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ESG – A Board Perspective
What leaders think
Hoggett Bowers was delighted to host, once again in the prestigious setting of the Law Society in central London, their first in-person lunch for over 20 months. Until the onset of the pandemic and the social distancing guidelines that followed Hoggett Bowers regularly organised Chair and Non-Executive Director, CEO and CFO lunches. In fact, the last lunch we held back in February 2020 was also a Chair and Non-Executive Director lunch. So, it very much feels like we have come full circle and are now entering a new chapter in hosting live events for our Executive and Non-Executive networks.
The lunch was well attended by a complementary blend of Chairs and Non-Executive Directors from across travel, energy, utilities, retail, hospitality, financial services and logistics sectors.
In the build-up, we asked our guests to consider the following topic and to postulate on a response to the three questions posed:
There has been an avalanche of material on ESG yet no common standards of how it is going to be reported or how to successfully implement it. There are role models out there like IKEA and Unilever but many Boards we have talked to range from the ‘rabbits in headlights’ through to becoming fully involved. It is an evolving process and the ESG mandate is incredibly wide. It will take time and effort to bed down. In a nutshell, it is a delicate balancing act, managing an array of differing stakeholder pressures and also keeping the business on track.
Therefore, against this background we asked our guests to consider three questions:
- Firstly, where is your Board in terms of demonstrating and delivering ESG progress and do you aim to be a first mover, fast up-scaler or slow changer?
- Secondly, is pace of change being driven more by investors, employees or customers?
- And finally, what are you needing to do differently as a Board with the introduction of ESG?
Q&A and Discussion
In response to the first question, where is your Board in terms of demonstrating & delivering ESG progress and do you aim to be a first mover, fast up-scaler or slow changer?
Many agreed that the Board focus was more weighted to elements of ESG rather than considering it as a more holistic measure. A high level of deliberation is currently being given to the E segment of ESG, relating to organisations renewed efforts to combat global warming, cut emissions and drive towards net zero operations.
One participant cited that “The E is taking up all the sunshine and that greater focus should be given to S, with a particular emphasis today on employee wellbeing and D&I.”
There was a strong consensus that it is important for organisations to attain a balanced ESG performance at a level that satisfies the interest from financial institutions and sovereign wealth funds looking to invest in companies.
However, there was criticism that the current ESG rating system does not operate on a level playing field. With a myriad of different frameworks available there is no single standard way for businesses to report on ESG performance. This makes it difficult for Boards to establish consistent metrics to report upon.
To further support this point, several guests mentioned ESG frameworks such as FTSE4Good, Dow Jones Sustainable Index, UNPRI and Fraunhofer Institute.
Given the complexity, and in some cases limited understanding, of the diverse types of ESG frameworks on offer to organisations, there was general agreement from many guests on a move towards standardising these frameworks to allow for greater impartiality when comparing ESG performance with peer group organisations.
One contributor from the travel sector highlighted that, in their business, they felt they were making timely progress in areas such as sustainability and environmental within the services and facilities they provide to their guests. They also recognised there is much more to do specifically highlighting areas such as their guest’s supply chain (car hire, flights, accommodation) as areas where improvement can still be made.
In addition, several contributors voiced the concern that currently there were no consistent benchmarks of what good ESG performance looks like in their sector.
Several guests from the service sector highlighted that their Boards had control over certain aspects of ESG but in other areas they were at the mercy of their customers or suppliers and the bearing they had on influencing their ESG score.
The consensus is that ESG is here to stay, and that all Boards are applying these measures in one form or another. Whilst not perfect in its current state ESG does offer a starting point for organisations to build from. This in turn challenges Boards to think more widely on both the internal and external influences that are shaping their ESG performance and how this is viewed by both financial and non-financial stakeholders.
There was general agreement that Boards recognise the importance of ESG and are working on how the work they are undertaking is communicated to / understood by their investors, employees, and customers alike.
It would be fair to say that some organisations are further on in their journey than others. For many it is not viewed as a race but more of a period of learning and adjustment on how ESG is reported to stakeholders and influencers in the future. One contributor added that on one of their Boards, which they chair, they are very good on S – charity partners with whom they get personally involved, inclusion and diversity is a part of the organisations DNA, signatories from inception of women in finance charter etc. They are good on G – operate as if they were a listed FTSE 250 business, external Board and committee reviews etc. But are laggards on E, which is frustrating and disappointing. They report ESG under a TCFD (Task Force on Climate-related Financial Disclosures) framework and the push is coming from their iNEDs to improve E performance and reporting. Which means seeking answers to some of the basics – plan for Net-Zero, measurement of scope 1, 2, 3 emissions and reduction targets. In response the executives have appointed BITC (Business in the Community) to work with them on defining what is a responsible business and how to close the gaps. They concluded by saying that they are on the E journey but playing catch-up.
Our second question asked, “is pace of change being driven more by investors, employees or customers?”
