One size does not fit all, and that is a good thing
Discovering your own unique priorities amid the myriad of environmental, social and governance (ESG) best practices and emerging reporting requirements is one of the most important steps boards and management can take.
“If you haven’t started on the sustainability journey, get started. Get educated, engage the board and management, and start the conversation on this important topic.”
As organizations implement and evolve ESG initiatives and reporting, “‘One size does not fit all’ is an adage the applies to these ESG activities,” said Grant Thornton Managing Director, ESG & Sustainability Services. “This shouldn’t stop a company from progressing on their ESG journey. It’s a matter of identifying your most important business issues and determining how to make an impact in ways that are in line with the overall business strategy and transparently communicate to your stakeholders.”
Emily Liggett, a director for UltraClean Tech, Materion Corp., King Philanthropies and Purdue Research Foundation, emphasized the importance of boards verifying that their organizations are making progress toward ESG objectives.
“If you haven’t started on the sustainability journey, get started,” Liggett said. “Get educated, engage the board and management, and start the conversation on this important topic. If you have started, keep moving forward, prioritizing and learning. This is a dynamic, evolving area, and it’s important to understand the opportunities and risks for your organization.”
Stakeholder expectations are becoming more refined
“It’s important to recognize the greater evolution at work: we are living through a refinement in the understanding of the sustainability topics that are important to different stakeholder groups.”
While expanding reporting requirements and stakeholder inquiries may feel like a new “flavor of the day” for boards and management, it’s important to recognize the greater evolution at work: we are living through a refinement in the understanding of the sustainability topics that are important to different stakeholder groups and how that relates back to the business from both a financial and impact perspective. This trend is likely to continue to play out over the coming years. It will be important for boards and management to understand this dynamic and balance that with the need to focus on critical path priorities.
As exposure to sustainability topics such as climate risk increases, the ESG agenda is becoming more focused. Where a couple years ago stakeholders may have been focused broadly on providing high-level disclosure against the framework outlined in the Task Force for Climate Related Financial Disclosure (TCFD), expectations are becoming more refined as the implication of topics like climate risk are better understood. Adding to the challenge are more extensive disclosure requirements, such as those under the Corporate Sustainability Reporting Directive (CSRD) or International Sustainability Standards Board (ISSB), which require greater transparency and detail than many reporting entities may be accustomed to providing. This same dynamic can be found at work when addressing social impact and other ESG issues.
“Successful ESG board governance includes understanding what is core to your company strategy and value creation and then ensuring that ESG is integrated throughout your company,” said Anne Alonzo, a director for Potlatch Deltic, Until Corp., and Feeding America and a former chief sustainability officer. “Make sure that you have in place the right company champion and board-level committees/support, and that ESG communications are aligned, and your business case value and opportunities are highlighted.”
The guidance from any of these standard setters and regulatory agencies may feel like it’s one-size-fits all because they create requirements that apply across a broad base of entities. Nonetheless, when a company reports, it needs to communicate its own story constructively and effectively within the confines of the requirements.
In reporting, companies should ask:
- What should a reader know about your company’s impact on society and the environment?
- What are your sustainability risks and opportunities, and how are you performing against them?
- Are you comfortable with the completeness and accuracy of the disclosed metrics? Has internal audit reviewed your metrics — and your reporting process?
- If we are providing sustainability metrics to our customers or lenders, how do we know that what we are providing is correct?
Key actions to consider
“Successful ESG board governance includes understanding what is core to your company strategy, ensuring that ESG is integrated throughout your company.”
Boards should keep in mind that there is no one-size-fits-all approach when it comes to prioritizing ESG matters:
- Understand the current state of stakeholder values: This is a period of refinement in the understanding of sustainability topics. What was material two years ago has likely been updated or fine-tuned today.
- Be prepared to prioritize ESG topics that are most critical: Sometimes the business issues and opportunities, or the potential exposure to risk for certain stakeholder groups, may take priority.
- Learn about the unique characteristics of the industry and how they relate to ESG: Industry is a key driver for identifying areas of interest to various stakeholder groups. Consistently benchmarking against industry peers can be an excellent exercise to help monitor and adapt ESG initiatives and transparency.
Materiality assessments: Guiding the ESG journey
A materiality assessment is an excellent tool for helping understand stakeholder concerns and the sustainability concerns most important to the business.
