Episode 14 - Tackling ESG in the boardroom

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SS: Sure, hi, Rachael. Really nice to be here on the podcast today. My background is [that] originally I trained as a corporate lawyer in one of the big city law firms, and moved from corporate law to in-house lawyering, and then from that to become a board secretary and head of governance in a big financial services institution.

For the last 20 years, I've been working directly with boards across the UK and Europe. I absolutely love the impact that both my profession can have and that boards have on the organisations that they're overseeing, but also on society as a whole. It's something that really has struck me over the course of the last 20 years. The emergence of stakeholder capitalism, or (environment, social and governance) ESG, or whatever you want to call it, to my mind is a really positive thing, and should have a positive impact on society. So, when you asked me to do the podcast today on ESG and the role that governance professionals can play, it is right in my sweet spot, I should say!

SS: To be honest, Rachael, I think it's very confused, and confusing. There's obviously a lot of discussion around ESG. ESG is an acronym [and] the words are obvious: environmental, societal and governance. But it actually means something different to every individual, let alone every organisation. I think that's where a lot of the confusion comes from.

There have been some people who suggest that we should look at ESG investing separate from ESG as boards are considering ESG. And that [not doing] that might be giving rise to some of the confusion: ESG ratings are not the same as what a board director might think when they think about ESG.

To my mind, it's what's underlying ESG and the phenomenon of ESG that's important. That is just common sense in terms of [asking], what are the important things for organisations and for society at any point in time? Taking that step back and understanding what that means for you, as an individual, for you as an organisation, or for you as a board. Really the label ‘ESG’ isn't that important, as it were.

SS: I think this connects very strongly with my first point, which is, it really is about doing all the things that a board should be doing anyway. I think one of the things that’s scaring boards away from meaningful ESG conversations is [that] they don't want another burden [or] set of discussions or tasks when they already have very full agendas.

I think as a governance professional, what you can do is really contextualise it [by pointing out that] these are things that the board is doing anyway, for the most part. What we need to do is just look at them under the umbrella of ESG, which can be broken down into scores of different categories. The company secretary can really help the board to go through an exercise of figuring out, which of these aspects are important to us? What do they mean for our organisation? What do they mean now? What might they mean in the future? And how do they connect in with our purpose? And our strategy? By looking at it through the angle of [thinking] these are topics, maybe risks or opportunities, that as a board we're probably looking at already. If we're not, we probably should, at least to exclude them. I think that's less scary for the board and less of a burden.

SS: I think it should start with purpose. Why do we exist? Who are our stakeholders? I think is the next question. I think they’re the two foundational questions: what is our purpose and who are our stakeholders? I think if you start to build a view of those two things, as a board, everything else flows from it. You know who your stakeholders are [and] how to prioritise them. And therefore [you can ask], what's our strategy that matches that purpose and those stakeholder objectives? I think that's the right place to start.

Unfortunately, it's not what I see happening for the large part. What seems to happen is a board director or a board in general has an idea that ESG means possibly solely the environmental aspect, which whilst being fundamentally important and urgent, oftentimes is not the most important thing for that particular organisation in this moment in time. By going through the exercise of looking at it as a much broader thing, in terms of your stakeholders and your purpose, you're less likely to be funnelled down an avenue that may not be the most important one for your organisation at that moment.

SS: I think strong governance is really the foundation for everything. It enables the board to see all the different aspects of ESG. Maybe it helps if I give you a few examples to explain what I mean. A decent board has solid risk monitoring in place. Through that risk monitoring, as part of its governance framework, it will see environmental risk and where it sits in terms of what the organisation is doing. It will also see some of the risks attached to different stakeholders. For example, shareholder activism. All of these things should be coming through in a solid risk monitoring system. That part of the governance, if it's working well, enables ESG to become something real and something solid for the board.

Another area of governance that is very important will be around remuneration discussions. How do we remunerate our executives and how does that connect in with our purpose and our strategic objectives? If the board is doing that well, you're more likely to have that alignment with your executive team around the things that really matter for the organisation.

Another aspect of governance, if it's working well, would be in terms of the UK Companies Act Section 172, where there's already been an obligation on boards for a number of years to look at each decision and to look at each discussion with the lens of various different stakeholders. If the board is doing that bit of its governance well, it's likely to be ahead of the game in terms of some of these different stakeholder discussions that are necessary on ESG.

