Closing the ESG gap in corporate reporting

In this episode of The Better Finance podcast, host Myles Corson and guests discuss how ESG plays a vital role in investor communications and what investors are looking for companies to disclose.

Key takeaways:

Companies must look for ways to articulate progress on their long-term strategy against a broader set of financial and nonfinancial KPIs, including ESG-related targets.
With an increased focus on diversity, inclusion and employee health, spending time on an earnings call or at the AGM (annual general meeting) can help investors understand how a company is progressing with their people agenda.
Regulatory and market-driven initiatives around ESG are moving very quickly and could have significant impacts. Continue to monitor this evolving space and evaluate how best to reflect what is important to your business.

For your convenience, full text transcript of this podcast is also available.

Chris Hagler

Welcome to Sustainability Matters, a podcast series of EY. My name is Chris Hagler. I’m one of the leaders in our climate change and sustainability practice and your host for this series. We designed this podcast series to provide leading trends and practical advice around the environmental, social and governance, or ESG, issues and opportunities facing business today. We originally planned this podcast as a follow-up to a recent webcast that I participated in with institutional investors regarding their perspectives on corporate governance and ESG.
Our goal with today’s session is to bring in the director perspective and talk about how ESG issues are being discussed in the boardroom and the challenges of oversight and prioritization. But in the week since we first started planning this session, the world has changed. Today we couldn’t be all together in a room to record a webcast. Dealing with COVID-19 has risen to the top of the board agenda, and it has changed how we interact and work. Some in the business world might presume that this short-term crisis will permanently shift attention away from ESG. Yet, those of us who have been watching the progress of ESG frameworks and the links to long-term growth of companies find it to be more relevant now than ever.
Larry Fink, the CEO of BlackRock, who helped bring ESG into the spotlight with his letter to CEOs, recently talked about this issue in his letter to shareholders. This is within the context of COVID. It’s a quote “I have always believed in the long-term view. I have advocated for it in letter after letter, and I believe long-term thinking has never been more critical than it is today. Companies and investors with a strong sense of purpose and a long-term approach will be better able to navigate this crisis and its aftermath.”
There is just so much to explore in terms of the components of ESG and how boards are thinking about it, and how to build it into business decisions productively. And then how does that fit in today’s environment? Today, I am so pleased to have two extraordinary people join me to talk about the role of board members in ESG broadly, and more specifically how COVID-19 could change how we look at ESG.
Ana Dutra is an author, speaker, business advisor and sits on the boards of three public companies, four private companies and a number of impact not-for-profits. And Cigdem Oktem is the Regional Leader for EY Center for Board Matters, who focuses on bringing emerging issues to boards. So, before we dive into our conversation, if you two could just give us a bit more background about your work and your role in ESG? Ana, can you start?

Ana Dutra

Yes, sure, thank you, Chris. First of all, it is a pleasure to be here with you and discuss a topic that’s near and dear to my heart. As you both already know, I’m born and raised in Brazil, where I got my law degree and a master’s in Economics. I was always very interested in social issues. Then almost 30 years ago, I moved to the US to pursue my MBA at Kellogg and then spent my career not only giving advice to boards and C-suites in large global companies, but also leading companies myself in the professional services technology and products areas.
About two years ago, I shifted my career to become one, a professional board director. As you mentioned I served on three public company boards. I lecture in leadership, governance and board effectiveness as well. And I’m looking forward to our discussion.

Hagler

And I’m looking forward to hearing your perspective on these issues. Cigdem, can you give us a bit of a background on how you work with our clients at EY?

Cigdem Oktem

Absolutely. And thank you again, Chris, for having us as guests on your podcast. In my role, I have the privilege of working very closely with boards and CEOs on emerging issues, so bringing the conversation to boardrooms, to directors, to CEOs, to talk through what’s happening, what are the implications, what questions the board should be asking, because of course issues are always far more complex and nuanced than they might seem from a magazine article. And so, that’s really where I spend the bulk of my time, as well as doing research into governance, and understanding how the landscape is shifting. And that’s pretty much it.

