Skip to content

10 June, 2023

Subscribe Advertise About Us
  • My Account
  • Register
  • Log In
  • Log Out

Board Agenda

  • Governance
  • Strategy
  • Risk
  • Ethics
  • News
    • Categories

      • View All
      • Board Moves
    • Unilever chair

      News round-up: this week in governance

      Unilever seeks new chair; corporate purpose statements; unreadable annual reports; and helping the FRC on...

    • ESG strategy UK boards struggle to embed ESG in strategy

      Most recognise the importance of sustainability, but face challenges in translating ESG aims into strategy...

    • climate change litigation Growing climate litigation is ‘absolutely necessary’

      UN expert Ian Fry says court cases are needed to legally hold ‘to account’ those...

  • Insight
    • Categories

      • View all
      • Governance
      • Strategy
      • Risk
      • Ethics
      • Board Expertise
      • finance
      • Technology
    • audit committee

      Audit committees give investors a new perspective

      Investors who quiz the audit committee get a more rounded – albeit sometimes less comfortable...

    • Climate finance

      How climate change alters the financial landscape

      To achieve sustainability, companies and boards will need to look not only to their operations,...

    • generative AI

      Five AI issues to consider right now

      We may not know what AI will mean for us all in the long term,...

  • Comment
      • View all
    • hybrid AGM

      Hybrid AGMs maximise shareholder participation

      Avoid virtual-only annual general meetings: although pragmatic in an emergency, they water down shareholders’ rights.

    • ESG break up ESG: Should E and S break up with G?

      In the world of investing, maturity has revealed significant practical shortcomings in combining environmental, social...

    • controlling shareholders The politics and geopolitics of controlling shareholders

      Shareholders with a controlling interest influence not only financial matters but can also wield great...

  • Interviews
      • View All Interviews
      • Podcasts
      • Webinars
    • information resilience IT transformation sees boards moving to ‘continuous’ management

      Data analytics available on demand requires a resilient—and selective—approach to sharing information, a webinar panel...

    • life sciences podcast Reform of NHS levy ‘harms UK competitiveness’

      Boards in the pharmaceutical and life sciences sector face increasingly difficult decisions, according to a...

    • Board priorities 2023 Board priorities 2023: tact, trust and transparency

      We asked key figures what would help boards this year. The answers ranged from 'smarter...

  • Careers
      • View all
      • Selection
      • Board Moves
    • board survey 2023 Board appointments fell sharply in 2022

      Companies appear to be sticking with experienced leaders—to the detriment of progress—suggests FTSE 350 boardroom...

    • diversity statistics Diversity statistics challenged by new scorecard

      Companies can ‘hit the target, but miss the point’, say academics researching a more ‘holistic’...

    • CEO turnover CEO turnover rises steeply

      The researchers say political changes and business difficulties may have accelerated turnover, which has risen...

  • Resource Centre
      • White Paper Downloads
      • Book Reviews
      • Corporate & Advisory Services
    • Leadership ESG

      Leadership in ESG Integration: a study into UK board oversight, implementation and disclosure

      We asked 100 chairs, chief executives, other C-suite executives and company secretaries of UK companies,...

    • Mazars c-suite 2023

      Mazars C-suite barometer 2023

      The Mazars C-suite barometer is based on responses from more than 800 C-suite executives from...

    • Edison Energy Disclosure to Decarbonization report

      Disclosure to Decarbonization: A Guide to Setting and Achieving Your Climate Goals

      Sustainability leaders are charged with marshalling and coordinating resources, expertise, and innovation for a prosperous,...

  • Events
  • Search by topic
    • Governance
    • Strategy
    • Risk
    • Ethics
    • Regulation
    • ESG
    • Investor Relations
    • Selection
    • Board Expertise
    • finance
    • Technology

ESG: Should E and S break up with G?

by David Risser on May 15, 2023

In the world of investing, maturity has revealed significant practical shortcomings in combining environmental, social and governance.

ESG break up

Image: 3rdtimeluckystudio/Shutterstock.com

In our economic system, financial institutions are trusted intermediaries in managing risk. And when it comes to risk, the now ubiquitous ‘ESG’ is both embraced and criticised in equal measure –as a way of looking at ‘non-financial’ risks and as an investment screening and marketing opportunity.

Against this backdrop, it has been argued that the strategic, action-oriented E&S should be separate from G to decouple the ‘what’ from the ‘how’ of effective oversight.

When governance crashed back into the headlines recently as SVB and Credit Suisse stumbled and confidence in the banking sector’s risk management wobbled, it triggered an uncomfortable flashback to the credit crisis of 2008. This reminder of the fallout when governance goes bad is perhaps timely in light of the question marks over the usefulness of ESG as a risk management framework more broadly.

In our analysis, we prefer to think of E&S as representing the ‘sustainability’ of business more comprehensively while the G is there to distribute responsibility and ensure accountability.

Our recent study, ‘Governance of sustainability in the largest global banks,’ has only served to reinforce this assumption. In this report, we set out to examine the approach of 30 of Europe and North America’s leading banks – that is to say, how they incorporate environmental and social risk in their banking activities. How do these issues become part of a bank’s strategy? Do they have people on the board with relevant experience? Do they have dedicated committees? How robust are the standards used and how is their implementation overseen?

Maturity matters

One of the most important, recurring themes in our study is that different stages of sustainability maturity require different governance solutions and result in different governance outcomes. Firms that are positioned at different points on the “maturity spectrum” do things differently, from strategy development and risk integration to the board’s mandate, structure, and composition. Directors need to keep a watching brief on where they are on this spectrum and implement change as they “surf along the curve”.

