News analysis
Boards concerned about ESG should ask three basic questions
Boards concerned about ESG should start by answering three basic questions. In short, it all comes down to your stakeholders.
It’s natural for a board to worry about ESG (environment, social and governance). The term is everywhere, yet it carries so much weight, so much confusion and often a healthy amount of backlash.
If you’ve ever sat with your director colleagues, scratching your head and wondering how to approach it, you’re not alone. The same dilemma faces many board members.
Ultimately, it comes down to three basic questions. If you can answer them, you have the foundations of a consistent ESG strategy.
What questions should board members ask about ESG?
- Who are my customers?
- Who are my investors?
- Who are my employees?
Boston University law professor and investment expert David H. Webber laid them out in an interview with Fortune.
His comments come amid the intensifying debate over ESG, especially in the United States.
Against the backdrop of a rotating tug-of-war between pro and anti-ESG factions, Webber said that boards would have “really tricky decisions” to make when deciding their company strategy.
What do the questions enable?
Ultimately, they will enable boards to navigate the tricky environment that sometimes surrounds ESG, Webber suggested.
Yes, the movement is growing fast, and yes, politicians and governments are throwing their support behind it, but that fact is not universal.
Like it or not, ESG has been swept into the culture war in the US. It’s generally endorsed by the liberal, pro-regulation left and rejected by the conservative, pro-business right.
Are the questions relevant?
Yes.
They may seem basic, but when it comes to something as complex as ESG, we need to remind ourselves of the basics to make the right decisions.
Moreover, they don’t just apply in polarised environments. These questions can also help an organisation decide how ESG fits into their strategy.
They highlight what stakeholders value in a company, how much they are willing to spend on it, and how confident they are in its future.
A board’s job is to respond to these views, especially when shareholders express them.
So, what happens once my board answers these questions?
You know your audience, which is crucial for directors.
On a board, you must keep several groups of people happy at once.
Sometimes, at least one group will be displeased; that’s just business.
By producing firm, researched answers to the three questions and acting on them, you’ll have a much better chance of striking a balance in the boardroom.
If the three questions tell me that no stakeholder group cares about ESG, does that mean my board doesn’t have to consider it?
It’s an option, for sure. But realistically, the above scenario just isn’t likely to happen that much.
In the same Fortune interview, Webber said, “there’s just more dollars out there on the pro-ESG side.”
What does this mean? It means the most significant sources of capital are embracing ESG because, ultimately, its values are widespread and likely to remain so in future.
State pension funds in the US, UK and the EU, in addition to private investors, have ESG at the front of their minds and strategies, and they demand it from the companies they work with.
If a board thinks ESG doesn’t apply after asking the three questions, it should ideally have robust data and expert advice to back it up.