Hagler

Well, Cigdem, I can tell you that I rely on your work and the work of Center for Board Matters all the time in the work that I do with my clients. So, I’m grateful to have you here and to have you as part of our firm. So, let’s jump into this big question
ESG? In every interview I’ve done so far, we’ve talked about how this is being driven by institutional investors. That’s all we’ve been talking about. And now, I’m wondering is ESG still relevant during the COVID pandemic, when companies are facing financial challenges? Should they still be concerned about ESG? Ana, can you give us your perspective on that?

Dutra

Yes. So, let’s start with the affirmation that ESG is being driven by institutional investors. I actually think it’s a broader suite of stakeholders that is driving ESG. I have three daughters, they’re all millennials, and quite frankly they will not work for a company that does not have a purpose and is not doing something meaningful in terms of corporate social responsibility, environment, and doesn’t have the proper governance. So, I think there’s a myriad of stakeholders out there. It’s suppliers, it is the customers. Yes, it is institutional investors, as well, that are driving ESG. And I think the numbers don’t lie.
One thing that I didn’t mention is that Cigdem and I are co-authors in an article that talks about how to take the clutter out of ESG. And one of the findings that we had is that if you look at proxy disclosures, between 2016 and 2019, for Fortune 500 companies — in 2016 we had only 14% of the companies mentioning even corporate sustainability and citizenship and social responsibility in their proxy disclosures. You fast-forward just three years and that number goes from 14% to 69%. So, the conversation is out there. And companies want to talk about it.
Now, let’s insert the big monster in the room, which is the coronavirus, COVID-19. Right? People are separating the conversations, but I actually think that they’re more intertwined than many would acknowledge or admit. Because think about that
any decision, any action, any initiative that companies will trigger, will launch, because of COVID-19, inevitably impact and are connected to ESG. Because you're either environmental, they’re either social.
What do we do with our employees? What is our work-from-home policy going to be? Until when do we keep them away from our facilities? Do we give a furlough? Or what do we do to stimulate the economy? To a myriad, I have had board calls, ad hoc board calls, non-stop since the breakout of the pandemic. And the conversations, if you go topic by topic, they all fall into one of the three pockets of ESG. What do you think, Cigdem? Are you seeing the same?

Oktem

Absolutely. I appreciate the way you laid it out, Ana. Sometimes I wish we could take a label off of a concept, because the label itself can attract various reactions without thinking about the concept. ESG very much is in that bucket to me, because thinking about the E, the S and the G, it’s everything from supply chain to water to energy to human capital, employment generation, community impact, to — from a governance perspective — compensation policies, capital allocation, risk management.
These are exactly the conversations directors are telling us they’re having right now in the board, Ana, as you mentioned. And so, in a weird way, there seems to be even more relevance to the topics that are under the ESG umbrella. Because companies are already taking actions in these areas, which then also means, and I think we’ll come to this later, they’re going to want to think about how to capture that and tell that story down the line.
So, as they think about what they’re doing, how they’re doing it, the other piece of it too … and this was something I’ve been hearing a little bit more from scientists in listening to the news … is recognizing that the indications are we can, as a community, take big actions when we need to, when we understand what’s happening. And so, I think that will become part of this ongoing conversation as well. Not to get too esoteric here, but at the core of it, the kinds of issues that are in these categories are exactly the conversations that boards are having right now.

Hagler

And I really love that perspective, Cigdem. Take the label off. I don’t care if it’s called the ESG, or Ana, you used some of the other phrases that we hear — corporate responsibility, sustainability. Right now, I think we’re probably going to be hearing resilience, or adaptation, and not in a climate change way, but in an overall company resilience way. So, it’s not the words, it’s the addressing these important topics within the board.
So, how does a board prioritize? I mean, Cigdem listed off 20 different issues. I could add another 20 to that list and more. What is your perspective, Ana, on how a company … a board can help a company prioritize these most important issues they should be addressing now for the short term, but also sort of keeping in mind that at the end it’s about long-term value?

