by Sean Kearns, Editor-in-Chief, Longitude
Better business has taken on a new meaning. Whether it’s climate change or employee rights, shareholders and customers want to see social responsibility in action.
A strong ESG strategy needs business functions to work together towards common goals. Yet many companies are yet to fully embed their policies, and close guidance from the board will be essential if short and long-term ambitions are to be met.
This reality is shaping the way boards view their own success, according to new research among Financial Times readers who currently sit on boards. The survey, conducted by Longitude, a Financial Times company, found that while company profit still comes out as the most effective gauge of performance, company values and the quality of the leadership team are cited by nearly half of respondents. Two out of five say effective corporate governance is a key measure.
In the future, ESG will be a metric by which we can judge whether boards are doing well. The kinds of decisions that need to be made to make progress on ESG metrics will typically be board-level decisions.Independent director of Starhub and non-executive director of Inchcape
The question is, are boards really equipped to lead the ESG charge? A recent study from New York University’s Stern Center for Sustainable Business found just three board members from the 100 largest US companies have specific climate expertise.
In the research among FT subscribers, a quarter said they feel they need to improve their knowledge of ESG metrics and disclosures in order to be a more effective member of the board. And 27% say they would welcome more insight and guidance on ESG investment strategies. Heathrow Airport recently appointed a climate expert to its board with the specific aim of providing members with “relevant insight and advice on decarbonizing the sector”.
No time to waste
Ahead of November’s COP26 meeting, pressure on CEOs and boards to act on climate change is intensifying. The vote by ExxonMobil’s shareholders to change its board and the instruction for Royal Dutch Shell to cut its Emissions are just two examples. Since the start of 2020, the number of the largest companies with a net-zero emissions target has tripled to at least 1,500.
Sustainability is now central to corporate competitiveness and a company’s ability to operate. For many boards, it was global supply chain disruption that brought the importance of ESG into sharp focus. This is pandemic-induced in many cases but is also increasingly related to climate issues.
John Elkington, who has served on more than 70 boards and advisory boards, says the next two years are set to be “absolutely critical” in terms of ESG. “By 2030 I think we will have seen a profound, seismic shift in the makeup of boards,” he says. “Not necessarily lots of sustainability experts, but people who are open to that agenda, connected with people who are active in that world, and bringing the new agenda into the heart of the business.”
Motivation and retribution
In line with the increased pressure to act, incentives to improve ESG credentials are becoming more explicit. A recent survey by London Business School/PwC found that almost half of FTSE 100 companies have linked executive pay to ESG targets. About a third have an ESG measure in their bonus plans, and a fifth include such targets in their long-term incentive plans.
Earlier this year, Europe’s largest activist investor, Cevian Capital, warned it will punish companies that fail to set environmental, social and governance targets when deciding executive pay. The Swedish group will use its vote at annual meetings to call out groups that did not include ESG metrics in executive pay packages by 2022.
Boards must react to the increased responsibility, scrutiny and pressure that has been placed on them. The changing social and business context of the past year is increasingly reflected in the plans and the pay incentives of senior leadership teams. Greater knowledge of sustainability and social issues will mean that the board is better placed to judge their successes – and their failures.