In my space, if you have an effective board, which is a cornerstone of your governance, you are very likely to be addressing, as I said earlier, all these different aspects of ESG in one way or another. So, for me, the governance piece really is the foundation and if that's solid, you're much more likely to be doing a good bit of the other stuff that you need to be doing.

SS: Yeah, I think that is one way, Rachael, but not the only way. This whole question of not having enough meeting time and not having enough board time to cover all the aspects that boards need to cover is so prevalent. I think pretty much every board that we work with has the same issue. I think it's particularly acute in regulated sectors, where there's so much regulated activity that boards have to get through.

All the more reason why boards need to be absolutely clear on what their priorities are. That might mean looking at the full spectrum of ESG priorities and saying, ‘look, they can't all be priorities, we can't do them all this year. And so we are making a decision in view of our purpose and our strategy to prioritise X, Y, and Z.’ That might be relations with the community, diversity, inclusion and equality, and climate risk, and setting aside or at least delaying major board engagement on some of the other aspects of ESG. It really connects into this first conversation, or early conversation that boards need to have [which] is, how does this match our organisation? How does it match our purpose? And where does it fit with our strategy in terms of the strategic cycle that we're in now and where we want to be going?

SS: All of the topics that we've discussed here necessarily involve trade-offs by boards and that's where things do become complicated. That's where the need to go back to your purpose really becomes very obvious, because you can become distracted, and sometimes rightly, but sometimes that distraction actually doesn't serve your organisational purpose. If you're very clear on that, I think the answers to those questions as they come up, and they should come up, and these topics should come into the boardroom, and there should be a sensible discussion around, ‘okay, is this important for us now? Does it apply to us now? How does it connect to our purpose?’ But for me, it's that really foundational purpose piece that will help boards to be able to make these inevitable trade-offs.

SS: This is absolutely massive. I'm sure you're aware of all the new reporting requirements coming the way of boards and that just layering on top of a lot of what boards are having to look at in terms of reporting already. So, it's really not easy. But I think it does become more obvious when you're very sound in terms of what your ESG story is and what you have determined as a board is important in the way that I described earlier. And [then] to communicate that out through the organisation and for that to be the framework within which you communicate in your non-financial reporting and annual reporting as well.

I think where you see things going really badly wrong is where there seems to be a disconnect between what the board is looking at in terms of the topics on the agenda and the organisation’s strategy and then the environmental report in the annual report, and the two just don't really seem to marry up. I think being very clear, as a board, on what is our ESG story on the basis of all of this work that we've done, and looking at our stakeholders, looking how that connects into our purpose, then that becomes the container as it were, for the communication within the organisation and in your official reporting.

Also, one thing that's really important is how individual directors recognise their ESG story and tell it to everybody they're encountering. All of these things should really look and feel the same. I think for many organisations, we're not quite there yet because the regulatory requirements are changing so fast and it's very hard for boards to keep up with them. I’m sounding like a broken-down record, but if you do keep connecting back into that overall purpose, overall strategic objectives, [asking] who are our stakeholders? Therefore, these [aspects] are important to us. I think your story starts to emerge very naturally.

SS: That's absolutely right. Sometimes, where you see the disconnect is where the organisation hasn't received that message from the top. The board hasn't been clear on what those overarching things are. Then it's harder to make those connections and bring it together as a whole.

You mentioned greenwashing earlier Rachael. I think, in a way, one of the more important aspects of all of this is just being completely honest, and saying, ‘look, we're not able to do all of this now. We have decided, as a board, that these are the bits that are more important and therefore that's what we're focused on. We haven't lost sight of the other bits but we have prioritised.’ I think that level of honesty, even in your official reporting, is absolutely essential. You need to be transparent about the things that you know you're not doing and why you're not doing them for now, as well as the things that you're focusing on and you're executing and [which] are coming through.

SS: Again, this connects back to the earlier point of [asking], do you know what ESG means for your organisation? You may have determined that it's not the environment for the moment, but it is a real focus on D, E and I, or it is something else. Then that will inform the kind of expertise that you need in the board.

I don't think there's really any such thing as an ESG expert, anyone who is an expert in all of those things and who's going to be the magic bullet who comes into the board and helps the board sort it all out. We've just been talking about the fact that it's multifaceted and it really covers so many different things.