Dutra

Absolutely. So, first of all, I think you cannot prioritize what you don’t even know. My very first step would be create an inventory, assess the baseline, look at all the ad hoc initiatives that are occurring within your corporation and list them.
Do they fall under one of those pockets or not? Then categorize by impact. What is the social, the economic, the environmental impact of those initiatives? That’s when you start to prioritize for action, right? And how does that connect to the business? And then, let’s create the plan. What are the metrics? What are the goals? How do we track them? And then, finally, how do we communicate? But the interesting thing is that there is another. When you look at the pandemic like that, to me, there is another portion here to this methodology, and you touched on it. Which is, are there business opportunities for a company to pivot or shift that would qualify under ESG?
Let me give you a couple of examples. One is the “Wisconsin liquor company” that shifted from producing alcohol to producing hand sanitizers. And while that’s going to help them stay alive and keep their heads above the water during the recession, that is a hugely environmentally and socially responsible initiative. Or, all the apparel companies that are now shifting to produce masks and hospital gowns.
So, there is, I think, a third lens is there that is not just what we are doing, what else can we do, what we should start, but is a wait a second. If we have in front of us a new reality, a new world, how can we use the core competencies and capabilities that we have to not only be a player in this new world, but also be a player that’s doing something for the environment, for the ecosystem in general. And that’s a conversation that I think that boards can at least trigger. Don’t take me wrong. It is management’s responsibility to actually come up with a plan, but it’s the board’s responsibility to ask the right questions.

Hagler

To ask the right questions. And what I think is interesting is this idea of what problem are we solving? And you talked about when you were laying out your methodology, which by the way is really close to the methodology I use with my clients, so we should talk more.

Dutra

Is that right?

Hagler

(Laughs) One of the things that you said is sort of what impact are we creating? “Impact” to me means what change are we creating in the world? And if you say, “Well, what change do we want to create, or can we create?” Or, another way to say it is “What problem are we solving?” So, an apparel company, I love that example, has shifted from we were focused on providing, I don’t know, products that bring joy into somebody’s life, and now we are solving a different problem, we are creating products that allow our medical professionals to be more safe. I love that shift. And the board perspective of helping a company say, not just what opportunities are there, but what problems can we and should we be solving, and then how do we do that? Cigdem, have you seen that in some of the companies that you’ve been talking to?

Oktem

Absolutely. And one thing that I would add to the mix here, and I think it’s embedded in the conversation, is the ERM, the enterprise risk management, framework, and how that comes into the conversations as well. If we sort of take a step back and think about what companies have been going through, there has been massive industry disruption in many ways across multiple industries. So, you could see the current situation accelerating some of that, whether it’s accelerating the trend for physical retailers of the challenges they’ve run into, other types of industries and companies as well.
So, coming back to that ERM, you know, what were the key risks that the company was facing? And how can we take action now that both serves that greater purpose and help us address the risk? So, are there things that we were considering doing as a company that we should now look to accelerate, for example. Especially if we’re investing in technology to enable remote working. If there are other ways to think about this as well.
But I think it’s interesting, and this is a little bit of the timing of our conversation, boards and companies are right now in that crisis mode of understanding that a great way to serve all of their stakeholders is to preserve capital and liquidity to the extent necessary. Very soon that shift is going to come into the opportunities and maybe using this as an opportunity to address some of the big risks that are going on and accelerating some of the plans that they may have had.
But this is where boards, I think, are so critical, and directors are very, very good at leaving the aspects of operation in the hands of management and really being that guiding light, shining that flashlight on the road ahead to help management see that we’re going to get there and how we’re going to get there.

Hagler

You know, Cigdem, we actually did a previous podcast on how to integrate ESG into ERM, which gives you a whole sort of framework on how to go about doing that. But I like where you were going in terms of, how can the director help a company see what those risks could be, as opposed to the operational side that a company does? And, Ana, could you talk a little bit about your view on first of all looking at ESG risks in general in a company, and then maybe how that might be shifting a little bit right now?

Dutra

Yes, one question that I like to ask in any risk committee that I’m a part of is, what are the risks associated with doing nothing in some categories? So, for example, let’s take one that actually intertwines again with COVID-19. Well, if you do nothing in terms of investment in employee health and well-being, what are the potential risks? And, quite frankly, costs to the company, to the community, to other stakeholders around them? Or, if you do nothing in terms of pay equity, or if you do nothing in terms of transparency in shareholder, stakeholder communication.
So, there is a question that always should be asked, which is, if we look at where we have gaps as a company, from an ESG perspective, what are the risks associated with not taking any action regarding those gaps?

