As 2023 begins, there is good and bad news. The bad news: there is a long way to go before we see game-changing progress in the field of corporate ESG. But the good news, according to Dottie Schindlinger of Diligent Institute, the global corporate governance research arm and think tank of Diligent, is that we have tipped over to a point where leaders of large organisations realise inertia around sustainability is an existential threat.
Take Exxon Mobil as a key example. A major shake-up in 2021 saw three directors on the energy giant’s board ousted by a hedge fund called Engine No. 1, which was seen as a stunning victory for ‘shareholder activism’. How did such a result come to pass? Take a statement from investment behemoth BlackRock at the time as proof. “We believe more needs to be done in Exxon’s long-term strategy and short-term actions in relation to the energy transition in order to mitigate the impact of climate risk on long-term shareholder value,” BlackRock wrote (pdf).
“What was really fascinating about that case is when [Engine No. 1] launched that campaign, in years past that campaign would have gotten nowhere with shareholders and it would have been voted down,” Schindlinger tells Sustainable Future News. “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 might be making money now and today, but that is not going to be true five years from now – and shareholders agreed.”
It is pragmatic and in its own way, as Schindlinger admits, almost pessimistic. But it is still progressive – and this is the tipping point. “Self-interest, quite frankly, is often the strongest motivator,” she adds. “I hate to be so pessimistic about it, but I think if it was just good for the planet, it probably wouldn’t happen. It’s got to be good for the business.”
Schindlinger is executive director at the Diligent Institute, an independent corporate research arm of Diligent Corporation, which provides software as a service (SaaS) offerings across governance, risk, compliance, audit, and ESG. Her journey to Diligent was a natural one; Schindlinger describes herself as a ‘governance geek’ whose previous company, BoardEffect, built software for boards of directors predominantly across the non-profit sector before being acquired by Diligent in 2016.
The Institute provides research on the most pressing issues in corporate governance, as well as certifications, networks and awards to inform, educate and connects leaders to champion modern governance. One such report, now in its second iteration, is The State of ESG Strategy in Irish Boardrooms. The report polled 270 members of the Institute of Directors (IoD) in Ireland – hence the specific country focus – and found a mix of responses and progress points.
Overall, ESG is a full board issue for almost three in five (58%) primary organisations, up from 46% in 2021. More than a third (34%) of respondents said they had undertaken ESG director training in the past 12 months, while around half (47%) had ESG metrics or KPIs in place.
Yet only 17% of respondents said their organisations were incorporating ESG-related metrics in compensation plans for executive directors. More than half of those polled overall (52%) said they believed such metrics were important. Whether this is down more to apathy or not knowing where to start is hard to say – but there are other issues at play.
“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 kind of slow moving,” says Schindlinger, noting that incentive plans are often based on 12- to 24-month goals, and the average tenure of a CEO being several years at best. “It’s going to take multiple years for a company to really get to Net Zero, or to be carbon neutral, or even to be carbon net positive,” she adds.
One other result which raised eyebrows at the Institute was when respondents were asked to rate their confidence in implementing ESG KPIs. The average grade was six out of 10. In 2021, it was seven. Schindlinger suspects that the EU corporate sustainability reporting directive (CSRD), which was officially adopted in November, is at play here. “We think that may have had a bit of a cooling effect,” says Schindlinger. “The level of confidence… directors are concerned that they don’t really fully understand all the things that they’re going to be asked to report on, vis a vis the CSRD.
“If you’re an organisation, particularly a private company that’s 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. The time is now to put the right tools and solutions in place to steer your ESG strategy and generate audit-ready reports.”
Intriguingly, though help will be at hand for companies with CSRD and in spite of the preceding message, Schindlinger believes regulators are the least concerning pressure valve for organisations right now. Or, perhaps, the roadblock which is furthest in the distance.
“There’s a lot of pressure coming from every quarter at this point,” says Schindlinger. “If you think of the working population, roughly 34% of the working population at this point is millennial age or younger. And these generations quite famously really care about the climate. 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,” Schindlinger adds, noting BlackRock along with Vanguard and State Street. “It’s fascinating because I think 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’re doing.’ But the truth is, when 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.”
The coming 12 months will be turbulent from an economic perspective, with both cost of living impacts and the war in Ukraine continuing. Will this impact organisations’ sustainable strategies? It is something which many, including the Diligent Institute, fear. Yet the company has data to assess this in the form of a corporate sentiment tracker, which monitors trending topics and executives’ reactions to them. At the time of print, the current sentiment was 63% positive; a decent performance based on the past year.
Yet once something is pushed past its tipping point, there is only one way it can go – and this gives Schindlinger hope. “When we look at the sentiment from corporate leaders, their sentiment hasn’t changed about ESG,” she says. “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 is no going back.”
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