Boards, executives, and investors can collaborate to drive ESG performance -- if they get aligned behind common goals and principles.
ESG has been a trending issue for many years, but the timeline with which it has become central to the conversation has been different for boards, executives, and investors. In some firms, individual executives became champions of ESG, paving the way for boards and key investors. At other firms, activist investors demanded ESG be highlighted, while still others experienced board-driven changes to their treatment of ESG. These differing timelines have meant that even in firms where everyone agrees on the importance of ESG, not everyone is aligned on when or how ESG-driven changes should be implemented.
This is unfortunate, because when investors, executives, and boards are operating in harmony, ESG can create competitive advantages in reputation, performance, and profitability. For this reason, it is time to make getting everyone on the same page a priority. Here are four tips to help make it happen.
Tip #1: Start With Why
It seems overly simple to start by having each stakeholder commit to a public explanation of why ESG initiatives are important to the firm and why they are being undertaken. However, this exercise is a good place to bring forward and address the varying motivations that can be driving ESG support and enshrine the commitment to actions and standards in the corporate purpose.
For example, some boards that had previously been slow to move on ESG are now taking faster action since investors have tied continued access to capital to ESG metrics. This is a different motivation from wanting to create change in the world out of a sense of moral obligation. Are these motivations mutually exclusive? No. Further, having the conversation and perhaps even expressing a statement that captures this joint motivation (i.e., out of a sense that we must lead the change we want to see in the world and to preserve the opportunities we have with our investing partners) can help everyone move forward together, according to the Harvard Business Review.
Tip #2: Model The Change From The Top Down
A next step in driving alignment is being sure that the organization is modeling the changes in priorities, spend, and behavior from the top down. For example, if the company is committing to lowering its travel-related carbon footprint, face-to-face team meetings can be replaced by video conferencing… and the board and executive can give up private jet privileges or even sell off the executive fleet.
Big steps like this require commitment and follow through from the top. While many environmental and social causes have strong grassroots support, management and boards should not perpetually be in the role of a following. Executive teams need to pace and lead, and this can’t be done from behind or under a system where there are “rules for thee but not for me.”
Tip #3: Tie The Change To Meaningful Incentives
As a part of being leaders, boards, executives, and key investors can put themselves on the same page with ESG by tying the desired changes or practices to meaningful incentives. This will, by intentional design, be different at every company.
For example, according to the MIT Center for Transportation & Logistics and Council of Supply Chain Management Professionals’ State of Supply Chain Sustainability 2022 Report, pandemic-era experiences have led many large and mega large firms to have a new perspective on the experiences of their front line workers. These employees, and especially female employees, faced an extraordinary burden in juggling work responsibilities with school closures and care giving tasks. Many left the workforce as a result, or were only able to stay because of flexible scheduling or childcare support at work. As a result, these same firms are now rolling out new programs around pay, scheduling, and mental health. Linking executive pay raises and board incentives with the implementation of flex-hours for warehouse staff or retention rates of entry-level employees with children would be a business relevant, meaningful incentive for these firms in ways that might not apply to a smaller organization with fewer public facing employees.
Tip #4: Build in Transparency And Accountability
A final step in bringing board members, the executive team, and investors onto the same page with ESG is to build transparency and accountability into each ESG commitment. This might mean using third-party verification systems for carbon emissions, publishing a public dashboard to ensure pay equity throughout the organization, or showcasing new spend contracts with diverse and minority suppliers after public pledges are made. When the system can’t be “massaged” to show anything but the absolute impact, everyone benefits.
For example, after the BLM riots of 2020, many firms vowed to review and renew their financial commitment to black-owned businesses. However, only a few firms created accountability systems to dimensionalize and verify that their actions matched their words, and even fewer were transparent about what they spent and where. Those firms now have a level of reputational credibility and trust their competitors will struggle to match, as well as access to a broader community of business partners which will add to their bottom line for years to come.
Coordinating efforts between boards, executive teams, and investors – even when everyone agrees that ESG issues matter – is no small or simple task. However, by getting aligned on the “big why”, modeling change from the top down, creating meaningful incentives, and building transparency and accountability into each ESG initiatives, firms can reduce the risk that they’re working at cross purposes or misusing resources. With alignment and coordination, firms can continue to make meaningful progress on key ESG priorities in 2022 and beyond.