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E-MailSarah Crowe is ESG and Sustainability Channel Lead and Charles Neidenbach is a Lead ESG Advisor at Nasdaq. This post is based on a publication by Nasdaq ESG Solutions. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.
Increased public scrutiny of corporate action and disclosure on environmental and social topics has generated concern that both leaders and laggards are at risk of unwanted attention.
Amidst the shifting landscape of environmental and social regulations and stakeholder expectations, we gathered input from governance professionals across the Nasdaq network, including corporate secretaries, general counsels, executives, and board members, to identify leading practices informing their approach to ESG and sustainability. They raised corporate sustainability and social responsibility disclosures, as well as the role of ratings in reputation and risk management, as key topics.
Several of the governance professionals we spoke with predict that the days of broad aspirational statements in sustainability and corporate social responsibility reports are waning as risk mitigation further influences the information shared in voluntary disclosures. The resulting approach for many organizations is to disclose the most impactful environmental and social metrics and policies sought by investors and rating organizations, and those most critically aligned with the business strategy and goals.
While organizations are in the habit of responding to stakeholder demands for stronger environmental and social stewardship, governance professionals are increasingly focused on communicating the alignment of topics such as climate and human capital management with business goals and fiduciary duties. Organizations are finding that the entities bringing forth environmental and social proposals, or bringing attention to sustainability issues through other means, are changing. There is such connectivity and ease of information sharing across activist groups today, allowing for the amplification of voices across media channels. As a result, even unsuccessful shareholder proposals can garner significant attention. To mitigate these risks, governance professionals are weighing the impact of strong public positioning on specific sustainability issues in their voluntary disclosures as a risk management strategy.
Given their reputational weight and impact on access to capital, ratings and rankings of ESG performance were also top of mind for the governance professionals with whom we connected, as they rely heavily on public disclosures. These conversations revealed an unexpected upside of ratings in that they can be an effective driver of internal collaboration. Managing ratings is not only a critical risk management and branding strategy, but it also presents an opportunity to democratize and share ownership of the assessment criteria across the organization.
To effectively drive positive ratings, it is essential to first identify those prioritized by the organization’s key stakeholders through an assessment that leverages proprietary capital markets data sources, unique stakeholder engagement tools, and benchmarking. Third parties can facilitate this type of assessment, including the Nasdaq ESG Advisory team. Once a particular rating is categorized as pertinent to the organization’s stakeholders, a gap analysis should follow to identify what can be done to fill disclosure gaps. Then subject matter experts and responsible parties across the organization can weigh in on what should be done. For example, sustainability and investor relations leaders can work closely with the corporate secretary and legal team to support the governance component of ratings—particularly those included in the Institutional Shareholder Services (ISS) Governance QualityScore.
Looking ahead at the remainder of the year, governance professionals shared that they expect to see corporate resourcing of sustainability, climate, and human capital management goals and priorities to help prepare for regulatory changes and align with stakeholder expectations. Governance professionals believe there remains significant low-hanging fruit toward enhancing organizations’ sustainability profiles and driving long-term value creation.
In addition to corporate sustainability and social responsibility disclosures and the role of ratings in reputation and risk management highlighted above, governance professionals we spoke with raised valuable focus areas to build upon in 2023, including best practices to:
- Establish organizational and operational design for strong governance
- Define “materiality” in the context of ESG
- Deepen board knowledge and education on ESG matters
