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Boards Have a New Approach to ESG

by Brian Stafford

When it comes to environmental sustainability issues, board directors are motivated by a more holistic understanding of the issue, and not just a concern for the “bottom line.”

©Martin Barraud/iStock/Getty Images Plus

Rising ocean temperatures, dramatic storms, raging wildfires, and other climate events are in the news almost daily. As awareness of the urgency of climate change grows, stakeholders look to both elected officials and corporate leaders to address the burgeoning crisis.

We have reached an inflection point, where businesses are realizing the impact they can have on these issues, as well as the impact these issues will likely have on business.  The pressure to examine environmental sustainability has reached corporate boardrooms, and many are wondering what role corporate directors can and should play.  

The findings of a recent report which looks at environmental sustainability efforts underway in corporate boardrooms globally goes against conventional wisdom. When it comes to environmental sustainability issues, board directors are motivated by a more holistic understanding of the issue, and not just a concern for the “bottom line.”  Simply put, board directors agree – social purpose and corporate profits are not mutually exclusive.

Board directors are already seeing long-term value in prioritizing environmental sustainability discussions, and view the issues as aligned with corporate interests.  The biggest motivator for board directors prioritizing environmental sustainability is the societal impact it has (40 percent of directors selected that option).  Additionally, “long-term viability” and “reputational risk” rounded out the top tier of motivations for board-level governance of environmental and sustainability issues.  By contrast, and perhaps going against a common narrative seen in publications today, only 9 percent of directors selected “investor pressure” as a primary motivation.  

While investors might have sparked board interest in environmental sustainability and helped drive media coverage, directors have identified more reasons to tackle sustainability issues than simply responding to investor pressure.

The good news is environmental sustainability is more than a trend. Companies in general are connecting the dots and taking a more holistic approach to environmental sustainability issues, but the organizations with the most experience in governance on this topic see the big picture that connects it with long-term business value.  For example, directors from boards with more experience tackling these issues prioritize “long-term viability” the most highly: 58 percent of directors who discuss sustainability issues frequently selected “long-term viability” as their primary motivation – 16 percentage points more often than any other reason.  

What’s even more encouraging is these findings are not specific to a single vertical, but span industries, including those that have not historically prioritized environmental sustainability. Financial institutions are providing an eye-opening look at how important these issues are in their boardrooms: 54 percent of these companies expect board discussion of sustainability issues to occur annually or more, and 37 percent expect board discussion quarterly.  Finance is not traditionally considered to have a level of high environmental impact or responsibility; yet, more respondents (17 percentage points) from this sector expect boardroom discussion of these issues to increase in the coming three years, more than any other sector.

Environmental sustainability governance is not going anywhere. In fact, boards anticipate their role will increase in coming years. Eighty-nine percent of respondents expect the amount of discussion of these issues to rise or stay the same over the next three years; only 2 percent expect to see a decrease (while 9 percent indicated they were unsure).

We are witnessing two distinct shifts in how companies approach environmental sustainability issues. First, we are seeing boards globally operating from a purpose-driven mindset as opposed to a purely profit-driven one.  Second, there is a deeper understanding of the significance that environmental sustainability risks and opportunities will play in determining an organization’s long-term success. Those shifts both help paint a more optimistic picture of the future. Financial institutions and their boards are part of that change, as they are realizing their role in understanding and addressing environmental sustainability issues. The status quo is being broken and it’s no longer sufficient for businesses to operate within their four walls.

Brian Stafford is the CEO of Diligent