Momentum over milestones – the practical challenges of ESG leadership
Natalie McEvoy, Counsel at Slateford spoke to Business Leader about the common challenges of ESG leadership and how to build ‘momentum’ in this space.
In her keynote address to the 2021 Society for Corporate Governance National Conference, Commissioner Allison Heron Lee referenced a study that showed that “71 of the top 100 revenue generators globally were corporations while only 29 were countries. In other words, corporations—in many cases U.S. corporations—often operate on a level or higher economic footing than some of the largest governments in the world.” The fact that the boards of those corporations have a potential influence greater than many countries brings home the holistic nature of big business leadership today.
Perhaps this goes some way to explain why so much is expected of big business as a role-model; those with the greatest resources arguably have the capacity to steer the ship. In particular, all eyes are looking to big business at the moment to offer the most impactful solutions for the climate crisis. We know that ESG (Environmental, Social and Governance) metrics, once seen as peripheral or an afterthought, are now taken very seriously. Quantifying ESG investment and performance is as important to the company itself – as a measure of its own efficacy and return on investment – as it has become to consumers and investors. In some instances, protecting a company’s position on ESG is to protect it from the attentions of activist investors or activist employees.
Pushing forward an ESG agenda requires the sustained investment of time, energy and money and the payback in corporate resilience takes time to come to fruition. Not only that but it requires an honest, considered and patient strategy; one that lays the foundations before building the house. A company unaligned on its promises as against what it is realistically capable of accomplishing in the ESG arena faces the dangerous prospect of being exposed for hypocrisy. Additionally, the detail should be forward-facing as opposed to pulling the wool over stakeholders’ eyes. Take, for example, some corporates pushing for “net zero” to mean an elimination of emissions, compared with others who will use the same language but intend for this to be delivered via offsetting payments. The sense of impetus is that the marketplace may tolerate the latter for a while, but that a neutralising approach – rather than one which solves the underlying environmental concern – isn’t without risk.
We know that the most crisis-proof companies communicate their values clearly, stick to those values and deliver on their promises. Identify and keep sight of what is important in the eyes of your main stakeholder groups, and ensure that you maintain a cooperative dialogue and constructive feedback loop.
Studies have also shown that individual leaders enjoying the most success in terms of delivering company stability and business resilience are those whose own personal values and visions align with that of the company. Perhaps it is logical that those who naturally live the values of their corporation find it easier to accurately make those risk/reward judgment calls that continued ESG investing requires. Paying more attention to whether you genuinely fit the job description and corporate ethos as a person – or at least the potential for you to mould and shape that into something authentic if not – may be a significant factor in choosing your leadership role for maximum career success.
Consumers, investors and stakeholders expect corporations to evolve in their ethics and performance to react to a dynamic society. In this sense, “ESG momentum” is often cited as a more useful indicator of brand resilience than ESG achievements or tilt. A momentum metric focuses not on what you have proposed or achieved to a certain point but whether you are in the habit of continually improving yourself in this area. Having a good ESG momentum is rightly seen as an indicator of stable and future-proofed investability; a kind of corporate health check.
In terms of stock performance, companies that showed an annual positive change in ESG rating – or sustained momentum – performed better than those with either neutral or negative momentum over time. It’s notable that sectors such as aerospace and healthcare are outperforming sectors such as hotels and insurance in terms of momentum, and that may be because the evolution is perhaps more obvious or the problem has had more attention. Whatever industry you find yourself in, work on your ESG planning as a long-term improvement as opposed to a fix list, and you will reap the benefits.
Realistic leaders who stick to their values and communicate effectively, who set the ESG vision as a journey rather than a destination, who take responsibility for the whole, invite the independent input of others and who invest and evolve continually and generously will best bolster the corporate reputation as well as their own most valuable asset. No wonder then, that that role can compare with the effective government of a small country.