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Rising demands on environmental and social standards create new pressures in governance, board leaders say

·4 min read
Photo by John Phillips/Getty Images for TechCrunch

It’s clear one of the main ways companies will be judged on their ESG strategy is the makeup of their board and C-suite leadership. If their leaders have a history of prioritizing and driving progress in the environmental, social, and corporate governance areas, they have a stronger leg to stand on. If not, they open themselves up to greater scrutiny from customers, employees, and financial markets.

“We have employees pushing so hard on any CEOs who are laggards in this space,” Amy Chang, a director at Disney, Procter & Gamble, Marqeta, SambaNova, and Pragma, said at a recent Modern Board panel.

As multiple current and former board directors convened virtually to discuss best practices for measuring ESG, the first trend they noted was the effect of the rapidly changing business landscape, which has put a lot of pressure on corporate leaders.

Gabby Sulzberger, board member at Mastercard, Eli Lilly, Brixmor Property Group, and Cerevel Therapeutics, called the shifting environment “a perfect storm” that is significantly changing the way companies and their leaders are evaluated. The environmental piece of ESG has gained a lot of attention recently, but the social aspect was jump-started in 2020 by the disproportionate effects of COVID-19 on minority populations and by increased calls for political and corporate action against inequality.

All of this has placed higher scrutiny on governance, Sulzberger said.

“Whether you are the disrupter or the disrupted, the pace in which we had to make decisions was evolving," she explained. "The kind of query as to who and what the board should look like and board composition was all the more elevated.”

Paul Polman, former CEO of Unilever, said corporate leadership needs a big refresh. A recent survey of board members showed that 47% wanted to fire a fellow board member, and CEO turnover has increased this year as well.

As the push for standardized measures for corporate climate impact grows stronger, panelists made it clear that they as board members have a responsibility within their company to set high standards. Chang said Disney’s current climate commitments are strong, but she’s looking for ways to improve them, and she sees a path for her peers to do the same.

“One of the things that I'm hoping that all of us on this call do is think about proactively moving ourselves onto the nominating and governance committee for every board we're on…and reminding people to kind of think through net positive not just net zero,” she explained.

The element that makes standardization of ESG measures so tough is the fact that a company’s relationship with environment and society differs widely depending on its industry, what parts of the world it operates in, its customer alignment (b2b vs. b2c vs. hybrid), whether it’s a public or private company, and many other factors.

“Each company or industry may focus on moving the needle more so than others based upon what matters to your employees, what matters to your customers, what industries you focus on,” Brian Stafford, CEO of Diligent, said.

Alan Murray, CEO of Fortune Media Group, pointed out that Marriott has an ESG board committee. Steven Jennings, board member from Deloitte US, shared that he chairs the ESG subcommittee for his board, and that they’re focused on reducing the company’s environmental footprint.

In terms of actual standards, the panelists agreed for the need for companies to move beyond net-zero carbon emissions and start thinking about how to be a net positive by social and environmental measures. But they did point out that net zero is an admirable goal, and that the timing of these goals and the costs that companies incur in order to meet them are probably the best indication of the sincerity of their efforts.

“If a company doesn't make 2030 commitments, they're not making commitments,” Polman said. “If a company only does Scope 1 and 2 then they are paying lip service...you have to put the standards higher now and this is where the challenge is.”

Multiple panelists agreed on the importance of the use of third parties to evaluate their metrics, including SBTi, an organization that assesses and certifies science-based environmental targets. Atlassian CEO Mike Cannon-Brookes also indicated his preference for this standard in a previous interview with Fortune. The International Accounting Standards Board has also launched a sustainable standards board, and Polman noted that more standards are being released.

But greater action is needed across the ranks of corporate leadership, Polman said. “We need to set targets of what it takes to win, what the world needs," he said. "And that's tough. That takes courage. We need to work in bigger partnerships to handle these tougher issues…What we ultimately need as board members is to cultivate the CEOs in becoming these courageous leaders and giving them the courage, the support, and the tools to be what society needs right now.”

This story was originally featured on Fortune.com