For corporate directors, the current situation surrounding ESG feels like killing two birds with one stone. Meanwhile, a wave of regulation in the U.S. and European Union has required, or will soon require, increased disclosure by public companies about climate-related and other social and environmental risks, all of which will require boards to There is a high possibility that more in-depth information disclosure regarding risks will be required. Understand these issues and their impact on business risks and opportunities. Meanwhile, a growing ESG backlash has led U.S. investors to pull billions of dollars from sustainable funds, even as employees and customers continue to demand visible corporate commitments to sustainability. It's being pulled out. And anyone involved in global supply chains cannot ignore its importance.
Maria Doty, CEO of Chicago Networks, described this challenge as a “whiplash effect” and said, “Boards need to make sure they balance all of these considerations and “We're caught between trying to find a way to avoid alienating people,” he said. Person concerned. ” At the recent Board of Directors Summit, Mr. Doughty moderated a panel of experts invited to provide board members with guidance on how to navigate the current challenging situation.
1. Balance ESG and DEI goals without over-correcting. “ESG is fundamentally about risk management and driving value, and that's what every company wants and is focused on,” said Lisa Boyd, co-head of ESG practice and managing director at Joelle Frank. said. He reminded boards to focus on the practical value that ESG initiatives can provide beyond high-stakes political talk, and warned against hasty changes prompted by backlash. “Companies should be careful but not over-correct. There are risks to over-correcting, especially when the discourse is so tense and the pressures so strong,” she said. , suggested that companies take a step back and conduct an “audit.” [their] Evaluate the initiative and further clarify how it is adding value or not. ”
Pamela Marcolise, partner and head of U.S. trading at Freshfields Bruckhaus Deringer US, agreed, warning boards not to abandon their DEI and ESG efforts in response to external pressure. “Just because there is a backlash against DEI and anti-ESG is on the rise, it doesn’t mean DEI and ESG aren’t important, and it doesn’t mean there aren’t stakeholders who think DEI and ESG are very important.” He recommends that boards work closely with management to assess “how each of the key stakeholders of the company feels about these issues,” and notes that there is no one-size-fits-all solution. pointed out.
2. Trust your data. Boyd recommended a “more frequent flow of key insights and data points” so boards can ask more informed questions about the company's human capital strategy. “Many companies have some key metrics that show whether their human capital management strategies are paying off…but only a handful,” she said, noting that the best performers Companies “will be better understood with better insights and better metrics,” he said. Human capital management at board level, management level, and across the board. ”
3. Prepare for different global ESG requirements. Boards operating internationally need to be aware of the differences in ESG regulations by region. Amy Rozik, managing principal of corporate governance at BDO, points out that “the global train is moving full steam ahead” with respect to ESG regulations, particularly in the European Union, and that companies are increasing their commitment to CSRD (corporate sustainability). He suggested that close attention be paid to the development of standards such as the Reporting Directive. ). “They’re not just looking at the impact on the company, but also on the environment. [with] Double materiality lens. ”
Mr. Marcogliese told the board that he would carefully manage how these global standards are approached in the U.S., where the regulatory environment is different, and that those responsible for preparing the CSRD report would be able to “determine how this will play out in the U.S. He advised that boards should ask management to “take a look at this.” , “Who is responsible for this process, and how do you ensure that the people putting it together are complying with the requirements? In most cases, this is how this plays out in the United States. I'm keeping an eye on it.”
Corporate realignment: Aligning ESG metrics with strategy
The backlash against ESG and DEI has included anger over metrics in incentive plans, but Darren Moskowitz, a partner at Meridian Compensation Partners, said boards are seeing a dramatic retreat from using metrics. He said that one should not expect that. “About 67% of the S&P 500 has ESG measures in their incentive compensation plans,” he said, adding, “It would be foolish to say that number will change significantly in the short term.” Maybe it will come down? yes. But will it fundamentally change? I'm not sure about that. ”
Instead of abandoning ESG metrics, Moskowitz advised refining the application to align with the strategic priorities of the business. “When this first happened, I think we overreacted and everyone just threw something at the rating scorecard,” he explained. “We're now starting to advise companies to refine the wording a little bit in their plans to align it a little bit with what they're trying to achieve strategically.”
If you're using these metrics in your compensation plan, be sure to understand the company's rigor regarding measurement. “Ask your management team: How are you tracking it? What data are you using? Can you set reasonable goals?” Teams today would admit that they are “average” in this regard, but “for this to be a metric for incentive compensation plans, we need to be able to measure, track, and report better than average.” There is,” he said. ”
Looking to the future, Moskowitz predicted that advances in AI and analytics could significantly change the way companies approach ESG-related metrics. “The metrics we'll be looking at in four years' time will be completely different than what we're looking at today,” he noted. He envisioned a shift from lagging indicators such as turnover to leading indicators that provide more actionable insights. He also suggested that ESG indicators, traditionally tied to annual incentives, could start to be reflected in long-term performance plans, particularly in areas such as environmental and social measures. “We're already seeing it in the utilities industry. A significant number of utilities are taking environmental measures into their long-term plans. We're starting to see it a little more within the social component.”
Moskowitz framed these adjustments as opportunities for strategic adjustment and risk management, rather than mere reactions to criticism. Recognizing the subtle pressures facing boards, he noted that “the voices of those against are much louder than those for, but shareholders still agree with some things.” “There's no perfect solution. It's not all yes or no. We have to find that balance.”