“In our work with clients, we’ve learned that the extent of the work can be extensively tailored depending on resources available. Companies with fewer resources still benefit from a well-designed and executed materiality assessment.”
Materiality analysis has been used for many years to identify the sustainability topics that are most important to the business, but ESG materiality differs from the financial materiality that company leaders are familiar with. A concept known as “double materiality” that’s embedded in ESG materiality requires an outward determination of the company’s environmental and social impact on the world as well as a view of the ESG risks that may affect a company’s financial performance.
Generally, the company will begin its assessment by compiling an overly comprehensive list of potential topics that leadership will present to stakeholders. Based on stakeholder input, the initial list will be culled down to only the most material topics, which will be included in reporting and used to inform strategic direction.
While historically there has not been a standard requirement to guide the assessment process, newer reporting requirements are more prescriptive and include additional rigor.
Key actions to consider
It bears repeating: One size does not fit all when it comes to materiality assessments.
- Ask questions: The board wants to be sure that assessments are ongoing and effective. Ask questions such as: How many stakeholders are part of the assessment process? How frequently are they interviewed or surveyed? How has their input changed over time? The board also wants clarity on what management means when it says that an issue is material, i.e., is it material from an impact or a financial perspective or both?
- Evaluate the extent of the assessment: Not all companies have the resources to conduct the most comprehensive assessments, but the board will want to be sure that the work is properly tailored to the resources available and the need for stakeholder engagement and understanding.
- Feel comfortable that you understand the process. Ask questions such as: How did management identify stakeholder groups? Were any groups excluded, and if so, why? Did input from certain groups carry more weight than others and if so, what was the rationale?
- Understand double materiality: The reporting standards implemented under the CSRD require companies to undertake a “double materiality” assessment to identify how it affects people, the environment, and the organization. For more information, please see Grant Thornton’s “CSRD reporting: What you need to know,” or arrange for an expert to speak to the board on this topic.
Determine board responsibilities for ESG oversight.
Recent research shows a trend of boards moving overall ESG responsibilities out of a specific committee, such as an ESG or the Nominating and Governance Committee and making ESG the responsibility of the entire board.
Almost half (49%) of respondents to a Diligent Institute/SpencerStuart survey in 2022 said that the board has primary oversight over its ESG strategy, whereas in 2019 a similar survey found that just 20% of respondents placed environmental oversight with the full board.
But various board committees also are involved in this process. The nominating/governance committee may also be responsible for governance and some companies even establish an ESG committee. Meanwhile, the compensation committee may oversee employee benefits and diversity, equity, and inclusion efforts that also fall under the ESG umbrella.
For best results on ESG performance, the ESG priorities in the organizational strategy should be linked to the performance metrics that are used to determine individuals’ compensation. ESG progress and success should be baked into the compensation and reward system. The audit committee has oversight over the accuracy of the performance metrics, and the compensation committee provides governance over the compensation incentive structure. With those responsibilities resting with separate committees, the board should coordinate interconnectivity between various pockets of responsibility.
Key actions to consider
- Ensure ESG-related metrics measured at the board level, such as compensation, are relevant and aligned with the corporate strategy. From a disclosure perspective, does the full board agree with the approach?
- Take steps to move toward a holistic approach where ESG responsibility sits at the board level. This might include adding sustainability champions on the board and in management positions as well.
- Encourage integration of ESG goals into business strategy. Not all companies have the resources, but those that do should consider hiring a chief sustainability officer (CSO). The number of companies appointing a CSO is growing rapidly. CSOs with a well-defined job description can help define and clarify sustainability efforts across the company and streamline board reporting.
- Management needs to establish a tone at the top and drive the ESG agenda throughout the organization, with the help of the board’s oversight and support. Management should be required to keep the board informed on ESG issues at each board meeting.
- Integration is another area where different organizations will have their own strategies and tactics. Depending on various factors, from company size to resource constraints and available expertise, a company may have a good handle on reporting but no program in place to engage the internal business partners who are key to driving performance improvement.
In ESG, as in many other areas of business, differentiation provides an opportunity for organizations to distinguish themselves from competitors.
Each board must evaluate its own circumstances, expertise, industry, and composition to determine the best path forward.
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