We have come across more than a few articles recently on how a company’s board of directors handles ESG oversight. To be kind, we’ll summarize by saying it’s a work in process. In all fairness, we acknowledge that people who typically serve on boards of large corporations rarely have much of a background in sustainability because they came up through the ranks during a time when companies were not paying attention to ESG issues. But that does not address the problem; it just explains how we got here.
Not long ago, the Wall Street Journal published a special section on climate technology that included excerpts from the WSJ’s Pro Sustainable Business Forum on the role directors should play in ESG oversight efforts. Panelist AnnaMaria DeSalva, global chair and CEO of the consultant firm Hill+Knowlton Strategies and vice chairman of the board of XPO Logistics, was asked which committee or committees at the board level should be taking the lead on sustainability issues. She observed that this question has not been decided, and that audit, nominating and governance committees each have a role to play, but that opinions vary across industries and companies.
Another panelist, Harmit Singh, executive FP and CFO at Levi Strauss & Co., said that his company reviews progress on ESG issues with the board’s nominating and governance committees each quarter, and recently did an outreach with institutional shareholders—led by the board chair without the CEO or CFO present—where ESG was one of the major topics discussed.
Panelist Nancy Pfund, founder and managing partner at venture capital firm DBL Partners, was asked whether investing in the sustainability space has changed over the last year or so. In a nutshell, her answer was “absolutely, yes.” She said that they went from “no one cares” to seeing investor clamor for accountability and transparency, not just on environmental issues but also on “S” and “G” issues, virtually overnight. Separately, Ms. Pfund noted that the board’s actions with respect to ESG needs to reflect the industry in which the company operates. As an example, tech firms can and should be way ahead of food & agriculture businesses where steps to reduce carbon footprints are beginning but will take time to develop.
In a separate WSJ article sponsored by Deloitte, Tensie Whelan, Clinical Professor of Business and Society and Director of the Center for Sustainable Business at NYU Stern School of Business, was interviewed about how boards can address their ESG oversight role. Professor Whelan’s research reveals some rather eyebrow-raising facts; for example, none of the property & casualty insurance companies she studied had anyone on the board with any environmental climate experience. In an industry where climate change is a huge issue, this almost seems like malfeasance (yes, that’s a strong word – maybe “really, really imprudent”?).
Professor Whelan notes that while boards are adding more women and at least some are committed to more racial and ethnic diversity, she believes that for the most part, ESG issues are not yet in the DNA of most organizations. A board needs to understand ESG risks and opportunities and how the executive team is managing them. Things are changing so fast, she noted, “the board needs to be looking at trends and targets quarterly to make sure that the pace of change in the organization is commensurate with what is happening externally.”
The interviewers asked Prof. Whelan to comment on the observation that “Many organizations don’t factor in avoided, future costs of taking certain actions, but if they did, many sustainability measures that seem…irrational today may become “no-brainers.” Her response: “Absolutely.” Then she gave this perfect example: A company was evaluating whether a technology could reduce the amount of water used in its factories that were located in water-risky areas; in fact, one was shut down due to water issues. They knew how much it cost them to shut down for several days but couldn’t get the internal rate of return to support buying the new technology, even though the company had made water stewardship commitments.
The problem was, they were only looking at the cost of the water going in and the cost of water going out. Prof. Whelan’s team helped them to see that moving all of that water around used a lot of energy. Furthermore, if they implemented the technology, they would no longer need a special permit that allowed them to exceed their water allotment. As Prof. Whelan noted, “those points were not included in the IRR analysis because they were just not used to thinking that way.”
Sustainability and climate change are ongoing problems and boards are often too focused on short-term results. More board education and ESG oversight are needed, along with regulations, and pressure from investors who have a long-term perspective.
If you have any thoughts on this issue, or would like to know how your company can use OWL ESG’s metrics to educate your board directors, please contact us.