Hagler

And just a quick, off of COVID-19, just a little bit, would you apply that same question to the question of carbon emissions or climate change?

Dutra

Absolutely. You not only can, but you should. I just recently finished a very extensive course at Carnegie Mellon and its deal on cybersecurity for directors. I’ve been always interested in it. I have a technology background. And here’s an interesting thing, if you think about disaster recovery plans, or resiliency management methodologies, they are usually only used in the context of cyber-attacks and cybersecurity. And yet, they apply perfectly well to this COVID-19 pandemic.
So, we should be always thinking in terms of, well, if we don’t do anything in terms of carbon footprint or carbon emissions or energy efficiency, what are the consequences 3, 5, 10 years from now that are going to directly affect us and the directly affect all our stakeholder groups. So, absolutely yes.

Oktem

I was just going to build on what you were saying, Ana. I love the way that you asked that question of, what if we don’t do anything, what are the risks? I think that’s a brilliant question to ask. And the other piece of this is, we are hearing about some who are pushing back and saying in this time of crisis we shouldn’t be thinking about carbon emissions or addressing some of the climate aspects of these, or DNI, diversity and inclusion. And yet it seems critical in many ways to build this into the thinking now in these critical decisions. Not to say you would give up one for the other, but to find where they feed into each other, where they help each other. So, if you’re reviewing your supply chain, how do you bring in also maybe some of the more sustainable measures that you could use into that, as you’re already doing that.
So, Ana, I think that comes back to this key of the assessment, that basic step that you were talking about. And then as we considered the prioritization to understand where is going to be the highest impact, least effort, as you're thinking about some of these trade-offs. I hope the way I just laid it out makes sense, but I think there are a number of strands coming together, and the real leaders coming out of this are going to be the ones who can process all those different dimensions at the same time on a problem.

Dutra

I agree with you 100%, Cigdem. And I would add that in those times of crisis, you see people in companies’ real colors, right? So, here’s just a guess, is that companies that had their carbon footprint initiatives and all that, but who are just checking a box, are going to react exactly the way that Chris described and that you described, which is, “Hey, now this is no longer a priority,” or that we’re doing DNI efforts just because they were feeling the pressure, but it was not part of the fabric of the organization, of their DNA, they’re going to push that to the side.
For the ones that had already embedded in their DNA all those initiatives, they are just going to continue to do more but always taking into account, because it’s the key part of the mindset and the culture. So, I think I would be very suspicious of the ones that separate and that deprioritize, and very complimentary of the ones that just keep embedding the efforts in everything they do.

Hagler

Ana, I think that’s an interesting point, as you think about companies who look at this crisis as a short-term interruption or disruption and have to deal with it, of course, but also continuing to look at the long-term value of the organization, and how at the end of the day it’s not about what this quarter’s results look like, but what our results look like 3, 6, 10 years from now.

Dutra

Listen, there’ll be always a healthy tension between the need to create a more strategic, centralized and comprehensive approach to ESG, but also making sure that ESG is a part of the fabric of the organization and is present in every functional business unit or geographic leadership decisions, right? It’s a little bit like innovation, as well as DNI. It always concerns me when there is an innovation effort that runs in parallel with the operations of the organization, or there is an ESG or there is a DNI, which is part of ESG as well.
On one hand, we want the effort to be coordinated, highlighted and underscored in a comprehensive manner for the entire organization. But on the other hand, we want it to seamlessly permeate the entire organization and become a part of the culture and mindset. So, that’s why I said it’s a healthy tension. I would rather actually start with the latter. So, have it permeate the entire organization and become a part of the culture and mindset, but then document and communicate on a systemic and coordinated basis. Does that make sense?

Hagler

Mm-hm. (Affirmation) So Ana, you were just talking about communication. The difference between how something gets built up in an organization and then how it is communicated externally. Let’s continue down that conversation, Cigdem, do you have some perspective on what you think boards and CEOs should be communicating about ESG right now in this time of crisis?

