The novel coronavirus pandemic has intensified investors’ focus on environmental, social and governance (ESG), as the outbreak disrupted global supply chains and affected human capital management practices. As countries, states, and cities reopen, companies are navigating this period of reemergence, and boards of directors and management teams should consider integrating ESG into corporate strategy and culture to better position a company for the long term.
“Boards need to be working very closely with their CEOs moving forward to think about how is ESG embedded into the business and how it is reflected in the company’s strategy, operations, financial decisions, and, overall, in the company’s culture,” Kaley Childs Karaffa, director of Board Engagement at Nasdaq, said during a virtual event hosted by digital and print platform, Corporate Secretary.
Karaffa noted that the pandemic has forced boards to “view ESG issues in a new way” as it pertains to risk oversight, ranging from human capital issues to the impact on environmental initiatives, such as reducing a company’s carbon footprint. She stressed the importance of having a “clearly delineated path” about what each part of ESG means to the company, which will help boards communicate the company’s priorities with investors.
Investors have shown particular interest in ESG over the past couple of years, and it has only intensified amid the pandemic. In the first four months of this year, investors poured about $12.2 billion into ESG funds, the Wall Street Journal cited and reported. The Journal noted that the amount this year is more than double the amount that ESG funds attracted during the same period last year.
“What this is highlighting is that it is important for the board to understand what are their investors’ priorities, and understanding the increase of ESG proposals as they have existed in years prior and how that’s impacted by what we’ve seen today,” said Karaffa, noting that there has not been a dramatic shift in ESG proposals yet.
“Boards should be working closely with their CEO, management and IR teams to understand whether they have a sufficient understanding of the major shareholders’ priorities and how those are changing amid the current environment with the expectation from investors that the economic downturn is expected to become worse moving out of the second quarter and into the third quarter,” Karaffa continued.
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 found that 86% disclosed that engagement covered climate change and environmental sustainability, climbing by one-third year over year.
“Human capital and corporate culture also were addressed, while traditionally separate topics, such as compensation and ESG, continued to converge,” Huennekens wrote.
As boards and management teams lead their companies through this unprecedented time, they “will be able to take lessons learned” from the pandemic to build resiliency, said Karaffa. She noted that boards should understand their business continuity plans as it relates to each area of ESG, consider what metrics they disclose, and adapt planning exercises going forward.
“Even though we are working through ever-changing circumstances – whether the board is working with management to assess the disruptions in the supply chain or other things that impact the immediate success and operations of the company – the board can be the mechanism for which the company is able to maintain focus on its long-term ESG priorities,” said Karaffa. “There are a lot of opportunities to be gained in this environment.”
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