Sustainable Future News spoke with Dottie Schindlinger, executive director of Diligent Institute to discuss the findings of their ‘State of ESG’ report and to understand how corporate leaders are embracing ESG into their organisations.
Almost four in five directors in Ireland do not integrate ESG metrics into the compensation of their executive directors.
This was the key finding of a report issued by Diligent, a SaaS solution provider across governance, risk, compliance, audit and ESG, in November. The report, put together alongside the Institute of Directors (IoD) in Ireland, explored how ESG has become increasingly important as a full board issue, but also how actions are not quite aligning yet with words.
Jump to section
- Dottie’s history
- Diligents educational classes
- Scale of the ‘state of ESG strategy in Irish boardrooms’ report
- Background of the report
- The reports findings
- Boardrooms and ESG incentives
- Drivers behind ESG in boardrooms
- The benefits of incorporating ESG
- ESG during an economic downturn
- Key questions from business leaders
- Barriers to sustainability
- ESG trailblazers
Tell us a bit about your professional background – and what brought you to Diligent in the first place?
I came to Diligent in 2016, by way of an acquisition of a company that I helped to build called BoardEffect. BoardEffect is a software platform specifically for boards of directors, mostly in the not-for-profit space, working with healthcare, higher education, and non-profit organisations. Prior to that, I sort of always had this strange interest in and affinity towards governance, I’ve been fascinated in the idea of how organisations govern themselves for many decades at this point. I had a number of different roles in governance – every side of the board table – and then came to BoardEffect and helped to build software that supported the work of boards, which I found really, really interesting work.
When we got acquired by Diligent, there was an opportunity to take on a role in thought leadership, which, as a governance geek, was sort of the best day of my life. That enterprise has now become known as the Diligent Institute, which is all about providing cutting-edge research on what is happening in the world of governance; how boards of directors and leaders of companies & organisations are really thinking about the best way to take their organisations forward.
We also now have begun to expand our purview to include educational programmes, including two certification programmes we launched this year; one in climate leadership, and one in ESG, leadership and strategy. We’ll be increasing the number of programmes that we offer to directors, but our focus really is in helping to arm corporate leaders with the information and insights they need to be successful in their governance role.
Have you seen a positive uptake of these educational courses? Is there a big desire for this kind of material?
In the first few months of the programme we had over 400 people register, and we’ve had over 100 graduates. It’s been going very, very well. I think that speaks very much to some of the things we found in this report that we did with the Institute of Directors in Ireland, and that there’s a concern on the part of corporate leaders that they just don’t quite know enough. When they grade themselves on how strong is their knowledge in the space, they maybe give themselves a 7/10, which is not a particularly favourable grade.
I think that speaks to the idea that this is still very much an emerging area. I think it would be a fallacy to think that we have reached the pinnacle in terms of measuring and disclosing what we’re doing to the climate, measuring and disclosing what we’re doing vis a vis our stakeholders and our workforces. There are still a lot of unanswered questions.
Focusing on your report in partnership with the Institute of Directors in Ireland, what kind of scale are we looking at with the companies involved in the study? Why Ireland to begin with?
We had small, medium and larger enterprises participating in the study, both public and private entities listed. They range in terms of industry and focus area, and certainly a number of organisations in the financial services sector. But then also organisations that are in energy production or energy transfer; production of goods and manufacturing. It’s a good cross-section of the companies in Ireland.
There are really two main reasons [as to why a focus on Ireland]. One is that we have this fantastic partnership with the Institute of Directors, but for Diligent as a company, Ireland is an important place. We’ve recently opened our offices in Galway, and really invested in the region. It’s a really important place for us to understand what’s happening and really understand what customers in the region need, some of the challenges that they’re facing, and how we might be able to help them meet those challenges.
What prompted the research? What were you hoping to achieve, and what do you plan to do with the results?