I think once, as a board, you've been through the exercise of deciding what it means for you, and how it fits within your strategy, you then look at your board composition in the way that you should be [doing] periodically anyway. Saying, ‘okay, we have this real gap in D, E and I as an organisation, we're really focusing on that. Number one, is our board composed in a diverse way that would help us through that thinking? Or is there a need to have somebody with deep expertise in D, E and I in the board that will help us oversee and challenge management and get through that aspect?

I don't think there is an easy fix for this. I think it is that process of understanding your board composition and how it fits with everything that you're trying to do. I think with some of these very technical aspects of ESG, like climate risk or biodiversity risk, it's very hard to go out and find somebody who has all the other aspects that they might need to become a non-executive, like the industry knowledge for the particular organisation. Boards can and are looking at bringing in consultancies who can help with that or getting expertise in different ways. Maybe really bringing somebody through the management team to sit side by side with the board and help the board bring it together. There are other ways of doing it and it's very individual to each particular board and organisation.

SS: Yes, absolutely. We're seeing more and more boards set up ESG committees. Whether you set up an ESG committee and what the ESG committee is set up to do will both be very much determined by some of the earlier things we were talking about in terms of [asking] ‘what are we focusing on? Where are we on our journey? And therefore, what would we need a committee to assist the board on?’

For example, if you have as a board set your net zero ambition, but you don't have a transition plan to get to net zero, you might very well delegate to an ESG committee working with management on that transition plan, bringing it to the board for input and approval eventually. The important thing is to remember, the ultimate responsibility, as with everything where things are delegated to board committees, ultimate responsibility lies with the board as a whole. Therefore, the interaction between the committee and the board needs to be very clear and the board needs to be able to take the input from the committee and really incorporate it into its strategic thinking and risk analysis and overall work. It's not [the case] that you [just] set up an ESG committee and the board doesn’t have to do anything anymore. But the ESG committee will then assist the board in the way that the board sees fit at that moment in time.

SS: It's really hard to say what's coming next because the landscape is pretty confused for the time being and there’s quite a big difference between Europe and the US. The debate has become really very divisive in the US. Whether Europe and the US are going to go in slightly different directions on this now, I don't know.

There were very strong statements coming out of Davos, for example, some of the CEOs who were there saying this is just common sense. Let's stop talking about ESG as a concept and talk about what lies beneath it and how that is just the right thing for us to be doing as business leaders.

I hope it goes in that direction and there's less obsession around the acronym. I hope that the new and enhanced reporting requirements really help boards and organisations think through, how does this fit in our context? How does that fit with our purpose? My view is, it's not going away. But exactly how it evolves is hard to predict.

SS: You mentioned the ESG Committee earlier and to my mind that's part of looking at whether you have overall the appropriate governance structures in place for your board to address ESG. So, I think that will be step number one.

I think the second thing you need to do is look at refining your board processes and practices to make sure that all those different elements of ESG are getting properly addressed. Back to that old adage of ‘what doesn't get measured, doesn't get done’. Agreeing with the board, what are we going to measure? And how? And what are the expectations in terms of how that's reported back to you? What kind of frequency, what level of information? As with any other issue that the board is overseeing, that level of agreeing on the reporting, the (key performance indicators) KPIs, the metrics is really important, otherwise, it does risk falling off the cliff.

All of those important aspects of ESG agreed by the board would make their way into an annual board agenda planner. That way the company secretary and the chair and the CEO together make sure that [they] keep on track of them. I think you need to look at all your board processes and refine them depending on what the board agrees is important in the context of ESG.

SS: There's so much out there, Rachael. I don't think there is, unfortunately, not yet one standard way of mapping it and keeping track of it. There's lots of different things that I've seen in different board packs from different consultancies, or that have been devised internally. But there's no standards and there's no one size fits all. Thankfully, in terms of reporting, we seem to be moving in that direction.

There are some really comprehensive frameworks in terms of what boards should be looking at. [They] break down the ‘E’ into various different aspects, and the ‘S’ and the ‘G’. They've been put out by some of the Big Four (professional services firms) and other consultancies. I think some of those could be really helpful if you're starting on the journey, or even if you're partway through the journey, and you're thinking, I just really need to reassess and make sure that we're still up to speed.

SS: You’re really welcome Rachael. It's been a pleasure.