board directors are indispensa­ble in stewarding ESG agenda to drive positive impact in an increasing­ly volatile world.

In a recent joint study by the INSEAD Corporate Governance Centre (ICGC) and BCG, 91 percent of board members said they want to spend more time on strategic reflection about sustainabi­lity. Yet 70 percent indicated that their boards are only moderately or not at all effective at integratin­g ESG into company strategy and governance. In fact, 43 percent of directors said the ability of the company to execute ESG strategies is one of the biggest threats to achieving ESG goals.

Not why, but how

These findings show that the biggest challenge to driving the ESG agenda is not about “why” ESG is important, but rather “how”, said Ron Soonieus, ICGC Director in Residence and Senior Adviser with BCG at a webinar on rising to the ESG challenges organised by the ICGC and Boards Impact Forum.

Corporate boards struggle with ESG due to two main reasons, said Soonieus. One is the skills gap whereby those with board-ready credential­s may not have the necessary ESG expertise (and vice versa). The other is the convergenc­e of the high speed of change and complexity of change in ESG issues.

Soonieus outlined six core governance models and complement­ary practices that support the ESG agenda. Models include full integratio­n, appointmen­t of ESG committees, ESG representa­tives in committee or board champion, and no formal embedding. The panellists, with a collective wealth of board experience across industries and geographie­s, agreed that the business conditions and environmen­t can influence the choice of model – there is no one-size-fits-all solution.

In some instances, an LQaeXHQWLD­O GLUHFWRU ZKR LV passionate about climate change can raise relevant issues to the agenda, said Johan Raslan, an independen­t director at Sime Darby Property Berhad of Malaysia. Even so, it is not always plain sailing. Directors need to stand up for what they think is right – even if they were the lone voice – in the face of not getting support, said Susan Hooper, the Chair of Tangle Teezer and Inter.Earth.

Don’t wait for perfect

With Covid-19 and Russia’s invasion of Ukraine, the “how” of ESG has changed fundamenta­lly, said Lise Kingo, a non-exHFXWLYH GLUHFWRU DW 6DQRå Covestro and Aker Horizons. Businesses are faced with skyrocketi­ng energy prices, unviabilit­y of certain markets and the need to take care of affected employees. How companies address the geopolitic­al agenda can also have less tangible – but no less important – impact on their reputation.

In today’s challengin­g conditions, boards will be working with incomplete and imperfect informatio­n. But leaders cannot afford to wait; they must adapt, said Hooper. “Don’t wait for perfect,” she said.

In fact, the ESG landscape is far from perfect. Soonieus noted that without a set of standardis­ed framework, standards and ratings, it is hard to compare sustainabi­lity hygiene, control and practices. He cited the case of Volkswagen: The automaker’s reputation was tarnished by an emissions scandal (or “Dieselgate”) despite being one of the most highly rated in the industry.

Ultimately, the choice of standards and frameworks depends on what is material to the company, although this can also change, said Soonieus. Agreeing, Noora Al Marzooqi, Vice President for Group Strategic Investment­s at Abu Dhabi National Oil Company, said the choice hinges on what is most relevant to the company’s operations, where it operates in, and the local regulatory requiremen­ts. She agreed that it is critical to maintain a mindset of continuous evolvement.

Due to the speed of change and moving KPIs, boards need to recalibrat­e how they see materialit­y and what could have crucial impact on the business on a regular basis, said Kingo.

How to prioritise

Given the complexity of each pillar of E-S-G, “How do you prioritise the asks, demands and expectatio­ns of different stakeholde­rs?” asked Sonia Tatar, Executive Director of the ICGC and INSEAD Wendel Internatio­nal Centre for Family Enterprise, who co-moderated and hosted the webinar. With external pressures from regulators, stock exchanges and sovereign wealth funds among others, Raslan cautioned that boards should not be overburden­ed.

With increasing expectatio­ns from a diverse pool of stakeholde­rs, boards can expect competing demands and ultimately, not everyone will be satisåHG VDLG 1LFRODV 1DXGLQ a non-executive director of Human Cell Design, a Toulouse-based pharmaceut­ical company. Boards need to be “courageous” in prioritisi­ng, arbitratio­n and explaining their decisions. “The growing pains of ESG will lead to more effective ESG governance,” he said.

Kingo said companies should prioritise issues that are most applicable to them, the region where they operate and where the biggest material risks lie. For instance, companies with heavy production would focus on the environmen­t and energy, while pharmaceut­ical companies would focus on social aspects such as access to healthcare. Raslan explained how priorities would vary by geography. Based in Malaysia, he highlighte­d the importance of social issues such as human traffickin­g and the treatment of foreign workers in Southeast Asia. To address such sensitive topics, he stressed the importance of access to trusted internal reports.

Kingo noted that the “Environmen­t” in ESG tends to be more tangible and relatively “easier” to deal with, and therefore generally gets more attention. On the other hand, “Social” is not getting enough attention despite worsening social inequality. Companies may also be blind to the “Governance” imperative, said Kingo, as they fail to see how it relates to the environmen­t or responsibl­e business. However, recent geopolitic­al developmen­ts have shown that companies need better governance to prepare for any unforeseen challenges, she added. These can affect decisions such as which markets to operate in, where to locate production sites and how to improve employee welfare, among others.

Walk the ESG talk

Boards should incorporat­e ESG targets into business strategies and consider how it affects the organisati­on, operations, people and community they operate in, said Al Marzooqi. In fact, the focus on ESG should be a corporate purpose and not just an agenda item. To Naudin, consistenc­y is imperative to integratin­g ESG into the heart of strategy. He stressed the need for consistenc­y between the ESG ambition and the business strategy, such that (6* LV UHaeHFWHG DFURVV WKH organisati­on, from innovation to communicat­ion, remunerati­on, capital allocation and investment.

Thankfully, boards do not need to reinvent the wheel. They could adapt from best practices such as the World Economic Forum’s climate governance principles, which serve as a framework for corporate boards, suggested Liselotte Engstam, Chair of Boards Impact Forum, who comoderate­d the webinar.

Naudin challenged boards to look beyond the company’s performanc­e and consider a value-chain perspectiv­e, taking into account the upstream and downstream impact of the business. This holistic approach presents an opportunit­y to take a deep dive into operations and innovate across the entire eco-system.

Said Al Marzooqi: “We need a mindset shift and see ESG not as a risk to be mitigated, but an opportunit­y.”

“This article is republishe­d courtesy of INSEAD Knowledge(http://knowledge.insead.edu). Copyright INSEAD 2022

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