As investment in environment, social and governance (ESG) gains momentum, investors and stakeholders increasingly expect swift and concrete sustainability initiatives from companies across the globe. But boards have lagged behind the ESG fervor. While 40% of directors were found to be ESG conscious with some level of knowledge in the space, only 8% of board directors were found to be competent and capable of effective, embodied action, according to a 2021 study of the top 100 public corporations internationally.

We recently considered the evolving perspectives in ESG, as well as tools and strategies for boards to meet the ESG expectations of their stakeholders.

ESG investment has skyrocketed in recent years. According to the Forum for Sustainable and Responsible Investment, the leading voice in sustainable investing across all asset classes, ESG investments grew 42% in just two years, rising to a total of $17.1 trillion in assets under management.

In addition, President Joseph Biden recently signed The Inflation Reduction Act into law, which will provide tax credits for clean sources of energy, accelerate clean energy production and provide funding for clean energy technology that could have reverberating effects across industries.

With these developments in mind, we believe that an effective ESG strategy should be long-term, sustainable and designed to accomplish each company’s individual goals. We suggest three key guidelines for boards to consider when making an effective ESG plan.

What Gets Measured Gets Managed

Gathering verifiable ESG data is a helpful starting point for boards to begin considering investor demands. In a survey done by Boston Consulting Group (BCG), 90% of companies did not measure their emissions correctly, with over half estimating an error rate of 40%.

Boards may also consider using ESG reporting software to help companies efficiently navigate and publish their ESG data to various stakeholders. The BCG survey found that 86% of companies still record and report their emissions manually using spreadsheets. ESG reporting software can simplify the process of ESG data capture, engagement, oversight and disclosure.

Measuring stakeholder needs is another important board initiative. Not every company is the same, and stakeholders in each company will find different ESG metrics relevant across different businesses. Companies can survey stakeholders and consider their perspectives to help inform the company’s ESG strategy.

Walk the Talk

We believe that corporate culture, human capital management and technology-driven changes to the business landscape have underscored the benefits of enhanced board diversity—diversity in the boardroom is good corporate governance.

The benefits of increased diversity to stakeholders are becoming more apparent and include an increased variety of fresh perspectives, improved decision making and oversight and strengthened internal controls. Over time, diverse boards will have more robust debates, make sounder decisions, understand customers better and attract higher performing employees.

Recruiting, hiring and retaining diverse teams can be bolstered by a governance framework that considers a diverse range of voices and experiences and recognizes the value of investing in human capital.

Command Over Compliance

Perhaps the most significant guideline that boards must follow when it comes to sustainability is a change in mindset from compliance to command. When board members see ESG as a core tenant of their governance strategy, rather than a compliance box to check off, they can go above and beyond accountability, becoming a leader in the ESG space.

ESG Accountability in the Boardroom

Companies are facing increased pressure from investors on ESG reporting metrics, with investors calling for more transparent and consistent disclosures. While some disclosures are mandatory based on jurisdiction, many are not. Yet, there is still rising demand from stakeholders to engage with these metrics.

While one size does not fit all, each board should consider whether their current governance framework will meet these new expectations. Boards that show their command of the ESG space may help make their company more resilient for the future.