“Moreover, issues related to environmental or social impact are becoming more transparent and more measurable, for both companies and third-parties.”
We are at the point with many global issues where leadership from corporate boardrooms is crucial to preserving a healthy planet and economy. For example, on questions of corporate disclosure on greenhouse gas emissions, we have a long way to go to be able to measure and manage climate change from the world’s largest emitters. We just don’t know how much many firms are emitting, and what their plans are to decrease in line with the Paris Accords. In this interview with Dennis Whalen, Leader of KPMG’s Board Leadership Center, we hear about a new report on how boardrooms are integrating sustainability or “ESG” considerations into their decision-making. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: What is the purpose of this report and who is the audience?
Dennis: After publishing ESG, strategy and the long view, our five-part framework for boards, we heard from directors and executives who were looking for more insight into how companies have integrated environmental, social, and governance matters into the boardroom conversation on strategy. So, we conducted one-on-one interviews with directors and officers of major corporations—all recognized leaders in addressing ESG and sustainability. As indicated by the interviews, it’s not easy or even obvious which issues are the most significant. After all, material ESG factors will differ on a company-by-company basis. But we hope that some of the insights gleaned from our discussions and detailed in the paper will give other corporate directors and officers the momentum to formalize how they define and assess, integrate, and communicate their ESG activities.
Tim: What are the most important two or three findings?
Dennis: Uncovering the truly strategic and impactful ESG-related issues and metrics can be a significant undertaking. Often you have to look at the impact across your value chain to understand how the issues affect your customers, employees, vendors, and supplies, and ultimately your shareholders. Even level-setting on what issues need to be monitored and measured, and how they link back to the company’s financial health, will take more than one board meeting—and they will change over time. Moreover, issues related to environmental or social impact are becoming more transparent and more measurable, for both companies and third-parties. This goes beyond analytical ESG ratings to brand and reputational issues.
Tim: How did these directors and officers suggest that companies can ensure alignment with strategy?
Dennis: Integrating the company’s one, two, or three major ESG initiatives into strategy enables the board and management to bring the same focus and discipline to the management and oversight of these initiatives as they do for other strategic initiatives aimed at creating long-term value. How to achieve that integration, however, is complex and will vary from company to company. Two broad areas of focus include employee selection and behavior—including talent, compensation, and employee empowerment—as well as organizational processes and routines, such as ESG metrics and targets, performance monitoring, capital allocation decisions, as well as considering ESG issues when making marketing, financing, and investment decisions. What will be the impact? How will the market receive these moves?
Tim: What other factors are driving better ESG integration with strategy?
Dennis: From our interviews and observations, we are seeing the position of chief sustainability officer (CSO) or head of ESG elevating closer to the chief executive or chief operating officer. For some companies, the position is either in or directly reporting to the C-suite. Some CSOs are working directly with internal analysts and consultants to work with project teams and those making capital allocation decisions. Smaller companies are bringing in third parties for sustainability audits and assessments, the results of which go directly to the board and senior management. Critical to any effort, however, is the link into the financial organization and the reliability of related metrics, whether aligned with the recently finalized SASB guidelines or recommendations under GRI.