Considerations for Navigating Sustainability in a Polarized Environment

Environmental, social, and governance (ESG) issues rose to prominence over the past few years as institutional investors, ratings agencies, proxy advisory firms, employees, customers, and regulators all pushed for corporate action on the topic. This momentum has recently been followed by public political criticism and anti-ESG rhetoric in the United States, causing larger institutional investors to refrain from using the term “ESG.” We have also seen the US Securities and Exchange Commission stay its final climate disclosure rules pending the outcome of current litigation.

However, in Europe and other regions, mandatory ESG reporting requirements are still being implemented. The combination of a meaningful demographic of employees and customers that still expect company action on ESG-related topics and growing litigation and activism against ESG create an incredibly complex environment for companies and their boards to navigate. With these factors and others impacting corporate decision-making and oversight, boards should consider the following practices when navigating ESG conversations with their management teams in the current environment.

Do ESG without calling it “ESG.” Given the politicization of the term in the United States, we’ve seen many financial stakeholders and public companies move away from using the generic term “ESG” and toward a focused approach that targets those factors within the “E,” the “S,” and the “G” that have a material financial impact on the business. Topics that fall under governance, such as board structure and executive compensation, matter to virtually all public companies, regardless of size and industry. Additionally, human capital tends to matter to all companies with employees and customers under the social pillar of ESG. Beyond these issues, companies should address the specific environmental, social, and governance matters that are financially material to their businesses, depending on company size, industry, and maturity. This may include issues such as workforce health and safety, climate change risk exposure, labor management, and data security and privacy. Given the potential for ESG backlash and the opportunity to adequately address many ESG-related topics in disclosures without ever referring specifically to the term “ESG,” we are seeing a rise in the use of alternative terminology for this topic.

Identify vulnerabilities and opportunities. Companies should assess their public-facing disclosures (including commitments made, such as to work toward net-zero carbon emissions or diversity goals) across all communication channels for exposure to applicable regulations, litigation risks, alignment with investor and proxy advisory firm policies, and benchmarking against market and peer practices. One reality that continues to be reinforced is that outlier status at the top or bottom of the curve relative to similarly situated peers can be risky as can a lack of adequate public communication on commitments. It is important to assess these vulnerabilities annually at a minimum. 

Reassess materiality. Materiality is one of those terms that means different things to different people and regions. In Europe, the concept of double materiality goes beyond a simple financial materiality assessment; under the EU Sustainability Reporting Directive, companies must consider impact materiality as well. Impact materiality assesses how a company impacts both people and the planet, while financial materiality focuses on how sustainability issues impact the company’s financial performance and future viability. It is important that companies have a materiality strategy that is aligned to the country or countries in which they operate. It should be refreshed at an appropriate frequency and reflect the reality of changing stakeholder perspectives and applicable legal requirements.

Ensure consistent communication. One of the greatest risks that has emerged in relation to environmental, social, and governance issues is inconsistency in public communication. It is not uncommon to see marketing teams make a public commitment or use language on a corporate website that is misaligned with regulatory filings or the company’s official ESG reporting. Having proper governance mechanisms surrounding oversight, practices, policy creation, implementation, and disclosure controls is key to maintaining consistent communication across all channels.

Monitor the changing landscape. It is vital that companies and their boards understand, at any given time, the status of the regulatory environment. Focused attention should also be paid to activism and litigation trends for peers and the industry, and market and peer practices as they apply to oversight, policies, and disclosure levels. Moreover, companies could go a step further to monitor employee perspectives, customer perspectives, and investor perspectives when watching the changing regulatory landscape. What made sense a year ago likely does not make as much sense in today’s environment. Proper oversight of the changing landscape will allow companies to mitigate risks and seize opportunities. 

Board members are not expected to be in the weeds on any of the aforementioned items. However, asking management about these considerations can help boards better understand whether the companies they oversee are sufficiently prepared to navigate a topic that will continue to evolve in the coming months and years.

Aon is a NACD partner, providing directors with critical and timely information, and perspectives. Aon is a financial supporter of the NACD.

Laura Wanlass is a partner in Executive & Board Advisory at Aon.

Amy Jennings is a partner and leader of Executive & Board Advisory at Aon.