We started out a year ago with a report that was very similar with the Institute of Directors in Ireland. The idea at that time was to try to just get a sense for how companies were embracing their oversight role in terms of ESG strategy and risk, and then also to try to understand how directors themselves were feeling about performing that role.
What we really learned is that directors lack a degree of confidence [in ESG strategy]. They understand its importance, but they don’t necessarily have the confidence that they know enough to do a really credible job. We wanted to repeat that study a year on just to see how things had changed, and we did see some change. But we’re still seeing that some of the more tactical things that boards of directors are able to do are not yet happening. It’s been really interesting just to see how things are evolving and how they’re not. And I think there’s still a long way for us to go before companies really are fully up to speed and are doing all the right things.
Is there a plan or scope to do a wider study, such as global, or national?
We did a similar study in Spain, and we did a study in the US with a group called Spencer Stuart. [For] 2023, our plan is really to do one global review of what is happening in ESG, and then to provide snapshots of what is happening in each individual region.
What was the main finding in the research that surprised you, if any, and why?
There were a few things that surprised me. One of the ones that really stood out for me is when you think about the different levers a board of directors can pull to effect change, one of the most important is setting executive remuneration policy. That’s one way you can incentivize change – you can incentivise specific activities.
One of the questions we asked directors was whether or not they thought that ESG should be tied into the metrics they use to determine executive remuneration. 52% told us yes, this is something we think is important. But when we asked them if they were doing it, only 17% said yes.
That could mean a number of things – and that’s the thing about data. [It could mean] that they just aren’t doing it, it could mean that they’re thinking about it, it could mean that they’re trying to figure out the best approach to do it. We do get indications, and some of the other research that we’ve done, that [this] is happening. There are a lot of conversations going on about how do we do this.
I would also say that it was a little surprising to see that the level of confidence in their ability to oversee ESG has actually gone down this year. Last year we asked this question, we got a 7/10. This year, it’s a 6/10. It’s very fascinating because in the context of this research, the corporate sustainability reporting directive (CSRD) was clearly going to be coming into effect. And so we think that may have had a bit of a cooling effect. Directors are concerned that they don’t really fully understand all the things that they’re going to be asked to report on with CSRD.
I think there is now a sense of urgency on the parts of organisations, particularly because the threshold of where the CSRD takes effect is pretty low… and it’s not a lot of time. If you’re an organisation, particularly a private company, [who has] never been required to disclose anything about ESG – maybe you don’t even have a public ESG strategy at this point – I think there’s a sense of panic. It’s really going to be difficult for you to meet that deadline if you’ve just absolutely done nothing.
I think what we’re seeing in this report is some of those impacts. There’s a concern that everyone’s got to get their act together, and very, very quickly.
Looking at remuneration for ESG targets more generally, is it fair to say that many companies want to add it as a measure of success, but saying that and then getting oversight and being able to track it is the difficult part? So for organisations it doesn’t make sense to do it yet, because how do you have a fair system?
I think that’s a good guess. We don’t really know exactly what’s behind the data – we just know what the data says. I think that’s a good guess that maybe [organisations] are feeling that ‘okay, we don’t really yet have a good strong way of measuring the impact that we’re having on climate or our social policies – and until we have a way to really measure them, how do we know what to incentivise?’
I would say the other factor there, when we think about remuneration policy, if you think about what you need to incentivise in terms of climate risk and strategy, a lot of these things are slow moving. It’s going to take multiple years for a company to really get to net zero or to be carbon neutral, or to even be carbon net positive. And often, incentive plans are a single year, or a two year incentive. You have to look at long-term incentives instead of short-term incentives, and it just gets a little more complicated.
I think it’s really both of those factors: one, not feeling really confident that they have the metrics, they need to really do a good job of setting the policy in the first place; and secondly, how do you incentivize something that might take 10,15, 20 years to put into place, especially when the average tenure of a CEO is about six to eight years? There’s a little bit of a disconnect there. I think boards are grappling with some of these questions and really trying to figure this out.
