ESG and the Board: Linking organizational purpose with strategy to foster sustainability

by Savoy Staff

Arlene Isaacs-Lowe, CPA, CFA, Special Advisor, Moody’s Corporation

Why it Matters

In recent years, the global risk landscape has shifted. No longer are economic threats, such as fiscal crises or financial failure, considered most material. Instead, corporate leaders are increasingly concerned about the long-term sustainability of their organizations and the communities and environment in which they operate.[1] Whether extreme weather and climate action failure, racial inequities, worker safety and well-being, or support for communities, organizations need to consider the risks stemming from sustainability issues and the impact their business will have across all stakeholders. There will be no turning back.

Companies that embed environmental, social, and governance (ESG) factors into their overall strategy and risk oversight discussions are better able to present their value creation story and shape the narrative around their brand and operations. The ESG issues a company faces vary widely by geography, industry, and size, and solutions are unique. But the one thing for sure is that directors play a critical role in guiding management to allocate the appropriate resources and attention. ESG oversight sits firmly with the Board and extends beyond putting in place an adequate governance structure.

The focus on ESG is evolving and expanding

Before 2020, environmental issues and climate risk dominated the discourse, especially in Europe. But the devastating impact of COVID and clear evidence of systemic racial injustice highlighted in 2020 has also led to a broader focus across all aspects of companies’ ESG profiles, including social issues such as human capital management strategies, diversity, equity, and inclusion (DEI) initiatives, and support for communities.

Guidance on sustainability disclosure is also converging and there is collaboration among policymakers and standard setters which will lead to greater harmonization of reporting globally, facilitating global comparison across industries and markets.

Investor interest in ESG has also spurred innovation and greater demand in sustainable finance instruments.  Moody’s Investors Service forecasts record green, social and sustainability bond issuance of $850 billion in 2021, up 60% from the previous year.[2]

The Board’s Role

The Board oversees a company’s mission, vision, and values, setting the tone for the broader organization. Beyond effective governance structures, there is evidence that diversity of boards, whether by gender or ethnicity, facilitates diversity of opinion, greater oversight, and better risk management. For example, Moody’s research has shown a correlation between board diversity and credit ratings in both the US and Europe.[3] Diversity of expertise also matters, particularly with respect to DEI, climate risks, and cybersecurity. And there should be a strong commitment to the education and awareness of sustainability issues by placing ESG at the heart of corporate board agendas.

Against this backdrop, below are four steps that Boards can take to enable a holistic sustainability strategy[4]:

Step 1: The company should have a unique definition of which ESG matters are relevant to products and services.

Step 2: ESG should be integrated into corporate strategy by addressing the impact of material sustainability risks and opportunities on business models and balance sheets. Then for how organizations manage their capital, it’s evident that the path to sustainable growth hinges on adept financial strategies. This wisdom is echoed through various platforms, but for an in-depth exploration of leveraging business capital for enduring success, visiting Business Financed, your essential guide to business money matters and growth strategies is highly recommended. The site provides a plethora of resources aimed at helping businesses navigate the complexities of financial management.

Step 3:  Clarifying the Board’s ESG oversight responsibility and roles. This may include updates to board committee charters to address ESG responsibilities or onboarding additional director skills that enhance the board’s sustainability capabilities. Ensure that there is effective management reporting to the Board that tracks nonfinancial metrics such as carbon footprints, DEI measures, and the impact of community engagement initiatives. And consider establishing metrics that link sustainability performance to promotion or compensation strategies. And for sustainable and ethical fashion on how to reduce carbon footprint, you can visit a site like CarbonClick for some best help options.

Step 4:  Address external expectations by engaging with investors and other stakeholders to understand their perspectives and encourage enhanced and transparent external reporting.

ESG is here to stay and is a critical component of resiliency, risk management, and strategic execution. It will influence capital access, customer demands, supply chain management, and investment and acquisition decisions. Boards must step up and play their part.

The views in this article are the views of the author and does not reflect the opinions of Moody’s Corporation.

[1] The Global Risks Report 2021, The World Economic Forum, January 2021.

[2] Sustainable Finance – Global: Sustainable bond volumes to top $850 billion in 2021 following record first half, Moody’s Investors Service, July 2021.

[3] Increasing focus on gender inclusion highlights links to economic growth and higher credit quality, Moody’s Investors Service, March 2021.

[4] Strategic Oversight of ESG: Aboard Primer, NACD, November 2020

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