Director's Cut | Spring 2020
The Business Case for Expanding ESG Emphasis
Why U.S. corporate leaders must champion for change now.
Kristie P. Paskvan, CPA, MBA
Board Director and Leadership Fellow
Europe generally leads the way when it comes to environmental, social, and governance
(ESG) matters. For example, the push for more female corporate directors began in 2008
with Norway passing legislation obliging public companies to reserve 40 percent of director
seats for women. In the years since, more than a dozen countries, including Belgium,
France, Germany, India, Italy, Netherlands, and Spain, followed suit, passing similar quota
mandates and guidelines. In the U.S., however, only California, Illinois, and New Jersey have
taken meaningful action and a federal mandate on such inclusion remains elusive.
Still, this diversity and inclusion development has not gone unnoticed in the financial world.
Not surprisingly, analysts, bankers, consultants, investors, and finance publications around
the globe have attempted to evaluate and quantify the impact female directors have on
shareholder value. And while the results indicate a positive trend, the most strategic
organizations and corporate leaders have already moved beyond focusing solely on
shareholder value. If your company hasn’t revised its key performance indicators to include
various ESG aspects, including not only elements around board diversity but also climate
change and employee benefit programs, I contend it’s already behind.
Consider the following: The World Economic Forum in Davos has always been a hub for
innovative ideas around corporate purpose and actions, and 2020’s meeting was no
different. The entire event loosely focused on “stakeholder capitalism,” asking investors to
stand shoulder to shoulder with customers, communities, employees, directors, creditors,
unions, suppliers, and governments by expanding their focus from shareholder profits to
ESG matters and a system that benefits all stakeholders. Last fall, Business Roundtable, a
Washington, D.C.-based nonprofit association whose members are CEOs of major U.S.
companies, redefined corporate purpose as “to promote an economy that serves all
Americans.” BlackRock Chairman and CEO Larry Fink’s annual letter to CEOs this year spoke
earnestly about climate change and the expected effect on the global economy. Fink also
warned that his firm, which has some $7 trillion in assets under management, would avoid
investments in companies that have a high sustainability-related risk going forward.
With this shift in focus away from just profits toward a larger combination of ESG values, all
stakeholders, but especially institutional investors, are looking for data on public and private
companies. Public companies are increasingly being rated on ESG initiatives by proxy
advisors like Institutional Shareholder Services (ISS) and Glass Lewis. In turn, institutional
investors and research analysts use this data for investment evaluation. If your public
company isn’t reporting on all of its ESG efforts, it likely isn’t ranking as high as companies that are exceeding expectations by demanding their supply
chain partners invest in environmental and conservation efforts;
establish flexible work and wealth-building programs for
employees; and upgrade diversity, inclusion, and executive
compensation practices. The bottom line is that collaboration
across the stakeholder chain is necessary to create maximum
impact and corporate leaders should be evaluating all kinds of
options. And while ESG policies are expected in the public
company space, private companies should anticipate the same
critical evaluation of their policies and practices.
Consider these ESG questions reviewed by proxy companies:
• Does the company have an enterprise-level environmental policy?
• How is the company influencing actions by vendors and partners
all along the supply chain?
• Has the company disclosed a climate change policy that
specifically addresses risks, counterparty exposures and related
business strategy, and financial planning?
• Does the company disclose water usage or water recycling
• Does the company disclose its human rights policy?
• Does the company have labor rights policies, including formal
grievance channels? Does this include all operations, suppliers,
vendors, and partners?
• Does the company publicly disclose data on workforce equality
connected with gender, race, ethnicity, nationality, religion,
LGBTQ, or other potentially protected classes?
• Does the company state a commitment to a fair and living wage
for all employees?
• Is the board chair an executive director or a non-executive director?
• Is executive compensation tied to ESG factors?
• What proportion of the board has a lengthy tenure? What
proportion is diverse?
• Are shareholders informed of each board member’s attendance
to board or committee meetings below 75 percent?
• What is the size of the CEO’s pay as a multiple of the median pay
These are just a few of the hundreds of questions requiring greater
disclosure. Annual report sections on ESG are expanding as
additional topics are added each year. Some key takeaways are
that stakeholders want to see real action where climate change is
involved, all the way through the supply chain. They are expecting
companies to hold their vendors and partners accountable for
the policies each has in place—and if the policies aren’t
environmentally friendly, stakeholders expect a change to be made.
As large companies expand their policies and disclosures—
Microsoft recently announced a plan to be carbon negative by
2030—anticipate stakeholders’ expectations for all companies to
rise with the tide. This is true in the social and governance verticals
as well. Other examples of companies that have adopted expanded
ESG policies include Delta, which instituted a new profit-sharing
plan which reportedly gives each employee an additional two
months of compensation, and UBS Asset Management, which
added an evaluation of sustainability and environmental concerns
for all of its actively managed portfolios.
As awareness and interest in ESG has increased, so have concerns
about “greenwashing,” where a company conveys a false
impression of its environmental friendliness, have grown. Think of
Volkswagen’s clean diesel scandal, or Nestle’s claim that its cocoa
beans were sustainably sourced. Organizations who hope to reap
the benefits of the appearance of being ESG conscious while
cutting corners behind the scenes should beware.
But signs that ESG emphasis is not a trend are on the rise. In Chicago,
the city treasurer’s office announced that financial firms looking to
manage a portion of the city’s $8.5 billion portfolio must “demonstrate
commitment to diversity hiring and social responsibility under a newly
launched scorecard system.” Further, organizations like the Thirty
Percent Coalition and 2020 Women on Boards now exist to help
diversify and expand the board director pool for women, a
governance expectation that can no longer be ignored.
For those of you at public companies, I suggest you assess all the
materials that ISS and other proxy firms are reviewing. You likely
aren’t telling your organization’s whole story. The momentum shift
toward an ever-expanding ESG emphasis is creating an opportunity
for companies that can be proactive and innovative in incorporating
and evaluating ESG aspects in their business practices. By making
decisions based on the good of all, rather than just the good of
shareholders, corporate leaders can create opportunities for
everyone to benefit along the continuum of doing good—and that
brings more value to the entire organization