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From the boardroom to Wall Street, ESG is crucial for financial resilience

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The ongoing shift to center ESG is driven by multiple forces. Chief among them are a rising demand from the public for transparency and purpose in business and a growing awareness among corporations that sustainability is integral to financial health, according to participants at GreenBiz 21. 

As diverse business stakeholders adjust to the climate crisis, social justice movements and a global pandemic, sustainable investing tactics are increasingly proven to benefit companies’ stability and profitability. In the first, COVID-stricken quarter of 2020, 89 percent of Morningstar’s ESG-screened indexes outperformed their broad market equivalents. And ESG-focused investment funds took in a record $347 billion in 2020.

Among the many timely conversations during GreenBiz 21 were sessions that explored how boards can govern amid disruptive risks and the view of ESG from Wall Street. Both conversations framed ESG as crucial for financial survival and success.

How boards can manage disruptive risk

Two key takeaways from a discussion about board-level responsibility for ESG issues were that ESG fluency is an essential component of successful contemporary risk management for boards, and that, while boards have made some progress toward embracing sustainability principles within their purview, they still have a way to go. The speakers agreed more boards must recognize that ESG metrics and financial concerns are not disparate. 

Veena Ramani, senior program director of capital market systems for Ceres, said "companies, particularly large companies, are really, really, really good risk managers. But the problem is, data out is only as good as data in — environmental and social issues are not being processed through the enterprise risk management systems, through scenario analysis. So obviously, the board is not going to get the analytics to make smart decisions. I hope people realize that they need to have a broader approach to risk management and broaden the scope of what goes up the board." 

I think the partnership with the CFO is incredibly important, the partnership with investor relations because sustainability goes to the heart of performance.

To emerge from the pandemic and survive long term, ESG needs to be integrated into everything that a company is doing from a strategic and operational perspective, noted Douglas Chia, former executive director of The Conference Board ESG Center and now president of Soundboard Governance.

Are boards ready to take on this task? Kathrin Winkler, a former CSO, CW Partners consultant and GreenBiz editor at large, asked, "Are boards ESG-literate?"

"Largely, probably not," responded D'Anne Hurd, independent trustee with Pax World Funds and former senior financial management executive at GTE and PepsiCo. 

While Hurd has seen some progress in this regard, the first question she often receives from board members is, "What is ESG?" She said, "They better wake up," mentioning that consumers, suppliers, employees and investors are pushing for greater ESG fluency and action. 

Ramani said the Biden administration’s priorities will push ESG even further into the foreground. Both Hurd and Ramani pointed to a class offered by Ceres and Berkeley Law, "ESG: Navigating the Board’s Role," as a relevant resource. 

The view from Wall Street

The importance of embracing the confluence of the ESG and financial realms is a trend Martina Cheung, president of S&P Global Market Intelligence and S&P Global, increasingly sees in her work.

She noted in a GreenBiz 21 keynote interview: "Whether it's climate risk, social equity governance and stronger representation from government … as we see that play out; the real effects of that on the markets, on companies’ performance, on sectors … our clients are turning to us and saying, ‘What information do you have that can help us as we have to make decisions, as we have to comply with regulations, as we look to raise capital?’"

One important factor is the movement to standardize ESG reporting, according to Cheung. She thinks achieving a single set of standards is still a few years away but pointed to some promising convergences. Among them, the International Financial Reporting Standards (IFRS) Foundation’s proposal to develop ESG standards is “critical,” Cheung said. 

One way sustainability professionals inside big companies can help investors traverse the ESG path is by spending more time collaborating with their peers in the corporate finance function, she said. "I think the partnership with the CFO is incredibly important, the partnership with investor relations because sustainability goes to the heart of performance." 

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