Board of Directors: Driving the ESG Agenda

June 13, 2022

Connecting corporate purpose with sustainability practices should be at the heart of decision-making for every board of directors. Regardless of the industry, oversight of business strategy and results must be combined with guidance and approval. Organizations require this leadership to ensure long-term value creation for shareholders through a compelling, sustained business plan. Driving the ESG agenda from a top-down approach is critical as the organizational culture is developed and communicated throughout the organization. Its efforts will act as drivers of change to mitigate risk, capture opportunities, create economic value and continuous shareholder growth.

Harvard University conducted a study where they interviewed 130 international corporate directors and C-Suite executives, surveyed 1,500 additional corporate leaders and analyzed executive and board-level practices. The results exposed the challenge for board members to take a first step toward engaging in sustainability. To start, the definition of sustainability must be very clear to link it back to the company’s purpose, operations and products or services being offered. According to Investopedia, sustainability is “the ability to maintain or support a process continuously over time. In business … (it is seeking) to prevent the depletion of natural or physical resources, so that they will remain available for the long term.” This concept can be applied to every single action that an organization takes. It means creating solutions to address today’s business problems without compromising the access to resources for future generations. The sustainability umbrella covers economic, environmental, and social aspects. 

For the agricultural industry it entails strategy around soil recovery, creating well-being for agricultural workers, mitigating the effects of fertilizers, and minimizing water use. According to the US Department of Agriculture, the industry emits about 10.5 percent of total US greenhouse gases; however, agriculture also provides opportunities to reduce greenhouse gas emissions and help remove carbon dioxide from the atmosphere. On a worldwide scale, the chemical and petrochemical industry represents around 30 percent of the total energy consumed on an industry level, making it one of the most relevant CO2 emitting industries, together with the iron/steel and cement industries.

Today, different technologies are being deployed to transform processes into being more efficient, while lowering costs and reducing contamination. Safety, human rights, equality, and community agendas are essential, as are waste management programs, water consumption and regulatory policies. The automotive industry is currently focusing on the supply chain, on carbon reduction, noise pollution, recycled materials, and how to transform a conventional automotive business into a sustainable electric mobility enterprise. For fashion, one focus in the ESG agenda revolves around working conditions and compensation for textile workers, mainly women in developing countries. In addition, the UN states that textile dyeing is the second-most significant polluter of water and it takes around 2,000 gallons of water to make a typical pair of jeans. Every second, the equivalent of one garbage truck of textiles is landfilled or burned and they estimate that the industry accounts for approximately 9 percent of annual microplastic losses to the ocean. If companies do not make changes, the fashion industry will use 25 percent of the world´s carbon budget by 2050. In summary, the challenge lies in understanding how to transform the negative into positive. As such, the board of directors’ role is to drive and oversee how theoretical ideas and strategies are turned into measurable actions for their business and the community.

Every topic discussed by the board of directors should include a sustainability mindset amid continuously educating directors, and in turn actively monitoring how this purpose-oriented culture permeates across the organization. The board should define how aggressive the company should be around ESG performance, how the C-level and others involved in executing should be compensated through bonus programs that focus on long-term value creation. Avoiding short-term financial goals will in turn drive up employee retention levels, ensure a commitment to the process, and push for a sustained mindset around “doing good,” which will eventually drive profits, customer loyalty and investor confidence. The reasons for executing an ESG plan should be clear, from top and bottom-line growth, to access to capital, to regulatory compliance, risk-management, employee motivation and reputational advantage. By understanding the foundation and endgame, the operational teams will be able to act with creativity around how to get the most out of the ESG agenda. But for this to happen, the board needs to be aligned and set applicable structures, standards, and control systems.

Planning and executing takes time. Therefore, directors need to define what topics to prioritize, how capital is allocated, and whether expert support is needed to accelerate compliance through organized expertise that can add knowledge, best practices, and value. Consultants may help analyze divesting opportunities from assets that will impede the organization´s transition to a more sustainable business that addresses global Sustainable Development Goals (SDGs). The focus on people, ecosystems, and economics are tied to actions around sustainability, diversity, and ethics. These elements are linked to corporate governance as investors, clients and employees are all constantly questioning how the organization is contributing to society and how the operational structure proves to solve local and global challenges.

To prove correct implementation, the board of directors must set goals, clear metrics, and reporting requirements, ratify data, and approve public disclosure of impact. They must oversee the continuous work of the leadership and operational teams, guide the organization in decision-making around deploying technology to meet sustainability goals, and be the champions of change. Instead of reacting, being proactive in driving the ESG agenda will push a positive effect upon the organization and its reputation.

There is growing evidence that applying sustainable practices to an organization produces improved financial performance. The role of a board lies in ensuring long-term value and protecting the interests of stakeholders. Incorporating sustainability into the corporate strategy and culture is a strategic imperative; nonperformance is too costly. Making a genuine difference will define how an organization is perceived and driving the ESG agenda is the key to achieving long-term success in today’s highly competitive market.