Knowing how and where to start on an ESG journey is a challenge for many companies. With an overwhelming amount of data, confusing reporting standards, and the uncertainty of looming regulations, it’s understandable why even experienced executives may be hesitant to commit to formalizing ESG programs, despite their importance to company performance.
We sat down with Jeffrey Harris, who has a successful track record investing in technology and energy companies through long-time affiliations with Warburg Pincus and Quantum Energy Partners, and has served on the Board of Directors of nearly fifty companies, including fifteen that have been publicly-listed. Here’s what he and other board members want you to know about ESG.
1. Board members care about comprehensive ESG
ESG is here to stay and board members as well as other stakeholders, are ready for executives to take charge of ESG reporting and management.
“All of the stakeholders of enterprises care about ESG today. Paying lip service to the requirements is a losing strategy. Cutting corners today to save money on implementation is a losing strategy. The trends are clear—regulators, stockholders, employees, vendors, and customers all demand quality information because they too are implementing these programs,” Harris started.
“This is not just another thing to do; ESG programs matter. And while climate accounting is the issue of the day, ESG won’t end with carbon. It will reach into every area of operations and requires executives to act responsibly on behalf of all stakeholders.”
ESG is here to stay and board members as well as other stakeholders, are ready for executives to take charge of ESG reporting and management.
2. ESG reporting is on the agenda
Just as your executive team is paying more attention to your sustainability performance, your board members and investors are expecting ESG reporting to be front and center in your quarterly updates.
“Over the last two years, the ESG conversation on every board I’m on, both public and private, has evolved. We’ve moved from ‘what is ESG’ to ‘what are you doing about it, and how can you prove it,’” Harris said.
Even if your sustainability program is a mature pillar of your corporate strategy, board members want to see investor-grade data that demonstrates your progress on your action plan.
“Increasingly, boards are concerned about the headline risk of their company being accused of ‘greenwashing,’” Harris continued. “This has to be avoided as once brandished it will be challenging to remove this stain.”
Board members are also counting on you to go beyond the data and develop the insights that help them understand how ESG fits into your long-term success.
3. ESG will change investments and compensation
While emerging requirements in nearly every industry are dictating both ESG strategy and reporting, satisfying regulators and avoiding compliance violations represent only a couple of the ESG risks executives should consider.
“In the past, ESG performance was not a primary driver of investment decisions. But today, even the most attractive asset is at risk if its ESG footprint isn’t well-managed,” Harris said. “And as data and reporting becomes more accessible, executive compensation will also be tied to ESG performance. This is on the agenda of most boards today and will be on the agenda of all boards going forward. It is imperative for management to implement systems and controls that provide data consistency and transparency, or they run the risk of adjustments over time that will reflect poorly on them.”
The move to connect ESG performance to compensation is definitely growing in popularity. While it’s a move in the right direction, organizations need to be intentional and develop incentives using meaningful ESG reporting metrics, as well as consider long-term goals and performance.
Getting a handle on your ESG performance and prioritizing sustainability with the appropriate incentives now can create a positive impact on your company’s bottom line.
4. It’s time to make ESG data your ally
Your board understands that ESG reporting isn’t easy. But neither you nor they can afford to ignore it. First, find a starting point that works for your operations. Because it’s relatively easy to collect and understand, Harris has seen Diversity, Equity, and Inclusion (DEI) data make its way into standard board packages.
While Social data is a good start, your board is expecting (and regulators will require) a more comprehensive picture of ESG performance. ESG and sustainability reporting software allows companies to collect, track, report, and manage ESG by unifying operational data, tying it to strategic objectives, and automating reporting. Relying on spreadsheets won’t cut it.
“I expect that in the near future boards will want to see comparative data for their companies versus peer groups. They will want to see advanced data analytics around E, S, and G to better understand the magnitude and progress of programs. This requirement will be driven by stockholders, regulators, and employees,” Harris said.
5. Addressing ESG early is a competitive advantage
“When it comes to ESG regulation, it’s not a matter of ‘if,’ it’s ‘when’—so why not get ahead of the curve and get credit for leadership?” Harris said.
With increased attention on ESG and sustainability, executives who are taking the initiative to embrace ESG gain the advantage of being labeled as an industry leader and avoid the embarrassment of being perceived as a laggard while other companies are praised for innovation and garner accolades.
In addition to recognition and investor attention, as one of the first to take on the endeavor of implementing ESG management and reporting, ESG trailblazers will be better positioned for looming regulation and shifts in reporting requirements.
“It pays to be prepared,” Harris concluded, “organizations that are addressing ESG now can do so in an integrated and meaningful way that aligns with overall corporate strategy—minimizing risk and identifying opportunities. Plus, they’re less likely to be scrambling in the future to meet stakeholder demands. Ultimately, organizations that see ESG as a nuisance, as an expensive burden, an imposition are missing the point because ESG matters.”
