Eton Bridge partners recently hosted a webinar in partnership with NEDA (the Non-Executive Director’s Association) to discuss the growing importance of Environmental, Social and Governance (ESG) on the Board agenda and how this has been impacted by Covid. We were joined by Vanda Murray OBE – a portfolio NED of several companies including Marshalls plc. Here we highlight some of the key issues and trends that were discussed around the boardroom approach to ESG.

If you’d like to watch the discussion in full, then there’s a link to the webinar here.

The rise of ESG

The role of the Board and its Board members has come under closer scrutiny in recent years with a growing attention given to how directors, both executive and non-executive, “promote the long term success of the company”. This aligns with the Companies Act 2006 Section 172 covering directors’ duties that now features in the updated corporate governance codes and reporting requirements.

Central to the Board director role has been an ability to add value around the areas of: Strategy, Risk, Performance and People, whilst understanding the perspectives of a range of key stakeholder groups, both inside and outside of the company, including investors in all of their forms. Investors meanwhile have taken a stand in terms of seeking greater clarity of organisational purpose, social responsibility, and sustainability from the Board. This has evolved more recently into an appreciation of ESG criteria that help investors and shareholders screen investments and assess a company’s impact on the world. ESG criteria are now key to a company’s ability to attract and retain investments from funds who have a ‘socially responsible’ investment strategy.

Playing the ESG card

The rise in responsible investing has resulted in some 25% of the world’s investment funds now only investing in companies demonstrating solid ESG credentials.  Larry Fink, CEO at BlackRock, and other influential funds and agencies have pushed the ‘climate change’ agenda in particular, and so the environmental aspects of ESG have tended to assert greater influence, especially in terms of reporting requirements. Boards are under the spotlight to see if they are effectively managing and overseeing ESG risks, as well as adequately planning for the future. In the absence of robust disclosures, investors will increasingly conclude that companies are not adequately managing these risks.

The focus on long-term sustainable success, generating value for shareholders and contributing to wider society are now consistent themes in governance and reporting guidelines, supported by ESG-centric rating models and disclosures. Marshalls’ own experience demonstrated there needs to be a blend of culture, words & deeds, and ‘doing the right thing’ to bring ESG to life, which is balanced with achieving the selected UN Sustainable Development Goals (SDGs) and 10 principles around Work, Environment, Human Rights and Fight against Corruption. Having strong, measurable commitments combined with wide stakeholder engagement ensures Marshalls is seen as ‘AAA’.

The 5Rs of ESG

The global pandemic has resulted in Boards very quickly re-assessing their ESG position, especially the Social and Governance aspects. In terms of their response to people issues, more attention is being given to the health and welfare of the workforce, as well as considering their new working locations. Business risk profiles are also under the spotlight with the crystallisation of a range of strategic, finance and operational risks (both on and off-radar) testing the robustness of controls and crisis plans. From an environmental perspective, asset utilisation has come to the fore with the less demand for office space and an acceptance of more ‘working from home’ and hence less travel. This in turn translates into aiding environmental efficiency and the opportunity to reduce costs.

Going forward Boards need to consider:

• Responsibilities: both individual and collective Board responsibilities will increase to meet the expectation of stakeholders eager to learn how ESG performance has been achieved.
• Resources: a balance between internal and external needs and the shift towards more cultural and social considerations around mental health and wellbeing vs. a fairer society and equal pay.
• Risk: most risk registers see risks as purely a threat – more needs to be done on opportunities; environmental risks need to be assessed based on both negative and positive positions.
• Reporting: much emphasis has been placed on a range of reporting requirements – especially on climate change – but more balanced metrics are needed on ESG as a whole, following the UN SDGs.
• Race against time: the environmental area in particular needs urgent action – companies need to gauge their current vs. future states and answer the call to “show me the plan.”

ESG and NEDs

NEDs bring a range of capabilities and competencies to the boardroom table around: Knowledge + Skills + Attributes + Experience. The question post-COVID is whether a new breed of NED is required. Typically ESG has been picked up as part of all of the above competencies, however there may be gaps in knowledge and experience which might be covered by training and education, or which could call for more diverse candidates filling future vacancies. There is also the question of how ESG areas feature in recruitment criteria, as this will provide the pipeline of future thinking coming into the boardroom.

NEDs are increasingly called upon to act as a link with the workforce, reflecting the new UK Governance Code recommendations in this area. This also aligns with Board and Executive teams ongoing leadership challenges around employee engagement, in particular:

• Initiatives in place to support remote working/on-going personal development/collaboration;
• Leadership from the board on employee engagement – what does that look like from an employee perspective; and
• Follow through on initiatives – a Board member’s actions matter, not just the words.

What should Boards focus on?

NEDs and boards will need to be on their game to meet future ESG demands and need to ask themselves:

• Do we have quality information flows?
• Are we fully aware of all the impacts?
• Do we have access to the requisite expertise?
• How do we measure progress?
• Are our key stakeholders on board?

Considering the company through an ‘ESG lens’ has taken centre stage and the onus is on the Board ensure a strategy is in place and executed.