Implementing ESG Programs: Structure and Responsibilities (Part I of III)
ESG – the initials that are transforming corporate missions, purposes and structures, fueled by stakeholder and investor demand. It is a significant moment in corporate and stakeholder interactions. Companies recognize the responsibilities but even more importantly, the opportunities, to build a sustainable and financially profitable organization.
But there are significant changes that have to occur along with the ESG objective. I am dubious about the ability or incentives of companies to implement these changes. Right now, shareholders are demanding financial success – not a long-term basis but on a quarterly basis. Executive incentives and senior management objectives have coalesced around a powerful motivator – quarterly financial results.
Call it what you may – but short-termism is antithetical to what every company should be focused on – long-term financial growth and sustainable performance. COVID-19 and other significant risk events have demonstrated how dangerous short-term planning can be. I am not so sure that ESG is a powerful enough motivator to change the fundamental flaw in corporate business perspective. We shall see what happens but I am not sure ESG will have a significant impact here. More importantly, however, ESG may be the beginning of a broader movement, led by investors and stakeholders, to demand long-term sustainable planning along with a meaningful commitment to ethics and compliance as an engine of success.
As a first step, ESG is important. However, everyone understands that ethical companies that adhere to values are more likely to success than unethical or agnostic companies in the marketplace. This is the real movement that needs to occur and that can easily encompass ESG as a fundamental precept of an ethical company. When busines decisions are made with proper consideration of ethics, companies perform better and employee satisfaction increases exponentially.
As companies focus more on ESG, it is obvious that companies will achieve a significant number of benefits beyond that defined in the ESG acronym. A well-designed and tailored program will bring significant benefits to the overall company’s operations.
There are a number of important issues that design and implementation of an ESG program entail. It is hard to fill in many of the important issues given the SEC’s ongoing rulemaking on ESG disclosure issues. Obviously, SEC regulations will have a significant impact and everyone is anxiously awaiting the regulations. In the meantime, many companies are moving forward with planning and implementation. That is a good thing because it is unlikely that the SEC will alter the landscape to which many companies are moving.
Here is a list of issues, which I will explore in subsequent postings:
- Who should conduct oversight of the ESG program? A specific committee or the overall board?
- Who should be responsible for design and implementation of an effective ESG program?
- How should a board or committee charter be drafted to ensure proper oversight and monitoring of ESG functions/
- How should ESG reporting and disclosure occur? How should the talismanic standards of “materiality” be applied in this context?
- How can technology be used to ensure proper oversight and reporting of ESG issues?