As boards are now starting to get to grips with this, what do you think has been the main driver – customer demand, employee demand?
There’s a lot of pressure coming from every quarter at this point. Definitely from employees – I think that is a global phenomenon, not just something in Ireland. But if you think of the working population, roughly 34% of the working population at this point is millennial age or younger; and these generations really care about the climate. They really care about ESG. They care about what companies are doing in these areas, and are much more interested to buy from brands that are doing good things for the environment, social policy, and they want to work for companies that uphold their values.
The other big source of pressure, quite frankly, is the investor community. It’s fascinating because if you speak to investors, they don’t agree with that. They say, ‘we’re not pressuring you to do a particular thing, we just want to know what you are doing’. But the truth is, when you ask a question of what you are doing in this area, and that question is coming from an investor, there is pressure to have an answer. And if you don’t have an answer, that is going to cause a lot of anxiety.
Institutional investors like State Street, Blackrock, Vaguard, these organisations have quite publicly and repeatedly talked about their focus on ESG, the level of importance that they feel companies should be putting in creating strategy for climate risk reduction, and doing good thing’s vis a vis their workforce and their customer base.
The other source of pressure I would say is customers. If you’re not a B2C company and you’re not in a consumer field, you may feel that pressure less, but even in places like financial services, your customer might be other companies or suppliers, and you’re feeling some pressure from them. Your suppliers are going to start to ask you ‘what is your policy on this’, and they’re going to need you to have an answer, because that’s part of their required disclosure.
Interestingly, I would say that regulatory pressure, which is certainly a factor, is maybe a little bit later to this game. With the CSRD being passed, we’re likely to see that up tick as one of the most common answers [about where pressure is coming from], but to date, it’s really been the investor community, employees, and customers.
A lot of business leaders may see sustainability as simply a cost obligation. What do you say to them?
It’s really interesting. If we were having this conversation five years ago, I would agree with you, but I would say these days, I don’t really hear any business leaders saying that, quite frankly. I hear much more of the opposite – ‘no, we need to have this strategy.’ If [they] want to continue to operate for the next 5–10 years, it is really being seen as an important part of the business strategy. It’s not about just a corporate social responsibility anymore. This is part and parcel of having a sustainable business – and I mean sustainable in every way, not just environmentally sustainable.
In the US last year, there was a pretty famous case where there were three board members at Exxon Mobil who were exited from the board by a hedge fund called Engine #1. What was really fascinating about that case is when they launched that shareholder activism campaign against Exxon Mobil, in years past that campaign might have looked more like ‘you need to be doing better things for the planet, Exxon Mobil, you’re a fossil fuel company’, and it would have gotten nowhere with shareholders, and it would have been voted down. But this time, the argument they made went like this: this is a fossil fuel company that has no one in the board or leadership that understands renewables, you’re going to go out of business in five years because fossil fuels is not the growth industry. You might be making money now and today, but that is not going to be true five years from now. And shareholders agreed. I think that’s the change we’re seeing. Corporate leaders now understand this is imperative – this is existential for them.
Self-interest, quite frankly, is often the strongest motivator. I hate to be so pessimistic about it, but I think if it was just good for the planet, it probably wouldn’t happen. I think it’s got to be good for the business.
We are going through an economic downturn at the moment; businesses are feeling the crunch, and they’re starting to make concessions as a result. Was this explored in the survey, and is there an idea that organisations should continue to invest during a turbulent economic climate?
[This is] something we’re keeping a close eye on because I think everyone shares that fear that the momentum that has really gotten started here is going to start to backslide in an economic downturn. I think that is a credible fear. We didn’t have specific questions in this survey regarding that, but I can tell you from other work we do, we have a tool called the Corporate Sentiment Tracker, and what we’ve been seeing over the last few months is there’s a lot of concern related to the cost of goods tied to inflation and inflationary pressure, and also tied to the war in Ukraine. These are real concerns, so I think it’s definitely something to keep an eye on.
