The G in ESG—Governance to Make ESG Actionable
ESG Governance—intended to further the implementation of ESG priorities—has a problem
To improve we generally seek to identify ‘best or leading’ practices and then modify those practices to fit the conditions and challenges the organization faces. As we’ve seen in our exploration of the origins of ESG and the confusion around what is meant by E and, especially S, best practice does not yet exist; it cannot exist in a hyper-fluid environment such as ESG. It is evolving and will continue to do so. We are working in largely uncharted waters. Nonetheless, expectations abound.
It is not possible to throw in the towel, give up, or wait to develop an ESG governance. There is too much pressure from all sides—the investment community, media, and employees—to be passive. How then to meet these rising expectations? Here are a few suggestions:
Embrace the lack of best practice. Create a mindset of exploration. Use the scientific method—create options; test and refine; do it again. This will be an evolving process that could take years to stabilize.
Two key principles must be at the foundation of this exploration—accountability because you must own your behavior, and authenticity since your staff first then the rest of the interested observers will recognize and criticize your inconsistency.
Since some organizations are early adopters of rules not yet written, learn from those who have taken some early steps—e.g., PepsiCo, BofA, and Patagonia. When Patagonia gives its entire Black Friday revenues to environmental causes there is little complaint about the cashflow sacrifice. It is who Patagonia is. While none have fully developed proven solutions, they can share emerging practices and flag mistakes to avoid.
Utilize a standing committee to do the deep dive board oversight necessary to accomplish #1-3. While ESG is an important whole board responsibility, increasingly deep-dive investigation, the work of the board, is handled in committee. The committee options include Governance & Nominating Committee, the Risk Committee, or Strategy Committees if they exist or a standalone ESG committee/subcommittee if the issue is pervasive.
Set up operations work groups to do the heavy lifting for the deep dives. But make sure the work groups report to the responsible ESG-tasked Committee. Years ago, during the halcyon days of strategy consulting, every organization ‘did strategy.’ The efforts that delivered positive impact were driven from the top, not delegated in a hands-off way down the organization. If ESG is to be authentic and if the Board and Management are to be accountable, they need to be fully engaged.
Throughout this journey be careful. Especially on the ‘S’ issues reacting too quickly to noise, and following a loud trend, can be seen as virtue signaling, not authentic. Former Medtronic CEO Bill George in his book True North, lays down helpful principles on how to identify what is at the core of your values and culture. Visualize a Venn diagram. One side represents a controversial issue; on the other side is your True North. Speak out and act when the two overlap. That’s authentic.