Is ESG Receiving Sufficient Attention in North America?

Worldwide, there is awareness that environmental, social and governance (ESG) considerations will prove to be essential drivers and components of profitability and sustainable business over the next 10 years. The reality is, however, that the level of engagement with ESG — as an integral component of business strategy — is significantly higher outside of North America than within it, and to an extent that some may find surprising.

In a recent global survey conducted by the University of Oxford and Protiviti, 250 directors and C-suite executives widely dispersed across countries and business sectors overwhelmingly acknowledged ESG’s growing importance to their companies’ success over the next decade. But for every ESG factor addressed in the survey, North American respondents indicated less engagement with and commitment to ESG. For example, only one in four North American business leaders surveyed is of the view that ESG strategy will be extremely important by 2032. But that number jumps to nearly six in 10 in Europe and seven in 10 in Asia-Pacific. Of particular interest, less than 40% of North American leaders expect greenhouse gas (GHG) emissions to decline over the next 10 years, whereas 81% and 88% of leaders in Europe and the Asia-Pacific region, respectively, have such expectations.

This data raises two essential questions with implications for the future: What is driving the North American findings? And what are the implications for leaders and their boards?

Topics

Board Matters Internal Audit and Corporate Governance Business Performance

What Is Driving the North American Findings?

The Oxford-Protiviti survey findings suggest that either North American companies are at a lower stage of ESG maturity than their European and Asia-Pacific counterparts or they underestimate the importance of external pressures — stakeholder engagement and government and regulator commitment — that appear to be key drivers for companies in other parts of the world.

Two findings, in particular, offer insights that help explain the disparity.

First, slightly more than half of North American participants said they believe ESG reporting will not be mandatory in 10 years, whereas almost all the European and Asia-Pacific respondents believe it will. Thus, the views of North American business leaders may be influenced by a belief that ESG disclosures will continue to be largely voluntary.

Second, stakeholder engagement is widely expected by European (67%) and Asia-Pacific (79%) companies to increase in 10 years’ time. By contrast, 57% of the North American respondents expect their level of stakeholder engagement to remain about the same as today or even decline. For issues that are predominantly global in nature, this gap is troubling.

Whether one or both of the premises noted above is true, the outcome is the same: Many North American companies are laggards. By contrast, companies in Europe and Asia-Pacific may be thinking more strategically about environmental and social objectives, recognising them as an imperative for building reputation and brand image and creating competitive advantage. They are more likely to embed sustainability into strategy and product development to create breakthrough innovations and operating models that support the business and drive ESG and financial performance.

What Are the Implications for Leaders and Their Boards?

There are several questions directors should ask to ensure that the CEO and management team are taking the long view in leading the way to a sustainable business in a changing world.

Are we waiting for regulators and stakeholders to tell us what to do?

The fundamental issue for boards: What’s the right answer for the company over the long term, irrespective of the regulatory or stakeholder environment? Should it make a difference whether ESG reporting is mandatory or voluntary? Companies with a wait-and-see mentality regarding ESG priorities run the risk of conveying to their stakeholders a lack of vision and values.

Are we prepared to invest in GHG emissions reductions — or not?

The disparity on issues that are global in nature suggests European and Asia-Pacific companies are prepared to invest more in addressing environmental issues than companies in North America. How will that play out with respect to attracting and retaining younger generational talent, responding to customers’ sustainability information requests, and addressing the transparency that regulators are almost certain to demand with mandatory disclosure requirements? Directors should engage management in candid strategic conversations regarding corporate purpose and values relating to environmental and social matters. After that, they should engage in discussions around goal-setting and accountability.

Are inertia, indifference or short-term thinking limiting our ability to move beyond past conventions and the status quo?

Are North American companies constrained by short-termism driven by a focus on “making the numbers”? Using age demographics of “over 50” and “under 50,” the survey noted younger executives are more attuned to the growing importance of ESG. The question arises: Are short-term thinking and generational distinctions impeding broader strategic thinking? To that end, boards should encourage more diversity of critical thinking in the C-suite and boardroom.

Have we given sufficient attention to ESG’s implications for the future?

For sure, ESG has its share of critics and naysayers. While contrarian points merit consideration and acknowledgement, ESG strategy and reporting should be about competitive position and sustaining relevance of the business over the long term.

Are our strategy and core values aligned with our narrative to the street?

Long-term rewards are unlikely for laggards. Stakeholder messaging on ESG matters should be founded on purpose, commitment, principles and integrity. Greenwashing has a cost. While over 80% of American consumers are concerned about the environmental impact of the products they buy, 53% sometimes or never believe companies’ environmental claims.5 Vague slogans, fluffy language, pretty evocative pictures, lack of proof and over-the-top claims are some of the signs of potential greenwashing, not to mention ineffective investor relations.

Is ESG integrated with the business, or is it window dressing?

The company should integrate relevant ESG considerations with the overall corporate strategy and put in place appropriate people, processes and systems infrastructure to address and report appropriate objectives, metrics and targets. ESG initiatives and considerations should be factored into performance expectations, monitoring and reward systems. If they aren’t, ESG is relegated to a mere peripheral add-on to the business and will likely be under-resourced and subject to check-the-box compliance.

Is the board organised appropriately to engage in strategic conversations regarding ESG strategy, execution and reporting?

As ESG reporting increases in importance, directors should ensure that the board’s structure brings together the reporting and operational elements into a coherent overall message to achieve a “complete board view.” This may entail establishing a new committee, altering board composition and educating existing members to sharpen the board’s focus.

With the continued proliferation of climate-related phenomena, the days of climate change denial are over. This is a data-driven call to action. A compelling sustainability strategy supported by targets and goals for the future has become table stakes. The seven questions posed above demand the attention from boards that recognise there is a critical link between ESG and resilience, innovation and growth. Companies lacking transformative thinking on the sustainability front risk alienating customers and employees alike, particularly among younger generations.

For more about ESG considerations, read the article here.

(Board Perspectives — Issue 157)