This is the second of a series of interviews intended to help our IDN members grapple with the ESG topic.
In this episode, the we look at ‘ESG Readiness’ at non-exec board level, skill gaps, and how to close them.
Frederik Otto is the founding Executive Director of The Sustainability Board (TSB), an independent think tank that aims to advance sustainable leadership and governance. He has been a leader in consulting multinational companies on organisation and human capital strategy for over 15 years, with a more recent focus on sustainability and ESG. Frederik hosts the ‘Leadership Conversations by TSB’ podcast and further is a member of the Council for Inclusive Capitalism, and a fellow of Salzburg Global Seminar. Frederik has published multiple articles on the Harvard Law School Forum on Corporate Governance, and regularly writes for various other resources.
What is the importance of ESG considerations for a company’s governance and success?
While acknowledging ESG’s importance in corporate success and governance, I believe it doesn’t capture the entire narrative. To make it more tangible let’s capture sustainability by the acronym CHANGE:
- C = Climate change;
- H = Human rights;
- A = AI and emerging technology;
- N = Nature and biodiversity;
- G = Geopolitics and conflict;
- E – Equity, diversity, and inclusion.
All these issues illustrate that we have to go beyond ESG, and it is urgent to consider global impacts beyond our company’s sphere. Even if a business has a small environmental footprint, awareness of climate change and broader factors is crucial.
ESG, viewed as an organisational framework, is valuable for this purpose. It serves as a reporting tool, ensuring accountability and establishing a stakeholder governance framework. ESG criteria should be embraced for technical understanding, as they are essential tools to keep us on track. However, we must also remain mindful of the broader societal factors and dependencies that impact the business.
What is the main takeaway or key learning from this year’s findings in the recently published 2023 Annual ESG Preparedness Report?
Every year we evaluate whether boards have formalised an ESG policy, established a sustainability committee or delegated ESG matters to another committee. We also look at the materiality and quality of their charters, and we analyse board diversity and individual ESG engagement of directors of large, publicly listed entities.
This year our ongoing reporting initiative, in its 5th edition since 2019, reveals both familiar trends and new insights. Positive aspects include a rise in sustainability governance, though the messaging from boards in their disclosures is misaligned. Despite a gradual increase over the years, director engagement on ESG matters seems to be plateauing. The percentage of directors tasked with ESG oversight who are also engaged on the topic has risen from 16% in 2019 to 45% in 2022, and fallen to 43% in 2023 – a worrying trend.
Consistently, women directors play a pivotal role in driving sustainability governance, showing over 60% more engagement than male counterparts. A trend consistent since our first report, and a clear case for more gender equal boards.
We also found that management experience is as a key driver for ESG engagement, with directors leveraging their expertise implementing sustainability strategies in executive roles.
Another trend is the adoption of the increasing articulation of ESG in board policies, particularly among American boards, despite the current political polarisation on the ESG moniker.
In summary, awareness of the need to improve sustainability governance is rising, but engagement is fragmented, and skewed towards women.
What is the key gap in aligning boards with ESG standards, and how can Boards of Directors efficiently enhance their skills in this area? What are the key priorities for Board Chairs in this context?
Indeed parts of our research focus on assessing individual board member engagement on ESG. Using a simple checklist across all of the past five years, we find three key criteria for ESG engagement.
- Firstly, business experience, like executive or non-executive involvement in sustainability strategies or governance.
- The second criterion is personal or non-business experience, such as engagement with relevant non-profits.
- The third point is formal education or certification in sustainability, or being a thought leader on the topic.
No hierarchy exists among these criteria, and in our opinion experience can be gained through various avenues. ESG engagement signifies personal commitment, either visible through public engagements like conference and round table attendance, thought leadership on social media, or communicating the business strategy actively in board disclosures or on capital markets days. The level of formal education required depends on the board’s complexity.
As for the role of the chair leading on ESG engagement, jurisdiction surely matters, with American chairs still often doubling as CEOs. Here the role of the Lead Independent Director is just as important. This said, assigning too much accountability on one person should be avoided. The chair, especially if independent, is vital in holding the board as a system together, facilitating resource allocation, enabling committee formation, and overall governance of sustainability. The key is ensuring cohesive board operations with checks and balances for effective sustainability governance.
How do sustainability practices of privately owned or family companies compare to large publicly traded companies, considering the report’s emphasis on the latter?
I’m also an investor in a fast-growing, private UK startup in the food industry, and can see the different governance dynamics very closely in comparison to large public enterprises. For a start, private entities, unlike public companies, have fewer and more personalized interactions with stakeholders, especially investors. The accountability is simply to less people and entities, with private companies generally smaller and less rigorously regulated. That also makes gathering data on sustainability more manageable. Structurally, most private companies aren’t burdened with the same disclosure and reporting requirements as public counterparts. However, they can learn from ongoing standardization efforts and voluntary adopting sustainability governance practices.
Family businesses have a unique opportunity to drive sustainability, especially during generational succession. Newer generations are attuned to sustainability concerns and aim to build a positive legacy. Family businesses can leverage their organization’s might beyond philanthropy, acknowledging and reconciling with, say, environmental impacts caused in the past. Decision dynamics within family businesses, public or private, allow faster implementation of sustainability initiatives compared to non-family controlled companies.
The interviewer:
Dr. Pamela Ravasio is the founder and managing director of Shirahime Advisory, a Corporate Responsibility Governance boutique consultancy. She serves as fractional Chief Sustainability Officer for companies and advises boards on ESG and governance. With a background in roles like Global Stakeholder Manager, she played a key role in making the European outdoor industry a leader in future-proofing.
She currently sits on the boards of Polygiene AB and INSEAD’s International Directors Network.