In the near future, Board members are likely to have larger roles in communicating the organisation’s perspective on these matters to stakeholders. Choosing to do otherwise may no longer be an option as it may cause long-term competitive loss and the opportunity of maintaining a favourable public profile of the firm. The company has to decide whether it can risk damage to its brand and reputation. Boards are bound by fiduciary duties, and these have now grown to include ESG factors as they become linked more strongly to the creation of business opportunities and the risks which arise in parallel.
In its efforts to include ESG in its strategies, the Board will have to understand the risks that come with it, and the management and supervision of these to the satisfaction of stakeholders including shareholders, employees, and the communities they operate in. But ESG risks are not the easiest of risks to identify and mitigate. They are dynamic and interrelated, sometimes manifesting only in the long term, and almost always slipping under the radar of traditional risk identification systems. More sophisticated, longer and further reaching systems are necessary.
It is worth noting that stakeholders today want to see evidence of Board involvement in ESG, among many other things. This can be attributed to the less-than-transparent operations that resulted in many financial scandals and economic hardship globally in the past two decades. It is imperative, therefore, that the Board works with management to develop corporate strategies that encompass ESG which can effectively drive the organisation’s performance. But this is easier said than done. In many companies, ESG is seen as an exclusively social or CSR activity, not something that is linked to its long-term sustainability and competitiveness.
As it moves to incorporate ESG into organisational strategy, the Board should ask itself pertinent questions like which ESG-related risks (or opportunities) are significant to the current business, and which may directly impact the balance sheet. Members should continually seek information about ESG-related matters, and stay abreast of trends, standards and the continuously-evolving terminology.
7 The IERP® Monthly Newsletter September - November 2021