Tag Archive: ESG

Five Ways to Improve Your Board’s Oversight of ESG in 2017

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BoardOversightESG

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The National Association of Corporate Directors (NACD) recently released its sixth annual edition of Governance Challenges 2017: Board Oversight of ESG, produced in collaboration with NACD’s five strategic content partners: Heidrick & Struggles, the KPMG Board Leadership Center, Marsh & McLennan Companies, Pearl Meyer, and Sidley Austin LLP. Environmental, social, and governance (ESG) issues encompass a variety of areas in which shareholders have demonstrated an increasing interest: sustainability, diversity and inclusion, human rights, labor practices, executive compensation, employee relations, and board independence.

According to Institutional Shareholder Services, a record number of shareholder resolutions on climate change were filed in 2016, and the average shareholder support for environmental proposals in general has increased dramatically over the last decade—from receiving an average of 11 percent of the vote in 2006 to 21 percent of the vote by June 2016. Shareholder proposals for the 2017 proxy season are also expected to focus on social issues, as there will likely be a regulatory downshift in these areas under the Trump administration.

Drawing from NACD’s report, here are five ways boards can improve ESG oversight this year in response to growing expectations from investors and consumers in this area.

1. Integrate ESG initiatives into company strategy.

How companies consider ESG issues and link them to financial and operational performance demonstrates the company’s approach to creating sustainable, long-term value for investors. KPMG recommends boards set the context for the company’s discussion around ESG issues by asking how they are applicable to the company, customers, employees, and investors. Specifically determine how environmental sustainability can support the company’s financial future. What are the board’s expectations regarding ESG? Will the company broadly address environmental and social issues, or will the company only focus on areas that directly relate to its strategy and operations?

2. Ensure key functional leaders proactively apply ESG in business operations.

All leaders in the C-suite should understand the importance of ESG and how it impacts their functional responsibilities, according to Heidrick & Struggles. For example, does the CFO include ESG elements when conducting financial analysis? Does the CMO clearly demonstrate how the company is committed to ESG goals instead of resorting to greenwashing (i.e., dedicating more effort to claiming to be environmentally responsible than actually doing it)? The board may also consider adding director ESG expertise should the company be recovering from a company-caused environmental disaster or missed opportunities in the marketplace due to lack of attention to ESG.

3. Use executive compensation to support ESG goals.

While many public companies are already engaging on ESG issues, Pearl Meyer research indicates companies fall on a spectrum from conducting basic reporting on ESG to fully integrating ESG into company strategy, culture, and executive compensation plans.

ESGContinuum

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Alcoa and Exelon are two examples of companies that have linked ESG goals such as greenhouse gas (GHG) emission reduction to executive compensation. At Alcoa, “20 percent of executive cash compensation is tied to safety, environmental stewardship (including GHG reductions and energy efficiency), and diversity goals.” Exelon rewards executives for “meeting non-financial performance goals, including safety targets, GHG emissions reduction targets, and goals engaging stakeholders to help shape the company’s public policy positions.”

To link ESG to financial results, boards can consider the following questions regarding compensation:

  • Which components of ESG should we link to our business strategy?
  • How do these ESG factors affect our short-term earnings versus long-term value creation?
  • What are the leading and lagging metrics that matter, incorporating both financial and nonfinancial metrics?

4. Improve disclosure on the impact of climate change.

The Financial Stability Board’s (FSB) Task Force on Climate-related Disclosures (TCFD) is an organization initiated by the G20 Finance Ministers and Central Bank Governors that has produced recommendations for disclosing climate-related risks and opportunities. The task force recommends that directors consider the following, as summarized by Marsh & McLennan Companies, to promote better disclosure:

  • Processes and frequency by which the board and/or board committees (such as audit, risk, or other committees) are informed about climate-related issues
  • Whether the board and/or board committees consider climate-related issues when reviewing and guiding strategy, major plans of action, risk-management policies, annual budgets, and business plans, as well as when they are setting the organization’s performance objectives, monitoring implementation and performance, and overseeing major capital expenditures, acquisitions, and divestitures
  • How the board monitors and oversees progress against goals and targets for addressing climate-related issues

See the Recommendations of the Task Force on Climate-related Financial Disclosures for additional guidance.

5. Engage shareholders on ESG issues.

According to Sidley Austin LLP, it has now become the norm for investors to consider environmental and social issues when making investment and voting decisions. Boards should determine who from the board and management will engage investors on these issues. These representatives may vary based on the severity of the topic to be discussed and which shareholder the discussion is with. Tracking shareholder voting records, and analyzing which types of proposals are seeing increased traction over time, will also provide insight into the minds of investors.