Oktem

Absolutely. And we’re hearing so many thoughtful approaches from directors and CEOs, and I think that’s worth reiterating, as well, that none of these decisions, none of these approaches are taken lightly. Interestingly, institutional investors, which is where we started this conversation (Laughs), they are looking to continue to push the conversation.
You referenced Larry Fink’s letter. Well, State Street has just come out and also encourages companies to articulate how COVID-19 might impact or influence your company’s approach to material ESG issues as part of your long-term business strategy. So, I’m quoting directly there. And, really, that long term value and strategy, that’s the critical part, I think, in all these conversations.
And that’s where boards play such a significant role and are so good at thinking past the current crisis to understanding what are we doing about it, how are we going to come out the other side in a stronger position, and to the extent that they now can start to encourage management to communicate what’s being done, how it’s being done.
In several calls we had recently, to bring together directors and have a conversation about what they’re doing, we repeatedly heard the word “transparency.” So, think about the multiple 8Ks that are being filed and really providing that transparency on what the company is doing, how the company continues to keep sight of the longer-term goals and value creation, and what steps are being taken in the meantime so that communication, that transparency and that level of confidence that gets projected is going to be critical.

Dutra

I agree with you. And in order for that to work, the board needs to make sure to continuously reassure the CEO and the management team that they are doing the right thing. That they are doing the right thing even when they have to bite off some short-term losses, because they are telling workers not to work. That they are doing the right thing even if they do some of those pivots and shifts.
Because think about that CEOs have, whether it’s in the front of their mind or in the back of their mind, there’s job preservation, right? So, if the board says let’s play for the long term, let’s be strategic, let’s do the right thing, but then is pushing CEOs too much for the short-term result, they become conflicted. What do I do here? So, in my opinion, the communication to shareholders, stakeholders, investors, should be the CEO and management responsibility.
But the board’s responsibility is to support and reinforce the fact that they are behind all those decisions that CEOs are making that nurture the long term — the long-term performance and the long-term progress. So, I think that needs to be said, because otherwise it’s too easy to fall into the trap of, on one hand we tell CEOs to do the right thing, on the other hand we ask them, “Where are the results? You may not survive if you don’t deliver in the short term.”

Hagler

What you’re saying, Ana, is so critical, and that’s why in our research and our conversations with institutional investors, we are finding increasingly they are looking to hear from the board. Not the whole board. Typically, the lead director. But they want to understand that the board supports the CEO and the management team and that there is alignment around the goals and the messaging. So, I think that will continue to be part of these conversations.

Dutra

I agree.

Hagler

So insightful. I am so grateful for some of the connections that you have made for us today. Keeping the eye on dealing with the current situation yet looking for a long-term result. Thinking about how we deal with this current situation, but there may also be a positive opportunity. And also thinking about how do we put all of these different pieces together. And Cigdem, I like that getting rid of the labels.
I think we spend so much time saying, well that’s ESG, and that’s sustainability. And I think it’s more important for us to say, “Are we dealing with the right issues at the right time, and is management focused there, and is the board asking the right questions?” You two connected so many dots today that I hope that all of our listeners will really appreciate how you pulled all of those pieces together for us, and I’m very, very grateful for your time.
Please, to our listeners, if you would like to know more about these issues, please connect with EY Center for Board Matters. Just Google it. It’s easy to find and a great resource for both board members and for corporate leaders. Follow me at @chrishagler on Twitter, or EY Sustainable Impact Hub at @EY_Sustainable. And please subscribe to this podcast on iTunes or Google Player, wherever it is you get your podcasts. Thank you so much.

Presenters

Myles Corson

EY Global and Americas Strategy and Markets Leader, Financial Accounting Advisory Services

Brian Tomlinson

Managing Director, Environmental, Social and Governance, Ernst & Young LLP

Podcast

Season 3, Episode 7

Duration

39m 0s

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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Closing the ESG gap in corporate reporting

Key takeaways:

Presenters

Myles Corson

Brian Tomlinson

In this series

Presenters