Companies need to develop the skills in their corporate board members required (and demanded by investors) to address critical ESG issues
Investors are demanding in an ever-increasingly louder collective voice that C-suite executives of public companies and corporate boards future-proof their companies’ business operations and assets to be more resilient in the wake of the climate crisis.
Indeed, 64% of existing corporate board members say their strategy is tied to environmental, social & governance (ESG) concerns, which is a 15-percentage point jump from 2020 to 2021. At the same, very few corporate directors, only 25%, say that their board members understand ESG risks well.
Yet, ESG experts indicated that while the private sector has been slow to respond, regional, national and local government officials and regulators have not.
Critical professional membership organizations are taking notice and advocating for action, for example. Brad Monterio, member of the International Integrated Reporting Council, and current executive vice president of Member Competency & Learning at the Institute of Internal Auditors notes the progress made. “The events of the last year and a half and how quickly things have moved from the work of the Technical Readiness Working Group on prototypes towards the formation of the International Sustainability Standards Board and a proposed and requirements issued for public comment have been remarkable,” explains Monterio, an ESG expert within the accounting and auditing profession who has been involved in corporate responsibility movement for the last 14 years.
By contrast, he adds, it took international financial reporting standards a decade to take hold. “I believe the intent and wish behind how quickly this has moved is for the standards to be adopted by companies and capital markets around the world possibly within the next 12 months,”
Board members ill-equipped to oversee climate risks
Pressure is mounting for public companies and corporate boards to respond to the potential costs of climate risk. However, the ability for public companies to identify and manage climate risks is in doubt, especially at the board level. Public companies need to reassess the current skillset of their directors and their ability to manage risks associated with the economic transition in business operations in the wake of climate change, according to corporate governance and investors.
To date, corporate boards have mainly relied on external consultants for ESG advisory and education; but now it appears that the time has come to evaluate if the effectiveness of continuing this way is enough. Indeed, there is a growing belief among ESG experts and advisors of public companies that in order to meet the monumental task of ensuring the successful transition of business operations, given the predictions of climate shifts, the board must be composed of climate expertise as well as ESG expertise, more broadly.
Multifaceted ESG approach necessary
Anthony DeCandido, partner and co-leader of the sustainability service solutions practice for RSM US, a leading provider of audit, tax, and consulting services, is one of these ESG experts. DeCandido advises companies and company boards of directors to take a multipronged approach at re-skilling and upskilling board members to meet the demand of building and bringing in-house ESG expertise. Some of the strategies DeCandido suggests include:
- Take a grassroots effort to pinpoint individuals across company functions to be involved in ESG data collection and reporting to help re-skill themselves and others in this area. This can be achieved in two ways:
- Enroll nominated employees into online courses hosted by the Task Force on Climate-Related Financial Disclosure (TCFD), which was created by the Financial Stability Board and is aligned with many of the Securities and Exchange Commission’s proposed climate-related disclosure requirements.
- Sponsor your sustainability professionals to earn Fundamentals of Sustainability Accounting (FSA) certification aligned with the Sustainability Accounting Standards Board (SASB). To earn this certification, professionals must pass two exams, which focus on i) understanding and applying SASB standards for financially material sustainability information; and ii) how to normalize ESG data for comparison by investors while integrating approaches to sustainability performance and financial valuation of companies.
DeCandido emphasizes the importance of the data normalization aspect of the FSA as a key mechanism to quantify ESG impact and elevate better decision-making in the C-suite and at the board level.
- Pair a board member with an internal ESG expert for learning and mentorship to help increase the collective ESG expertise of the board.
- Finally, identify board-ready corporate executives with ESG expertise who could be added to the board.
A key obstacle to companies pursuing multiple ways to build up their ESG expertise at all levels simultaneously is that there are too few individuals who have true expertise in this space at the moment. Indeed, only 2,200 individuals have FSA credentials, despite that program being around since 2016. Companies that are pursuing DeCandido’s first suggestion, cannot fully employ his second suggestion until there is at least a handful of internal employees who have the depth and breadth of experience.
Likewise, there are very few board-level candidates with ESG expertise, and with the low turn-over of corporate directors, companies cannot rely on this tactic exclusively.
C-suite executives need to create a strategic plan to leverage revenue-generating opportunities and reduce risks associated with these opportunities. Company boards of directors need to oversee the execution of that strategy to ensure it will deliver financial results while minimizing any adverse impacts of potential ESG risks.
Investors’ demand that companies analyze opportunities and risks through an ESG lens is only increasing. To meet the challenge, companies need to expedite the progress they’re making in increasing their internal ESG expertise.