How Covid-19 can shape boards’ thinking on ESG

Jun 16, 2020
Kaley Childs Karaffa says boards should consider embedding ESG into corporate strategy in wake of pandemic

The novel coronavirus pandemic has intensified investors’ focus on ESG practices as the outbreak has disrupted global supply chains and affected human capital management practices. This is building on what was already a growing interest among investors in ESG issues, as reflected in shareholder proposals and investment patterns over the last few years.

Morningstar data shows that in the first four months of this year, investors poured roughly $12.2 billion into ESG funds, twice as much as such funds attracted during the same period last year. This highlights how important it is for each board to understand its investors’ priorities.

Boards should be working closely with their management and investor relations teams to gauge whether they have a sufficient understanding of their major shareholders’ priorities and how those are changing in the current environment. Companies are making decisions in response to the pandemic’s impact on the business, many of which are entwined in their ESG priorities.

The current focus of the management team may be more short term in nature to respond to immediate and rapidly evolving circumstances, addressing matters such as enabling virtual work environments, ensuring availability of necessary resources, minimizing negative financial impact and otherwise stabilizing the business. The board should be overseeing these decisions to ensure appropriate responses and stabilization, while also seeking to understand the enduring effect of these measures on corporate practices and priorities and resultant impact on long-term growth, all of which may change investor perceptions and priorities.

The Covid-19 pandemic has provided a heightened focus on ESG matters for boards through the lens of risk oversight as well as from the perspective of assessing strategic opportunities. An effective board can use this to reassess and further develop the framework under which ESG matters are reviewed and discussed. For example, a board may have reviewed workforce data from annual reports on whistleblower complaints, employee retention and other traditional employee metrics.

A board working closely with the CEO and head of human resources to understand the company’s Covid-19 workforce response measures – such as creating virtual working environments, ensuring safe in-person environments for critical employees and maintaining employee productivity and satisfaction – may gain access to additional insights and data on human capital metrics. These could then be used to both mitigate workforce risks on a forward-looking basis and to develop new strategies for strengthening corporate culture.

Boards and management teams may consider opportunities to improve environmental sustainability measures, which may have impacts such as decreasing costs, better alignment of corporate practices with investor priorities on sustainability or improvements in compliance with regulatory requirements.

Finally, boards may consider how lessons learned through this pandemic can help improve their governance practices, such as implementing additional crisis-response tabletop exercises to further develop their crisis-preparedness strategies or establishing new norms for communications between the board and CEO, particularly for situations with a potential material impact on the business.

Companies are navigating the period of re-emergence from lockdowns, and boards of directors and management teams should consider integrating ESG into their corporate strategy to better position their companies for the long term. There may be short-term measures implemented currently that are related to existing corporate ESG practices or opportunities to expand those practices that may lead to further strategic growth.

Having a clearly defined message of what each component of ESG means to the company is important for a board in communicating the company’s ESG priorities to investors and other stakeholders. Boards are encouraged to work closely with their CEOs from here on to think about how ESG is embedded into the business and how it is reflected in the company’s operations, financial decisions, culture and overall strategy.

Boards are responding to investors’ sharp focus on ESG, with many highlighting their efforts in the opening letter of their proxy statement. According to Kellie Huennekens, head of ESG research at Nasdaq, a recent analysis of 50 S&P 100 proxy statements finds 86 percent disclosing that engagement covered climate change and environmental sustainability, an increase of one third year over year. ‘Human capital and corporate culture were also addressed, while traditionally separate topics, such as compensation and ESG, continued to converge,’ Huennekens writes.

Despite the evolving circumstances resulting from the pandemic – whether the board is working with management to assess the disruptions in the supply chain or address other impacts on the company’s operations – the board can be the mechanism for which the company is able to maintain focus on its long-term ESG priorities and corporate growth.

Boards and management teams leading their companies through this unprecedented time can use lessons learned during the pandemic to build resilience and, importantly, improve overall leadership and corporate governance. From a practical perspective, boards should understand their business as it relates to each area of ESG, consider what information they disclose and adapt strategies going forward. There are a lot of opportunities to be gained in this environment.

Kaley Childs Karaffa is director of board engagement at Nasdaq

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