Sustainable Expectations: how the ESG investment agenda is shifting

Investors are placing environmental, social and governance issues at the top of their agendas, and they expect companies to do the same. They are increasingly looking for companies that have adjusted the balance between short and long-term value creation to develop strategies that lean toward sustainable outcomes and provide societal good.

US investment house BlackRock has been taking a lead in this area, their CEO, Larry Fink, has written to companies reminding them that he sees his firm’s responsibility to engage and vote with them as more important than ever. He wrote “companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”

Quarterly reporting, activist shareholders and the immediacy of investor demands can combine to force directors to take decisions that, while giving a quick response to an immediate issue, might have longer-lasting consequences.

Much of this comes down to good stewardship. In the UK, the Financial Reporting Council’s Stewardship Code, first published in 2012, sets out how stewardship aims to promote the long-term success of companies so that the ultimate providers of capital—the investors—also prosper. The primary responsibility for stewardship rests with the company board, but investors also play an important role in holding the board to account over the fulfilment of its responsibilities. However, the code is directed in the first instance at institutional investors. They are expected to do more than vote; those that sign up to the code commit to meaningful engagement with companies over matters such as strategy, performance, risk, capital structure and corporate governance.

Last year, the Organisation for Economic Cooperation and Development (OECD) published an in-depth review of responsible business conduct for institutional investors, setting out key considerations for due diligence under the OECD’s guidelines for multinational enterprises. By carrying out due diligence in line with these guidelines, the OECD believes that investors will not only avoid the negative impacts of their investments on society and the environment, but will also avoid financial and reputational risks, respond to the expectations of their clients and beneficiaries, and contribute to global goals on climate and sustainable development. The OECD has commented that “Increasingly, failing to consider long-term investment value drivers, which include environmental, social and governance (ESG) issues, in investment practice is seen to be a failure of fiduciary duty”. Institutional investors are changing their own internal procedures in light of the OECD’s guidelines; they are now approaching quoted companies and saying that they can’t invest in them until they are on top of their ESG agenda. ESG is no longer a sideshow…we see certain investors really trying to make a difference.

 

This blog is an excerpt of an article, “Sustainable expectations: how the ESG investment agenda is shifting” which appears in the Spring 2018 edition of Board Agenda. The full article can be found here.

 

By Richard Karmel & Anthony Carey

A very strategic engagement: stakeholders and long-term value

Companies have always had a responsibility to their shareholders, and now that responsibility is widening to include all stakeholders – employees, customers, suppliers and regulators – as well as the impact their actions have on wider society – the environment, the local and national economy, tax policy, the local community.

Attending to the needs of all stakeholders will make an enterprise more successful in the long-term, but it’s up to boards to engage with them in a fair and open way.

Ultimately, businesses create value, but that value has to be shared across a range of stakeholders. Companies need to make a strategic allocation of that value across this range of stakeholders, and if they allocate it properly, then tomorrow they will have more value to distribute.

The board should place a strong emphasis on engaging with its stakeholders and treating them fairly, including in financial terms. The board needs to set out, in a clear statement, the nature of the relationship it will seek to develop with each of the principal stakeholders in the business.

For instance, on employee matters, the board should develop clear policies and targets with regard to diversity and inclusion, including gender and ethnic diversity in senior roles, monitor them and report on progress being made towards meeting its goals. If the values are to be seen by members of staff, in particular, as being at the heart of the business, it is essential that they are visibly ‘lived’ by board members and those in senior management positions.

The culture of the business is the glue that holds it together. There is increasing interdependency in the way we behave, and it can tip one way or another very quickly. There will either be a virtuous cycle or a vicious circle. If you get it wrong, it will destroy the business. Our values at Mazars have been engrained as part of our Board Charter below:

Mazars' Board Charter 5

This blog is an excerpt of an article, “A very strategic engagement: stakeholders and long-term value” which appears in the Winter 2018 edition of Board Agenda. The full article can be found here.

 

The importance of tone at the top in times of uncertainty

Whether a business achieves sustainable success for the benefit of its stakeholders and wider society is critically influenced both by the board’s decisions and, also very importantly, by how board members act in the boardroom.

Boardroom behaviour has a crucial impact on corporate culture since how the executive and non-executive directors treat each other reverberates across the organisation.

Four types of board culture

We have identified four different types of board culture based on a 2×2 matrix that considers the degree of support and challenge respectively that exists in the boardroom. Ideally, there will be an ‘engaged’ board with high levels of both, but alas the three other options are also found in practice and in their different ways each will hold the business back from achieving its full potential: the ‘cosy’ board with high support and low challenge; the ‘us and them’ board with low support and high challenge; and, the ‘semi-detached’ board offering neither challenge nor support.

four types of board culture

1. The ‘engaged’ board

There will be strong degrees of openness and trust between board members on an ‘engaged’ board with high-quality information made available to the board and its committees in a timely fashion. There will be no issues ‘off agenda’ and challenging situations will be discussed at an early stage of arising with the collective intelligence of the board being brought to bear in determining the best way forward. Board meetings will be well-structured with time allocated for discussion and clear decisions taken after. In addition to dealing with regular board issues, time will be set aside for an annual ‘away day’ to provide an opportunity to review progress towards achieving the longer-term strategy and to consider other issues requiring significant time for reflection and discussion. The board also needs to know when it would be helpful to have external advice to assist in making decisions possibly, for instance, on issues related to cyber security or wider aspects of technology.

