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ESG Oversight Framework for Directors

Demystifying ESG for Board Members

January 27, 2020


Key Takeaways


  • In 2017, we called on boards to incorporate sustainability into long-term company strategy.
  • Over the past three years we have seen some progress, in that directors now acknowledge the importance of environmental, social and governance (ESG) issues to the business.
  • During engagements, however, we sense some ambivalence about the board’s role in overseeing ESG. Directors are seeking more guidance about what to focus on and what actions to take.
  • In response, we have developed guidance designed to help boards prioritize ESG within their organizations, including:

o State Street Global Advisors’ approach to contextualizing ESG issues within the current board oversight framework.

o R-Factor™, our transparent ESG score that measures the performance of your company’s business operations and governance as it relates to financially material ESG issues facing your industry.

o Our ESG oversight framework for directors that can serve as a road map for what actions are needed to further integrate sustainability into long-term strategy.

  • Board members have a critical role to play as catalysts for change on ESG issues. We look  forward to engaging with you on this matter and partnering with you in the coming year to build stronger companies and capital markets

Introduction


Over the past three years, there has been a noticeable change in directors’ recognition of the importance of sustainability or ESG issues to investors. When we first called on boards to incorporate sustainability into long-term strategy in 2017, only a few companies, mainly in Europe, could demonstrate that they had considered ESG in their strategy. A majority of companies were either not focused on ESG, or were considering it only in their communications with a broader set
of stakeholders.

Today, companies have begun to acknowledge the importance of ESG to their investors and boards are getting more involved in overseeing ESG. Meanwhile, directors continue to seek clarity on which issues are financially material to their business and want to understand investor expectations of the board’s role in overseeing ESG issues. Some of the reasons for these changes include:

  • Clearer understanding of climate change as a risk facing all companies globally
  • Growing awareness that intangible issues such as human capital and corporate culture are long-term value drivers that need to be managed
  • Growing customer and societal expectations for purpose-driven companies
  • The growth of ESG investing, which considers a company’s ESG profile in the investment process and allocates capital accordingly
     

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