In the latest in a series of round table discussions with board members on ESG, human capital and risk, Willis Towers Watson explored how boards of United States companies are adapting to and thinking ahead of a rapidly changing business, regulatory and cultural environment.
Willis Towers Watson met with a new group of 12 board members representing 32 companies across 14 industries. We asked questions similar to those addressed in prior round table discussions:
The most interesting and promising finding from the discussion was the degree to which board members view risk and opportunity as linked together. Multiple examples were given of situations where addressing social or climate risks led to competitive advantage in the market for products and talent. A company’s positive labor practices, for example, may help win a deal where customers increasingly care about how the products they buy are made and sourced. Companies are always seeking competitive advantage, and while strong ESG performance may not induce customers to pay more, it can help win the deal where price and other factors are equal.
According to this group, their boards generally have an in-depth risk discussion alongside business strategy discussions and will often regroup for deeper dive discussions of specific risks. Some boards are moving to have a specific risk discussion at every board meeting. Some either have or are considering a separate ESG committee, while others are parsing out specific risk topics to existing committees based on the topic and committee expertise.
Board members noted that prior to the pandemic, operational risks were the primary focus. That conversation has now shifted to human capital risks. Climate and environmental risks are clearly acknowledged, but for U.S. companies, human capital risks are at the forefront.
ESG priorities vary widely between and within industries. The ESG issues that are top of mind for directors may be a case of “where you sit is where you stand.” Climate and sustainability priorities are tremendously important for some industries and less for others. Human capital issues, however, seem to transcend all industries and may be the common denominator in ESG.
Board members cited several key challenges they see in addressing ESG risks and opportunities, including:
Challenges, however, present opportunities for innovation, which companies are embracing. Some examples discussed at the round table included:
Board members noted their companies are definitely considering ESG measures for executive and management incentives. The focus is currently on human capital measures much more so than environmental measures — although this varies greatly by industry. Concern was expressed over keeping the number of measures limited.
Most companies are focused on including measures in their annual incentive and waiting to put measures in their long-term incentives until they have more experience with them on an annual basis. In general, there is far more discussion and activity around the governance of ESG than on paying for ESG.
Board members noted several key connections between ESG risk, opportunities and people. Meeting environmental and climate goals will require an enormous amount of innovation. It is impossible to meet the commitments that companies have made or are considering with today’s technology. Effective, sustained innovation will require great human effort, creativity, resources, diversity of thought and time. Successful innovation can also produce remarkable payoffs. A company’s culture and the quality and diversity of its people will be critical to its ability to innovate and adopt new behaviors to drive change.
Lastly, board members noted that companies are in the midst of a new war for talent. They are chasing the same scarce talent pool that tends to be younger and embraces ESG and other social values. The sense was that this generation of people is currently more concerned about “S” issues than “E” issues, but that greater focus on the E is coming soon.
The talent that companies need in order to address ESG issues will be easier to attract if they are already focusing on ESG issues.
A version of this article appeared in Workspan Daily on July 15, 2021. All rights reserved, reprinted with permission.