More broadly in the world of investing, maturity has revealed significant practical shortcomings in the ‘lumped-together’ ESG configuration. For example, the skills and toolkit needed to understand and analyse E&S are very different from those needed to drive governance change through engagement. The result is that some ESG people are good at E&S and others are good at G, but rarely do you find a balance of talents on the investor side.

The separation of E&S from G means that everyone could play to their strengths.

The separation of E&S from G means that everyone could play to their strengths: management would be left alone to get on with building resilience into the business operating model, ensuring that it can withstand environmental shocks in the supply chain or the interruptions caused by extreme weather, workforce walkouts or even a global pandemic.

It also requires identifying sustainability opportunities in a systematic way and incorporating them into the strategy of the firm. The board or a board-mandated committee meanwhile assumes the oversight of management action, which feels right given the existential nature of the threats but also the size of the opportunities involved.

The environmental and societal shocks that just keep coming in recent times need dynamic, robust oversight, not endless box-ticking. One of the findings of the study is the excessive amount of “noise” in current ESG reporting.

Different stages of sustainability maturity require different governance solutions and result in different governance outcomes.

For companies, including banks, it should be less about glossy sustainability reports and more about demonstrating how E&S fits within the overall corporate strategy and risk appetite: how does my objective on greenhouse gases footprint reduction fit with the objective of expanding or maintaining ‘dirty’ activities—whether they are my own or those of my clients, as in the case of banks?

Corporate governance officers should not have E&S responsibilities—this should be part of strategic planning and owned by the front line: group leadership and each of the businesses, as needed.

As the understanding of E, S and G matures among market players, it is important to allow for a review of the reasons they were bunched together in the first place.

In our view, E&S should be firmly put within the orbit of traditional equity analysis which should start focusing more on shareholder welfare, a concept different from shareholder value. G, on the other hand, should be recognised as a separate area pertaining to the analysis of organisations—therefore, requiring a different angle and skill set.

It is about how to better direct and control companies so that they fulfil their strategic aspirations—including E&S. It might be a difficult break-up, but a separation of E&S from G would lead to better outcomes all around.

David Risser is managing director of Nestor Advisors at Morrow Sodali.

  • Facebook
  • Twitter
  • Google+
  • LinkedIn
  • Mail

Related Posts

  • News round-up: this week in governance
    July 15, 2022
    Elon Musk Twitter

    Dutch stakeholder committees; Elon Musk's next move on Twitter; C-suite partisanship in the US; ESG 'no distraction' from climate change.

  • Greenwashing threatens shareholders’ interests
    July 4, 2022
    greenwash

    ‘Companies that believe their own greenwash are embedding liability and storing up risk’, warns chair of UK Environment Agency.

  • Meta faces US lawsuit over its corporate governance
    October 6, 2022
    Meta lawsuit

    A Meta stockholder alleges that the company’s business model failed to consider the risks to society and to ‘diversified stockholders’.

  • Focus on the 'G' of ESG
    July 11, 2022
    governance

    Listening to what stakeholders define as valuable is the key to successful governance—and it will make corporate reporting much easier, too.

For thoughtful journalism, expert insights on corporate governance and an extensive library of reports, guides and tools to help boards and directors navigate the complexities of their roles, subscribe to Board Agenda

banking, board effectiveness, Comment, corporate governance, corporate reporting, Credit Suisse, David Risser, environmental social and governance, ESG, ESG reporting, Morrow Sodali, Nestor Advisors, oversight, risk management, shareholder value, shareholder welfare, sustainability, SVB

Search


Sign up to our Newsletter

Receive independent news, thoughtful journalism & expert insights about leadership, corporate governance & key boardroom issues straight to your inbox every week.

SIGN UP

Follow Us

 

 

 

 

Most Popular

  • UK boards struggle to embed ESG in strategy
  • News round-up: this week in governance
  • How to be an effective chair during volatile times
  • Audit committees give investors a new perspective
  • Top stories of 2022: corporate governance gets political

Featured Partner Profile

Diligent

Diligent

Diligent Corporation, which was founded in 2001, is headquartered in New York, NY with a European HQ in London. Diligent’s modern governance platform empowers leaders and teams at every level of the organisation to digitally transform and create ...

Featured Partner Resources

The Engagement Appeal: The Path to Inclusive Investor Engagement

The Engagement Appeal: The Path to Inclusive Investor Engagement

This is the inaugural white paper from The Engagem...

Stakeholder Engagement: A Roadmap for UK Plc Boards

This guide aims to provide directors and their col...

Digital Boards: How Technology Adoption is Driving Culture Change and Resiliency

Digital tools proved their worth to boards during ...
Leadership in AI report

Leadership in AI

This report from Board Agenda and Mazars, in assoc...
Director's Guide to Internal Investigations

A Director's Guide to Conducting Internal Investigations

An internal investigation must be handled meticulo...
 

ADVERTISE – FREE CORPORATE LISTING

FREE - Add your company profile to our Corporate & Advisory Directory.
ADD

ADVERTISE – PROMOTE YOUR REPORTS & WHITEPAPERS

FREE - Add your company profile to our Corporate & Advisory Directory.
Add Resource

Register Free

Register to receive free article views, selected resource downloads, and all the latest news alerts straight to your inbox. Register


  • Editors & Contributors
  • Editorial Advisory Board
  • Corporate & Advisory Services
  • Media Marketing Solutions
  • Contact Us
  • Careers
  • Board Director Network
  • Terms & Conditions
  • Privacy Policy
  • Cookies
  • Sitemap
|