CEOs face the challenge of not only balancing the priorities of multiple stakeholders, but also addressing a broad array of environmental, social, and governance (ESG) issues. As they identify the areas on which their companies should focus, their north star should be where their firms can have the biggest positive impact, as emphasized in a new report by The Conference Board ESG Center. Specifically, the impact that companies can have on their own welfare, that of their stakeholders, society at large, and the natural environment.
CEOs should consider three key areas where they can move the needle: the products and services they offer in the marketplace, how they operate their businesses and treat their employees in the workplace, and the actions they take through government relations, communications, and corporate citizenship in the public space.
The report also notes that CEOs should work with their boards to ensure that ESG is appropriately integrated into their companies’ strategies and goals. And as they turn to implementation, integral to success will be having their C-suites aligned—a significant task in and of itself, and one that the CEO is best positioned to lead.
The Conference Board produced the study with the support of KPMG, Morrow Sodali, and Weil, Gotshal & Manges. It is based largely on their recent roundtable exclusive to CEOs. Running through all the report’s insights is the centrality of the CEO in driving ESG.
“While CEOs may initially find it useful to develop a ‘sustainability strategy,’ the goal should be to incorporate ESG into planning to such an extent that the company has a ‘sustainable strategy,'” said Paul Washington, co-author of the report and Executive Director of The Conference Board ESG Center.
The report offers the following findings and insights:
IMPORTANCE OF ISSUES
To determine which ESG issues matter, CEOs should look beyond the traditional “materiality” assessment:
The traditional “materiality” assessment that companies have used for decades to identify which ESG issues to focus on has limitations: While this assessment can be a helpful starting point in assessing which issues to report on, it falls short in several aspects:
Instead, CEOs should engage in a strategic analysis that is more forward-looking: The analysis should assess several essential factors, which will better position companies to capitalize on the innovation associated with emerging environmental and social issues:
“To understand which ESG issues matter most to their stakeholders, CEOs will need to have multiple sensors that enable them to hear diverse perspectives,” said Merel Spierings, co-author of the report and researcher at The Conference Board ESG Center. “Capturing the range of viewpoints will require, among other steps, that CEOs include a broad swath of their companies’ functions in their decision-making processes. Leaders need to be in a learning and listening mode as much as they are in a leading mode.”
When assessing their ability to have impact, CEOs should consider their companies’ role in three key areas:
The marketplace: Includes a firm’s business strategy, products and services, and procurement activities.
The workplace: Includes a firm’s workforce, operations, and associated policies and practices.
The public space: Includes a firm’s political activity, corporate citizenship efforts, and public communications (other than SEC filings).
“As companies integrate ESG into their business plans, they need to be clear on their goals and whether those goals are to comply with the law, reduce costs, manage reputation, respond to pressures from various constituencies, or to become an industry leader,” said an Lyuba Goltser at Weil, Gotshal & Manges LLP. “This is an ongoing conversation at the management and board level—an issue where the company is first in ‘compliance mode’ may over time become one where it wants to be a leader. Similarly, given the growing level of ESG-related regulation and disclosure, companies may need to shift more resources just to comply with the rules, which may delay their progress toward a leadership role in others.”
MAKING THE CASE
To increase employees’ understanding and acceptance of a company’s decisions on ESG issues, the CEO and C-suite must make the business case:
Internal education and engagement can help make the case: Employees often do not see the pressure coming from external stakeholders, including investors and regulators, to address ESG issues. This lack of awareness highlights the need for CEOs and their teams to educate stakeholders—especially employees—about:
ENGAGING THE BOARD
CEOs need to work with their boards to ensure directors are fluent on key ESG issues, rather than over-rely on the views of a few “expert” directors:
Avoid the pitfall of over-relying on specialists: While SEC disclosure rules, investor pressure, and even business imperatives may tempt boards to recruit directors with certain expertise, boards must avoid looking to a single director as the sole source of knowledge and judgment on a specific topic.
Instead, make the board fluent on key topics: Especially at this time of rising expectations and skepticism about whether ESG can actually drive financial performance, boards need to be sufficiently fluent in ESG. CEOs can help to achieve this by:
TELLING THE ESG STORY
The CEO can take several steps to better communicate their company’s ESG story:
Communicating a more authentic, reliable, and effective ESG story: To better communicate in this area, CEOs will want to ensure their companies:
About The Conference Board ESG Center
The Conference Board ESG Center serves as a resource, platform, and partner to help Member companies address their priorities in corporate governance, sustainability, and citizenship. www.conferenceboard.org/esg
About The Conference Board
The Conference Board is the member-driven think tank that delivers trusted insights for what’s ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org
KPMG LLP is the U.S. firm of the KPMG global organization of independent professional services firms providing audit, tax, and advisory services. The KPMG global organization operates in 144 countries and territories and has more than 236,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients. www.kpmg.com/us.
About Morrow Sodali
Morrow Sodali is a leading provider of strategic advice and shareholder services to corporate clients around the world. The firm provides corporate boards and executives with strategic advice and services relating to corporate governance, shareholder and bondholder communication and engagement, capital markets intelligence, proxy solicitation, shareholder activism and mergers and acquisitions. From headquarters in New York and London, and offices and partners in major capital markets, Morrow Sodali serves more than 700 corporate clients in 40 countries, including many of the world’s largest multinational corporations. In addition to listed and private companies, its clients include mutual funds, ETFs, stock exchanges and membership associations. www.morrowsodali.com
About Weil, Gotshal & Manges
Founded in 1931, Weil, Gotshal & Manges LLP has provided legal services to the largest public companies, private equity firms and financial institutions for more than 90 years. Widely recognized by those covering the legal profession, Weil’s lawyers regularly advise clients globally on their most complex Litigation, Corporate, Restructuring, and Tax and Benefits matters. With approximately 1,200 lawyers in offices around the globe, Weil has been a pioneer in establishing a geographic footprint that has allowed the Firm to partner with clients wherever they do business. www.weil.com