What Board Members Need to Know About ESG

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This article was written by Maureen Kline from Inc.and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com. 

Board members represent the interests of shareholders, and should focus on the company's financial health over time. It's tough to find balance between the short term, meeting monthly and quarterly targets, and looking broadly at long-term risks and opportunities involving stakeholders and the wider community, from the environment to human rights and ethics in supply chains. Board members need to be stewards for the long term, ensuring that companies are looking at such ESG (environmental, social and governance) factors and are on track to protect profits. Here are two great examples of such long-term thinking. 

Taylor Guitars sources ebony, mahogany and rosewood, key materials for its acoustic guitars, from tropical regions of the world. If company management focused only on quarterly earnings, it might not have paid attention to the risks to the long terms supply of these particular types of wood. But co-founder Bob Taylor decided to look into what key forests might be like decades into the future, and it wasn't pretty. So the guitar company launched its Ebony Project in Cameroon to create a sustainable model for sourcing ebony. The project will help the guitar company be profitable way into the future. And along the way, it will help restore forests, improve human rights, and affect the future of Cameroon itself. 

Under the leadership of Patrice Matchaba, head of US corporate responsibility at Novartis, the Swiss pharmaceutical company has put together a 10-year plus initiative called Beacon of Hope, partnering initially with historically Black colleges and medical schools. "The aim is to achieve a paradigm shift in education and health equity by working together with communities of color to co-create programs focused on increasing trust in the health care system through greater diversity, equity and inclusion across the research and development ecosystem," reads the company's website. The hope is that by improving trust, building a pool of role models, and building innovative solutions directly in underserved communities, over time health disparities in the US can be removed. Being able to provide innovative health solutions to all types of populations is part of the company's business model and can potentially open up new markets. 

Such ESG strategies are all the rage. Investors, customers and employees are demanding that companies align with high standards of environmental, social and governance practices. But board members, ultimately responsible for oversight and protection of their companies, don't necessarily have experience in the new field of ESG. Here are five tips to get up to speed.  

Immerse yourself in your company's sustainability report, and those of its main competitors and customers. The company should have followed a process engaging with stakeholders to identify the most material ESG issues, and should identify goals around these material issues and a roadmap to achieve them. The goals should be specific, measurable, achievable, relevant and time bound. Ask questions about the goals and roadmap. Specifically, the company should have a plan to become carbon neutral in line with the goals of the Paris Agreement, and should have goals that align with the UN Sustainable Development Goals, 

1. Take a tour of the company's policies for its employees and suppliers. Are there ethics, human rights, diversity, equity and inclusion and whistleblower policies? How are they implemented? How are employees and suppliers trained and what audit programs are in place? Does the company follow OECD guidance on due diligence in supply chains, or report using the UN Guiding Principles on Business and Human Rights? 
2. Review this manual on layering ESG factors into enterprise risk management, and get ready for ESG reporting guidance from the newly formed International Sustainability Standards Board and probable new climate reporting requirements from the SEC. Even if the company doesn't trade on a stock exchange, these are trends you should become familiar with. 
3. As a board member, direct company strategy towards integration of ESG into the core business and focus on both inbound and outbound materiality. For example, in the case of climate change, do rising temperatures pose a risk of fire, flood or drought for your company's physical assets or supply chain? And what are your company's impacts on global warming in the world? When looking at impacts, become familiar with concepts like natural capital, and carbon pricing, taxes and dividends. 
4. Direct the company to map out how it can grow without exceeding its share of planetary boundaries. Ideally, the company should have a plan to become a "regenerative" company, a company with a net positive impact.  

Being a board member has become much more complex. May 2022 be the year board members get their ESG credentials in order.