But here’s what’s fascinating. When we look at the sentiment from corporate leaders, their sentiment hasn’t changed about ESG. They still really see this as an incredibly important thing that they need to be focused on. They’re not backing away from their commitments, it’s quite the opposite. I think part of that is going to be the regulatory pressure coming from CSRD, but I think it’s also that they are sold on the idea that this is the way to have a sustainable business. This is the future, there’s no going back.
I do take heart that we’ve gone over the tipping point now – and I think companies really have this as part of their strategy. Not a sideline, not a footnote, but part of the overall strategy.
What are the key questions business leaders are asking when it comes to integrating sustainability into their operations?
There are three big buckets of questions that that directors are focused on – and the good thing is they’re the kinds of questions directors should ask. First and foremost is ‘what is our strategy’? Is it the right strategy? Are we focused on the right things? Does it align well with the overall business strategy? So strategy is a big component.
The second question is ‘what are we measuring and why’? What are the specific KPIs that we’re getting? Are they the right ones? Is it actually aligned with the strategy? Are we measuring the things that will help us meet that strategy?
Then the third one is ‘how do we know that information is right’?
That third one, I think, is a big issue. There’s a huge conversation happening about the assurance of metrics in the climate space particularly and also in the social space as it relates to ESG. There is a big concern there. How do you provide assurance that the numbers that you’re measuring – your carbon emissions, your scope one, scope two, scope, three – are accurate? I think we’re going to see a huge industry grow up around the idea of assurance, we’re already seeing it happen. You know, the big four accounting firms, other providers are really kind of all getting in line scrambling to get in line to help companies with that level of assurance. And since that’s going to be a requirement as part of CSRD, I think that is going to be a place we’re going to see a lot of attention over the next couple of years, as companies get ready for those for those disclosures.
What do you see is the biggest common barrier you come across around sustainability?
The biggest barrier is that there’s really kind of no consensus globally on exactly what we should measure how and how we should report and disclose now. There are a lot of efforts underway to solve that problem, and they’ve been underway for a good number of years, and we’re definitely getting much, much closer to having one consistent set of standards that everyone in the world agrees to. But the fact that we don’t have that yet just really adds a huge layer of complexity, especially because what we’re talking about is climate change. It’s not one region or one company, it’s the whole planet. And so if the whole planet doesn’t agree on [it], it just really makes things very, very complicated.
For a long time now, it’s been a little bit of a ‘choose your own adventure’ approach, where you pick a framework that works for you, and you kind of measure the things that you care about, and you can ignore the rest. I feel like we need to solve that – and lots of directors would agree with that. There’s been a lot of frustration that it’s not consistent. But I think we really are finally getting there. We’re seeing things move in that direction of coalescence.
Who is blazing a trail right now when it comes to ESG strategy?
There are some really incredible examples out there. One that comes to mind actually is Coca-Cola, [European partners??]. They’ve done quite a lot to try to reduce the use of plastic and be really smart about the use of goods and recycled goods, and just putting programmes into place. They’ve taken a very novel approach to go country by country and figure out what works in a particular region and then just double down there. They were able to get something like 99% of bottles being recycled in Germany. That’s a good thing, even if they can’t necessarily do it in every country.
But it’s not just public companies that are doing some impressive things. [For example] the Mars Candy Company, a private company based in the US. For many years, they’ve been blazing a trail in terms of ESG – tricky because one of their primary commodities is cocoa. They’ve got some incredible programmes in place to help the farmers to make sure it’s done sustainably, and the farmers are taking good care – they’re for example not cutting rainforests to grow cocoa. It’s been a really smart approach. And it’s a good example of how it really doesn’t matter whether you are required by regulation to do this kind of work, or whether you just understand this is smart business, this is the way that you should be approaching things, and you just take that action on your own.
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