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November 12, 2024
Authors
The term ESG (Environment, Social, and Governance) is easy to say but hard to deliver. In fact, recent election results may make it even harder—by exacerbating the fundamental drivers of environmental degradation and societal discord.
Pursuing the vision of just and sustainable business has never been for the faint of heart. Yet business adoption of E, S, and G has progressed, albeit at different paces. Corporate investment in E has the longest history and has proven over decades to improve the state of land, water, air, and climate. Corporate prioritization of S has yielded strides in diversity and inclusion within the enterprise, and improved human rights and workers’ rights along the value chain. And while work in all of these areas is far from complete, new issues are popping up on the ESG agenda, from nature and biodiversity to living wage, a just transition, and responsible AI.
What about G? Governance flashed into the spotlight in 2020-21 with CEO-level commitments spurred by a few select yet seismic events, including Covid-19, the Me Too movement, and the cost-of-living crisis. But this chorus of commitments has quieted—due to the politicization of ESG topics, the challenge of executing against ambitious goals, and the consideration required to align governance with new, turbulent market and societal dynamics.
Don’t Be Fooled by the Silent G.
In BSR’s recent report The CSO at a Crossroads: Three Paths Forward for Sustainability Leaders, 83 percent of the CSOs interviewed felt that increased involvement by other C-suite executives helped advance ambitious sustainability objectives that protect and promote the business. This indicates that despite concerns about market dynamics, corporate leaders see the silent G as a positive force. That support is manifesting in increased professionalization of the CSO role, and the integration of sustainability across corporate functions and from the back office to the boardroom.
In fact, in closed-door convenings and private conversations around the globe, we’re seeing companies refocusing on G. They are assessing material ESG impacts; building data streams to measure and monitor progress; and hiring ESG controllers to collect, consolidate, and report.
At the same time, they are evaluating and upgrading organizational capacity to manage material ESG issues, both within the company and across the value chain. This first piece of homework—baseline analysis—is apt preparation for previously voluntary disclosure regimes such as the Task Force on Climate-related Financial Disclosures (TCFD), which is being embedded in regulations around the world, and for new newly minted requirements such as the Corporate Sustainability Reporting Directive (CSRD) and the International Financial Reporting Standards (IFRS). It also provides a solid foundation for corporate leaders navigating an extremely dynamic, high-risk operating environment, as described in BSR’s report, Between Two Worlds: Sustainable Business in the Turbulent Transition. The number and complexity of the issues at stake and the number and divergence of critical stakeholders underscores the essential role of strategy, oversight, and control to build business resilience.
Principles of Good Sustainability Governance: Key Questions
The confluence of all these developments is a real and abiding tension between pragmatism and ambition, which was on full display at Climate Week New York in September and continues to dominate the atmosphere in which sustainability plans are being developed. As corporate leaders contemplate how to assess and improve sustainability governance in this environment, we suggest asking six sets of questions, three each at the Business and Board levels:
Business
- Organizational structure, roles and responsibilities: What organizational models will ensure that material issues pertinent to specific business functions get the support, attention, resources, and controls they merit? How should you assign accountability for sustainability across functions? How should you align competency, resources, accountability in practice, and ensure that upskilling happens at all needed levels?
- Stakeholder engagement: How do you identify, target, and constructively engage stakeholders? What tools and levers can you use to anticipate and prepare for disruptive events?
- Resilience: How do you harness internal expertise and external perspectives to drive resilience throughout the business and along the value chain? How can company resources be leveraged to anticipate and prepare for cross cutting issues, like climate and health, nature and human rights, and the just transition?
Board
- Competencies: Does the Board have the depth of expertise required to evaluate key ESG topics, both within the business and in the larger policy environment? How is this expertise integrated into Board structures, roles, and responsibilities?
- Strategy and risk: What mechanisms does the Board have in place to understand the full range of material sustainability risks and opportunities for the business? How does it maintain a current, coherent view of evolving market dynamics and potential impacts on both business resilience and external stakeholders?
- Oversight, controls, and accountability: As Boards work to formalize ESG oversight in light of new mandatory disclosure regulations, how are material sustainability issues integrated into enterprise risk management? What mechanisms are in place to support timely oversight and informed decision-making on business strategy, market entry, M&A, and other areas under Board purview? How are decision-making structures and director incentives aligned with ESG goals?
In BSR’s experience, companies whose leaders ask these questions regularly—and sense-check them with materiality assessments, stakeholder discussions, and learning and foresight sessions—are more resilient to external forces, from extreme weather to economic headwinds.
If you are interested in learning more, stay tuned: we will address each set of questions in upcoming blogs. In the meantime, if you are seeking advisory support to build, enhance, or stress-test your corporate or Board sustainability governance structure, get in touch! Learn more about BSR’s corporate governance activities or contact the Sustainability Management team.
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