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Connecting ESG Strategy: and Long-Term Performance: Bolstering public capital markets and cybersecurity are expected to be key priorities.

Investors continue to elevate environmental, social and governance (ESG) issues on their agendas as a key to long-term value creation. Yet, for many companies and their boards, ESG remains peripheral to corporate strategy and other core business activities.

Only a third of directors and senior management responding to our recent survey indicated that their company is focused on ESG issues due to pressure from investors or a connection to longterm performance. Indeed, "reputation risk" ranked as a top driver of the company's focus on ESG issues, with more than a third of respondents reporting that ESG is widely seen as a "soft brand/marketing" issue.

Connecting ESG to strategy and long-term performance--as many institutional investors, including BlackRock Funds, State Street Global Advisors and The Vanguard Group, have called on companies to do more effectively --is no easy undertaking.

Each company has its own mix of issues that are significant to its operations and strategy, and it's clear that companies are moving at different speeds in addressing ESG risks and opportunities. Wherever the company is on its ESG journey, the board has a pivotal role to play in helping to shift ESG from the periphery to the center of the company's thinking.

To help boards have more robust conversations about ESG and the total impact of the company's strategy, operations and long-term performance, our paper, "ESG, Strategy, and the Long View" lays out a five-part framework, focusing on:

* Articulating what ESG means to the business and agreeing on common language.

* Identifying key ESG-related risks and opportunities --particularly those that are strategically significant to the company.

* Integrating ESG issues into the company's strategy, and helping to ensure alignment and buyin across the enterprise through the right culture and incentives.

* Effectively communicating the company's "ESG story" to investors and other stakeholders.

* Ensuring that the board has the necessary skills, processes and information to help guide the company forward.

In addition to finding that companies/boards appear to be lagging behind investors on the importance of ESG to long-term performance, our survey results show that companies are struggling to integrate ESG issues into their core business processes. Only 23% of those surveyed said ESG issues are integrated into the company's core business to a great extent, while the same percentage said ESG issues are only somewhat integrated into core business with a clear path forward.

Interestingly, nearly 60% of survey respondents indicated that ESG issues are "integrated into boardroom discussions" (which investors should find encouraging). Yet, most respondents cited significant room to enhance the board's oversight of ESG risks and opportunities, including:

* Improving the company's tracking of ESG issues and related communications to the board.

* Viewing ESG as a strategic issue and business priority (from a board perspective).

* Clarifying board/committee responsibilities for oversight of ESG issues.

An important question for all companies is whether the board includes directors with the relevant experience and expertise to understand the company's significant ESG risks and opportunities and to effectively oversee management's strategy for appropriately handling these issues. (Institutional investors, for example, have called for certain companies to have "climate-competent" boards.)

In short, the focus on ESG is accelerating, and our survey findings suggest that many companies and their boards have wide ground to cover in order to narrow the gap with investors' expectations for where companies should be on ESG. Clearly, companies that identify and incorporate ESG issues into their strategy, operations and culture will stand apart as forward-thinking organizations, focused on long-term performance and value creation.

Dennis T. Whalen is Leader of KPMG's Board Leadership Center.
What are the greatest challenges to addressing ESG as a strategic
issue at your company? (select all that apply)

ESG is viewed as a "soft"
 brand/marketing issue      35%
Pressure to deliver
 short-term/quarterly results    29%
ESG issues are disconnected from
 core business processes     27%
ESG is not a priority for the CEO   14%
Senior leadership does not recognize the
 value of ESG to long-term performance  13%
ESG is not a priority for business unit
 leaders/line managers      13%
Other          17

Note: Table made from bar graph.
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Author:Whalen, Dennis T.
Publication:Directors & Boards
Date:Dec 22, 2017
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