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Is your risk management and innovation up to the task?

Does your approach to risk management and seizing opportunities maximise your chance of being one of the winners or is it more likely that you will end up suffering a potentially existential threat to your business in the coming years? This is the big issue boards must address given the unusually high degree of change and uncertainty currently in the system which many feel is the ‘new normal’.

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The current environment shaped by the cumulative impact of technological change, political instability and low levels of trust in business, looks set to create far more significant winners and losers than would occur in more steady state times. Whilst maintaining the core ability to identify, assess and manage risks effectively remain the hardy perennials, agility and resilience comes to the fore at such times. (more…)

Don’t miss the point of non-financial reporting

Boards must understand the importance of sustainability and long-term value to their businesses, and that means taking non-financial reporting requirements more seriously.

Board-table-grass-coveredThe EU Non-Financial Reporting Directive (NFRD) is the latest attempt to persuade companies to integrate sustainability, amongst other areas, into key business structures and processes, and report what they are doing to tackle these key risks. (more…)

The importance of purpose in times of uncertainty

shutterstock_330863699Following on from my earlier blog on ‘Leading when only the unpredictable seems predictable’, I promised a health check on how fighting fit your board is with regards to achieving sustainable success in times of uncertainty and change.

This blog looks at issues related to purpose and long-term strategy. Subsequent blogs will address culture and values; risk management and performance measurement; and, boardroom behaviours.

The power of purpose

It might seem paradoxical, but being clear on your purpose, expressing it in an inspiring way and having a well-thought-out, long-term strategy is even more important in times of major change and uncertainty, such as we are currently experiencing, than in steady state times when ‘more of the same’ has a better chance of carrying you through to a satisfactory, even if not outstanding, performance.

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Leading when only the unpredictable seems predictable

Any thoughts that we were moving away from a period of high risk and uncertainty in UK business vanished once it became clear that the snap election had delivered the UK a hung parliament. The existing uncertainty around Brexit and the economy in general has undoubtedly increased.

???????????????????????Furthermore, the current causes of high risk and uncertainty are not only political. Technology is also having a major impact on businesses whether through new entrants’ lean technologically-driven business models; growing online retail sales; opportunities provided by Big Data and artificial intelligence or the threats from cyber attacks. In addition, trust in business has not fully recovered since the financial crisis and with 24/7 communications, including social media, reputational damage following a crisis is likely to be more swift and potentially more severe than in years past. BA will attest to that. (more…)

The future board is a very different animal. NEDs should take action now.

Business is going through a period of huge change and uncertainty.

As advances in technology remove barriers to entry on a previously unseen scale, business models are disrupted and ‘old’ sources of competitive advantage displaced, many feel that we are still in the fairly early stages of ‘The Fourth Industrial Revolution’.

In addition, global warming is already affecting many businesses, particularly those in the energy, manufacturing and insurance sectors, whilst recent political developments, especially in the UK and USA, have shown a growing distrust of business and its leaders and there is also concern at the economic shift eastwards. And all of this easily and instantaneously brought to the fore with the relentless ‘24/7’ world of social media and other communications channels. (more…)

Data privacy – too strategic for boards to ignore

Gold-key-on-white-keysPersonal data security is increasingly important, but many companies may not be ready to comply with the EU’s tough new data protection laws, which must be implemented by May 2018.

All EU businesses that handle data will have to comply with the General Data Protection Regulation (GDPR), which will require investment in systems and training for employees. As the deadline for implementing GDPR approaches, data privacy is rising up the agenda for senior management and board directors. The GDPR will affect many departments and goes beyond any border within an organisation, so the relevant level for accountability has to be at board level.  As a minimum, boards must ensure that their businesses remain compliant with the GDPR. Companies will have to constantly monitor their systems and processes against the regulation’s requirements, avoid data breaches and manage the risks. Large companies may want to create privacy committees to improve oversight or link data privacy objectives to directors’ performance management. (more…)

Diversity on Boards – Beyond Gender

A modern company needs a modern board—one that mirrors its workforce and customer base. Companies still fall short of this ideal but their stakeholders, including investors, will increasingly expect to see a shift.

Progress towards greater gender diversity on boards is happening but change has been slow. My colleague, Marianne Sandén Ljungberg, is the CEO of Mazars’ operations in Sweden and leads Mazars Group’s thinking on diversity. She acknowledges the power of established, male-dominant board structures but sees their influence being eroded. She sees more women are being appointed to be CEOs which creates the opportunity for more people to assume senior positions at board level. (more…)