In September 2023 the AFR published an article based on recent King & Wood Mallesons Boardroom Survey called “Directions” called “Boards get back to basics, abandon “woke capitalism”.
Some of the interesting themes included:
- sharpened emphasis on business priorities / value drivers (and walking back public ESG commitments)
- responding to the rapidly evolving implications of technology, digital and AI
- re-setting risk appetite for more challenging times
There was a strong emphasis on Company Boards getting back to basics, with the vast majority of directors citing profitability as their top priority after years of culture, reputation, social and climate issues dominating the agenda.
Close to 70 per cent of Directors said profitability was now their top priority, up from just 47 per cent the year before when it ranked fourth behind skilled labour, the skills’ shortage and cyber risks, a long-running survey of directors by law firm King & Wood Mallesons has found.
More than 12 per cent of directors said they had reassessed or “walked back” public ESG-related commitments or disclosures, amid a crackdown by regulators on greenwashing and growing climate litigation.
Ensuring that Environmental, Social, and Governance (ESG) considerations are genuinely about governance rather than just marketing involves a commitment to embedding sustainable practices into the core governance structures and decision-making processes of a company.
So, what are the key principles to keep ESG focused on governance rather than being primarily a marketing strategy and ticking a box.
In this article we take a deep dive and share some of the key principles to keep ESG focused on governance from a risk management perspective: –
- Authenticity: Using ESG solely for marketing can lead to greenwashing, where companies make false or exaggerated claims about their environmental or social efforts. Prioritising governance ensures that these efforts are genuine and aligned with responsible business practices.
- Long-term Value: Effective governance is the foundation of sustainable business practices. It involves creating policies, procedures, and structures that promote ethical behaviour, transparency, and accountability. These are not just for show but contribute to a company’s long-term success and value creation.
- Risk Management: Good governance practices help identify and mitigate risks effectively. Companies that genuinely focus on governance are better equipped to handle challenges related to environmental and social issues. This risk management approach is more effective than using ESG as a marketing tool.
- Investor Confidence: Investors are increasingly looking at ESG factors when making investment decisions. Companies that prioritize governance demonstrate a commitment to ethical conduct, which can enhance investor confidence and attract responsible capital.
- Stakeholder Trust: A strong governance framework fosters trust among all stakeholders, including customers, employees, suppliers, and the community. Trust is a valuable asset that can be damaged if ESG is perceived as merely a marketing tactic.
- Regulatory Compliance: Governance is closely linked to compliance with regulations and reporting standards related to ESG. Prioritizing governance ensures that a company is adhering to legal requirements and industry standards, reducing the risk of legal issues.
- Crisis Resilience: Companies with robust governance structures are often more resilient in the face of crises. Whether dealing with a social controversy or environmental disaster, a company with a strong governance foundation is better prepared to manage and recover from such events.
To ensure ESG remains about governance rather than marketing and ticking a box, companies should consider: –
- Integrate ESG into Strategy: ESG considerations should be an integral part of a company’s overall strategy, not just a marketing add-on.
- Transparent Reporting: Be transparent in reporting ESG efforts and progress, both internally and externally, to demonstrate a commitment to genuine improvement.
- Board Oversight: Have the board of directors actively involved in ESG oversight to ensure alignment with the company’s governance framework.
- Engage Stakeholders: Engage with all stakeholders to understand their expectations and concerns regarding ESG and incorporate their feedback into governance decisions.
- Continuous Improvement: Continuously assess and improve governance practices related to ESG, adapting to changing circumstances and expectations.
By focusing on governance within the ESG framework, companies can create meaningful, lasting change that benefits not only their bottom line but also society and the environment.
Please contact Earl Eddings earl.eddings@vuca.com.au if you would like to discuss this article further.
Earl Eddings
Associate Director, VUCA Trusted Advisors