The overall view is that the pace of change relating to the ESG agenda is being driven largely by investors. One of our guests reflected two years ago few investors were enquiring about ESG but this has now changed, and investors are looking for answers to the ESG agenda. This in turn is placing the spotlight on Boards to provide relevant and timely information.
This view was further reinforced by a guest who had recently attended the AGM of one of the organisations they chair. They observed that many of the questions being asked by investors were all very much ESG related. Meaning, that together with their Executive colleagues, all NEDs needed to be well versed on ESG and credible in the responses they gave to the investor community.
Importantly ESG factors cover a wide spectrum of issues that have traditionally been excluded from financial analysis. Consequently, organisation’s ESG performance is informing investors on where to invest and with which companies. Investors are viewing companies through a new lens that does not just consider financial performance but also other key factors such as ethical impact and long-term sustainability.
One guest commented that for one of the Boards they chair, the business refers to having four stakeholders, not three, namely investors, employees, customers and suppliers. The Board regularly references these four groups as the guiding light in developing an ESG outcome that has a positive impact on all four of these stakeholder groups.
Conversely, they also look more stringently at the ESG credentials of suppliers to ensure they meet the expectations of the company. They went on to say, that the Board is making good progress in getting to grips with ESG but they do realise there is still a lot of work to be done.
One contributor stated that ESG agendas should not necessarily be dictated by investors or employees but rather by societal trends, pressures and expectations that have influence and impact on the organisations business model. They commented further that their Board is seeing more pressure from employees on wanting greater visibility and how the E and S aspects of ESG are being reported.
Several individuals noted that ESG performance is being shaped by their customer and suppliers, particular on the E aspect of ESG relating to decarbonisation and Net-Zero.
One recent example of this is Ikea, who are putting pressure on their shipping container suppliers to demonstrate how they are going to reduce their carbon emissions to fall in line with their own ambition of reducing greenhouse gas emissions by 70% per shipment by 2030.
In response to the final question, what are you needing to do differently as a Board with the introduction of ESG?
Several participants reported that some of the Boards they sit on have set up ESG sub-committees with the responsibility for standardising and reporting ESG performance.
One guest mentioned that their Board have gone as far as building ESG targets into their Executive’s bonuses.
The Chair of both a global travel retail business and an international manufacturing organisation drew caution at this stage. His view was that it is critical that ESG initiatives are relevant to the business model. By making it relevant to the business model you give the business the best opportunity to deliver great ESG results in the areas that matter most to your business.
It was felt that there was the need to prioritise in this way as it engaged the entire business because it is relevant and measurable, plus it avoided green washing. They also believed that businesses must accept there are areas of ESG where they can excel and others where they have much less opportunity to have an impact. Similarly, the view was open about where a business cannot easily achieve ESG changes.
ESG is not only about target setting and monitoring but also an opportunity to flex your business model to ride the new trends. In some cases, the ESG agenda is creating opportunities, with one of our guests providing the example that in one of his portfolio companies they have started broadening their product range to include tools and fuel services which are eco-friendly. Consequently, pushing the proposition to the consumer market that rather than buying equipment and seeing it unused for most of the year, why not hire it when you need it? Which has had the added benefit of reinforcing the green credentials of their customers and the organisation.
The consensus was that Boards have all adopted ESG and are applying it in one form or another. This involves adjusting to new ways of reporting ESG and being more cognisant on how stakeholders and influencers can impact on ESG performance.
Summary
ESG is thankfully here to stay, and to Boards across the globe it will be work in progress, both from output perspectives as well measurements/metrics and governance initiatives.
The voices of the four stakeholders (employees, investors, customers and suppliers) will only become stronger and it will be down to the individual organisation to prioritise in the areas where they can excel and have meaningful long-term impact.
It is clear not one size fits all. At this stage, applying a ‘Good, Better, Best’ approach to prioritising ESG in areas which benefit the business, could help organisations to focus their efforts.
Taking this approach will create alignment with the business plan and provide greater purpose throughout the organisation, enabling Boards to create incentives for progress for their exco and employees, whilst demonstrating progress to all stakeholders.
For further reading on Hoggett Bowers perspective on ESG then please click HERE.
Acknowledgements
Hoggett Bowers are very grateful to all our guests and a special thank you to:
| Andrea Blance | NED | Lloyds Banking Group |
| Carl Michel | Chairman | A-Rosa River Cruises |
| Clifton Melvin | Chairman | Unum Limited |
| Colin Matthews | Chairman | EDF Energy |
| David Etherington | NED | Embark Group |
| Denis Hall | NED | Cembra Bank |
| Francesca Ecsery | NED | F&C Investment Trust |
| Martin Read | Chairman | Wincanton plc |
| Mike Clasper | Chairman | SSP Group plc |
| Mike Tye | Chairman | The Big Table Group |
| Nick Salmon | Chair | South East Water |
| Pete Kallos | NED | Carin Energy plc |
| Shatish Dasani | NED | Speedy Hire |
| Simon Laffin | NED | Watkin Jones plc |
| Simon Linares | NED | Nottingham Building Society |
| Tony Cocker | Chairman | Infinis Ltd |