Boards must know that ESG isn’t just a buzzword. Here’s why

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ESG is gaining increasing importance in the GCC region with regulators as well as the UN mandates putting more pressure across the board, be it a large conglomerate, SME or private venture. It refers to the criteria used by enterprises to assess their impact on the environment, social (or society) and corporate governance.

The UAE has taken the lead in regulation by introducing the Sustainable Finance Framework and others have followed suit. The aim was to promote sustainable practices and facilitate ESG reporting.

Many GCC companies are slowly adopting sustainability reporting frameworks such as the Global Reporting Initiative and the Sustainability Accounting Standards Board to disclose their ESG performance. Institutional investors, including sovereign wealth funds, are considering ESG factors in their investment decisions. They expect companies in the region to incorporate ESG practices and demonstrate long-term sustainability.

Certain industries such as energy and real estate are particularly focusing on ESG due to their environmental impact. Efforts have to be continued to reduce carbon emissions, adopt renewable energy sources, and implement sustainable building practices.

Clearly, enterprise boards need to recognise the importance of ESG and integrate it into their decision-making processes. To promote and drive this faster, they have to engage with all stakeholders, and experts to develop ESG strategies and ensure responsible governance practices.

ESG regulations are already starting to bite for businesses. Earlier this year, the European Union launched its Sustainable Finance Disclosure Regulation rules requiring asset managers and advisors to factor sustainability data into their investments.

This will drive solid, objective disclosure metrics, with penalties for failure. In Germany, asset manager DWS is now under investigation for false “greenwashing” disclosures on its investments.

A clear messsage

Corporate board members are getting the message loud and clear. There’s very little tactical guidance on what they should actually do about it – How does your board build practical ESG discussion and oversight into its structure, agendas, reporting and actions? Who are the ESG resources with what skills, you’ll need in the boardroom? How can you assure relevant, actionable data on company ESG status? What ESG standards and reporting frameworks are out there, and which should guide your board?

Our ESG toolkit training covering all the above and more has been in high demand amongst global boards precisely for this reason. Many GCC enterprise boards have been serious about driving ESG initiatives and the pioneers include Aramco, Emirates NBD, Masdar and Majid Al Futtaim Group. Aramco’s climate strategy aims to lower its carbon intensity, increase energy efficiency, and invest in low-carbon technologies. Emirates NBD, one of the largest banks in the UAE, issued a $750m green bond in 2019.

The bond proceeds were allocated to finance and refinance green projects in areas such as renewable energy, energy efficiency, and sustainable water management.

Masdar has partnered with global giants to develop renewable energy projects such as the 800MW third phase of the Mohammed bin Rashid Al Maktoum Solar Park in Dubai. Majid Al Futtaim Group has aligned its sustainability strategy with the United Nations Sustainable Development Goals (SDGs). The focus is on areas such as climate action, sustainable cities, responsible consumption, and community development. These initiatives demonstrate how boards show commitment to addressing pressing global challenges and creating positive social and environmental impacts.

Most of the big concerns and activism agendas come under the environmental heading, but that covers lots of sub-concerns. Climate alone has many subsectors, and any of these might be your company’s hottest issue. Social matters bring controversies of their own, and the continuing discrimination against minorities and gender equity make this a hot topic. Governance is the last letter in ESG, and often tends to lag behind as a concern.

But this is the arena where items like board makeup and structure, voting rights, and shareholder powers are battled over. ‘G’ covers the proxy voting tools used to advocate for the ‘E’ and ‘S’ matters, and activists know how to use these to good effect. Driving ESG requires knowing the management team’s capabilities. Since ESG covers so much turf, you’ll want broad input. The heads of finance, HR, legal, investor relations, and compliance have a piece of ESG. An ESG shake-up can be a good motivator for venture or private companies to formalise how these tasks should be allotted. Designate a “management” ESG committee if possible.

Our advice is to use a board “skills matrix” to assess the talents a board currently has, what it lacks, and how succession planning and training can fill gaps. Now, add ESG background and credentials to your matrix. Every board doesn’t need a climate scientist, an environmental lawyer, or a rep from a human-rights organisation. Also, look into the backgrounds of current and potential board members for ESG negatives.

The challenges

How the board shapes itself to oversee ESG brings its own challenges. Start by looking at the bylaws and agendas of current committees and asking how they can take on specific pieces of the ESG spectrum.

The audit committee incorporates ESG materiality measures, risk, and disclosures. Compensation should factor ESG goals into pay measures and incentives, top executives/median employee pay balances, and stakeholder comp concerns. The nominating/governance committee can serve as the board’s overall ESG wrangler, and also factor board skills into its work, board ESG education, and stakeholder communication.

Here are some steps boards can take to effectively integrate ESG into their enterprises:

• Establish board-level commitment: Show the commitment of the board to ESG as the critical long-term growth factor by formal communication to all stakeholders. Ensure that all directors understand the business case for ESG.
• Assign a specific committee or champion: Create a dedicated committee or assign a board member to oversee ESG matters, and provide the necessary authority, resources, and expertise to drive the initiatives effectively.
• Integrate ESG into strategic planning: Identify specific ESG-related risks and opportunities that are relevant to your industry and operations, and set measurable targets aligned with the long-term vision and stakeholder expectations.
• Develop ESG policies and guidelines: Define guidelines and best practices for addressing ESG issues across various business functions, and ensure these are effectively communicated.
  Enhance board expertise: Consider recruiting new board members with diverse backgrounds and expertise in sustainability, social impact, and governance, and provide expert training.
• Monitor and measure ESG performance: Establish robust monitoring and reporting mechanisms to track the ESG performance, and implement appropriate metrics and KPIs to assess progress.
• Engage with stakeholders: Seek feedback and input from stakeholders to understand their expectations and concerns regarding ESG performance, and foster transparent and constructive dialogue with them.
• Incorporate ESG in executive compensation: Integrate ESG metrics and targets into executive compensation plans, and align incentives with the achievement of ESG objectives.
  Collaborate with industry peers: Participate in industry associations and collaborate with peers to share best practices and learn from each other, and engage in industry-wide initiatives and standards that promote responsible business practices.
• Continuously improve and innovate: Regularly review and update the ESG plans, policies and practices, seek opportunities for innovation and explore new ways to enhance performance.
  While ESG is relatively new vocabulary in most boardrooms, it’s fast becoming a language boards must learn.

Ralph Ward is a global board advisor, coach and publisher and Dr M Muneer is co-founder of the non-profit Medici Institute.