For more on how your board can improve ESG oversight, download your free copy of Governance Challenges 2017: Board Oversight of ESG. For NACD members, also see NACD’s handbook on Oversight of Corporate Sustainability Activities.

The “Orbital” Governance Perspective: An Astronaut’s Lessons From Space

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Few institutions represent American ingenuity and innovation more clearly than its space program. With rapt attention, the world watched July 20, 1969, as Mission Commander Neil Armstrong of NASA’s Apollo 11 spacecraft became the first person to walk on the moon.

Ron Garan at NACD Summit

Ron Garan—retired astronaut and chief pilot for commercial space launch provider World View Enterprises Inc.—was one of those who watched. “My most vivid childhood memory was July 20, 1969,” Garan said. “On some level, I realized that we had just become a different species. A species no longer limited to our planet.”

Garan delivered the opening keynote address to an audience of more than 1,300 on Sunday evening in Washington, D.C., at NACD’s Global Board Leaders’ Summit, the world’s largest gathering for corporate directors.

Beyond Limitations

Four decades later, Garan’s childhood dream became reality. He had trained with NASA to become an astronaut himself. “That first day in space when I got to take a look at our planet, [I] was absolutely breathless.…What I felt was an incredible sense of gratitude. Being physically detached from the world made me feel closer to the people on it—more interconnected.”

Reflecting on his second space mission, Garan remembers similar feelings of gratitude, but that gratitude was coupled this time with internal struggle. The technological advances that make space flight not just possible but routine offer the potential to solve some of the world’s biggest problems. Yet, Garan pointed out, some people on this planet still do not have access to basic resources like clean water.

“These days we’re more connected than ever, and the Internet is the backbone,” said Garan.  “The Internet can be our nerve center, enabling us to solve problems in an entirely different way.”

Collaboration

Garan further explored that challenge in his third mission, when the seeds to a solution began to root. The answer? Collaboration. On this space mission, Garan was weightlessly floating about 100 feet over the International Space Station, attached to the craft’s large robotic arm. That station represents the collaborative innovation of 15 nations—including the United States, Canada, Japan, the Russian Federation, and 11 European nations—that have, at times, been at odds with each other politically and ideologically.

“What would it look like for us to have that kind of collaboration here on the [Earth’s] surface?” Garan asked. “Collaboration doesn’t mean we agree on everything. What it does mean is that we find the things we do agree on so we have a platform to work [from in order] to address the things we don’t agree on.”

Risk: Necessary for Innovation

But innovation and collaboration don’t come without risk. As a highly decorated fighter pilot, Garan had run several missions and trainings in which he’d successfully flown and had no mechanical problems in flight. Then one day, while piloting a jet during a routine takeoff, he heard a loud pop that jolted him. He very quickly realized his engines no longer had any usable thrust. Garan tried to land in a wooded area and quickly realized that he had no need to be in the jet at that point. Seconds before impact, he ejected and his life was spared.

That incident, though life-threatening, did not change Garan’s outlook on life or risk. But the very next day, he was in flight and, because of a mechanical malfunction, had to conduct an emergency landing. After having completed thousands of flights, he’d had emergencies two days in a row. The second day is when the idea of what it means to take risks sunk in.

Before ever entering a plane or spacecraft, one must decide if doing so is worth the risk. The same is true for business leaders who want to innovate and collaborate. When NASA is planning a mission, they consider every possible issue that could go wrong and develop a response plan that’s ready and waiting to be activated. Boards should do the same. Similarly, a great idea on the shelf can only provide value if it’s activated. “Ideas are overrated. There’s got to be a streamlined path to action,” Garan shared.

“Any change involves some level of risk,” Garan said. “Any innovative business strategy must involve risk. Collaboration can help mitigate risk and also provide an engine for growth.”

Implications for Businesses

It’s important for businesses to understand that we don’t live on a globe; globes are just abstract lines on a map, Garan shared. We too often think of the world in terms of it being about business and economy supporting a society that sustains a planet, he said. “Instead, we live on a planet that sustains a society that has built an economy.” Understanding that concept is adopting what Garan calls an “orbital” view.

It’s time that enterprises realized that it’s good business to care about issues like sustainability and corporate social responsibility (CSR)—beyond just doing it to boost a brand or reputation, Garan shared. Issues like CSR should be part of a company’s DNA now, not just for future generations, he added.

The retired astronaut described how, on his last space mission, his spacecraft entered back into the Earth’s atmosphere and landed on its side. “Now out of my window, I saw a rock, a flower, and a blade of grass. I was home. In Kazakhstan, nonetheless,” he said. “I wasn’t in Houston, where my family was. But I was home and had a different idea of home.”

Thinking of the planet as “home” may be what’s required to actually make one small step for directors and one giant leap for corporate governance.