The Next Generation NED Network held a lively and wide-ranging discussion on ESG – and particularly, the role of NEDs in steering their businesses through this seemingly ever-changing landscape. Hosted at Barclays, the panellists brought the conversation to life with a variety of viewpoints and areas of expertise spanning finance, communications and academia.
The discussion kicked off with a provocation: Is ESG dead? With board members becoming exasperated at the amount of time dedicated to ESG issues in meetings, alongside an economic downturn which is likely to result in a slimmed down focus on financial results, there is a sense in some quarters that the buzz around ESG has outlasted its actual utility.
However (and perhaps unsurprisingly for a panel comprised of ESG professionals), the panellists were unanimous that far from being dead, ESG is alive – and growing. Whilst there are uncertainties about the future guises that ESG may take, the central, underlying issues which gave rise to ESG (climate change, political upheaval, social inequality and so on) are certainly not going anywhere, and indeed are likely to be exacerbated in the years to come.
Not only are these issues sticking around, but so is the appetite for business to tackle them; Edelman’s latest Trust Barometer found that the public places more trust in business than in NGOs, government or the media, demonstrating that corporates are increasingly expected to step up to the plate. From a financing perspective, the panel also suggested that the number of European ESG investors will soon outweigh the number of generalist investors, and even that this distinction could eventually become moot as all investors begin to take ESG into consideration.
So, if ESG is alive and kicking, how should NEDs and the companies that they support define, measure and disclose it?
ESG as a concept has received significant criticism – that its terms are too broad, that they are vague and difficult to define, and that they would be better split out or replaced. Indeed the FCA’s recent consultation on the UK’s Sustainable Disclosure Requirements acknowledges: “the acronym ‘ESG’ has no natural language meaning when taken out of context, and some consumers may be unaware of what it stands for”. The FCA’s recent consultation on the UK’s Sustainable Disclosure Requirements suggests that certain consumers remain unaware of its meaning. Panel members highlighted that ESG is currently used as a catch-all term to refer both to investment issues (particularly financing and mitigating climate-related risk), and to more ‘woolly’ questions around corporate purpose and ‘making the world a better place’. In a bid to remove ambiguity and make the concept more rigorous, some have argued that ESG should be done away with entirely, and have suggested alternatives such as ‘SRI’, sustainability, resilience and inclusion.
Whilst there is certainly merit in a discussion around the concept of ESG, some members were keen to emphasise the need for increased discussion around the actions which ESG mandates. Fundamentally, it is likely that there will never be total agreement on the definition of ESG. However, much in the same way that the lack of a universally-agreed-upon definition for ‘strategy’ or ‘leadership’ does not preclude these topics from the boardroom, NEDs should not avoid discussions on ESG simply due to a lack of a standard definition. It is, by its very nature, a broad church and NEDs have a crucial role in helping their organisations establish which specific areas of ESG are most important (and material) to them and their organisation’s stakeholders.
For boards who are looking to tackle ESG head on, one of the more uninviting – or even off-putting – aspects is the proliferation of ESG metrics. By some counts, there are now upwards of 600 ESG data aggregators globally. In time, it is likely that there will be a significant degree of consolidation of ESG standards, particularly as the regulation matures, although this does nothing to allay the current frustrations of many boards who have long been asking for a standard set of measurements.
Measuring and reporting on indicators of ESG is an important means of raising the visibility of these indicators and therefore driving progress, with the obvious example being carbon emissions. Nevertheless, a panel member noted that even without a standardised set of metrics, it is perhaps straightforward enough to conclude that no single company has yet ‘solved’ the ESG question and there is still a long way to go to address the underlying issues.
The conversation also turned to the challenges around ESG disclosure, for which organisations must strike a balance between being ambitious and not overstating the case. With accusations of greenwashing on the rise, it can be tempting for businesses to shy away from being too bold in their language and commitments. In future, it is possible that there will be an increase in firm-on-firm litigation and comparative advertising disputes as competitors hold each other to account for overblown ESG claims (although for now, the firm-on-firm litigation landscape remains relatively benign).
Crucially, however, organisations with an eye on the medium- to long-term will recognise that there is a lot to lose from remaining silent on these issues, as investors, customers, suppliers and employees all increasingly expect to see businesses take a stance.
To conclude, the members of the panel were asked to provide one key piece of advice to NEDs. Their advice ranged from the pragmatic: ‘Peer comparison can help you to ballpark how far you need to stretch your ESG targets’, to the inspirational: ‘Don’t be afraid to innovate and fail’. Ultimately, there are no ‘off-the-shelf’ solutions to issues such as global warming, human rights protection, or biodiversity loss.
NEDs should help their organisations to consider the most relevant and pressing issues specific to their sector and ways of working. Several issues which fall under the ESG umbrella are, in fact, already high on the agenda for many boards, such as mitigating risk in the supply chain. NEDs can shape the response of their organisations by putting ESG issues on the agenda, and by demonstrating innovation and courage in the solutions that are proposed.
The event ESG: defining, measuring and disclosing the ‘E’, ‘S’ and ‘G’ was held by the Next-Generation NED Network under the Chatham House rule and hosted by Barclays on 23 November 2022.
Join us for our upcoming ESG Summit, on Thursday 27 April 2023. Find out more and book your place today.