Decision-useful data, external frameworks and driving outcomes: EY on ESG
When EY published its recent report, Six priorities for boards in 2021, it spoke of organizations ‘evaluating every aspect of their business’ following a year of global ‘upheaval’. But while it identifies six distinct areas of focus, each really falls under the scope of ESG and demonstrating the long-term resilience of the company.
EY’s six areas of board focus for the coming year are:
- Overseeing strategy to create long-term value
- Promoting enterprise resilience in the face of uncertainty
- Focusing on workforce transformation and new ways of working
- Leading on diversity, equity and inclusion
- Guiding an ESG strategy that drives stakeholder engagement and value
- Challenging board composition and effectiveness.
IR Magazine talks here to Jamie Smith, investor outreach and corporate governance specialist at the EY Americas Center for Board Matters, who says that despite the growing importance of ESG, companies don’t need to reinvent the wheel.
Companies – and IROs – are increasingly being told to focus on ESG issues but this is a very broad bag. How should a company go about assessing which areas it should focus on most and how to best communicate what is being done across those areas?
A foundational step is a formal sustainability materiality assessment. That involves a company engaging its most important stakeholders to identify and prioritize the ESG topics that are most relevant to the business. This helps companies filter through the lengthy list of ESG issues to find a manageable set of priorities that intersect directly with the business.
To communicate what they’re doing related to those ESG priorities, companies can leverage external frameworks that provide guidance for ESG disclosures. By aligning to external frameworks, companies can meet investor expectations and needs for comparable, decision-useful ESG data. Robust disclosure processes and controls must also underpin ESG disclosures.
Some areas of ESG are harder to measure than others and in the past there’s perhaps been an over-focus from companies on the more tangible metrics. Is that something you continue to see and, if so, what should companies be doing about this?
Companies do not need to reinvent the wheel. Commonly used, market-driven external frameworks provide guidance on those areas of ESG where measuring progress is particularly challenging.
That guidance has been developed based on feedback from and engagement with companies, investors and a host of market participants, and continues to evolve. For companies struggling with the frameworks, they should engage those organizations and provide feedback to help make them better.
What are your thoughts around tying ESG to executive pay?
Executive pay incentives can help drive strategic ESG outcomes, and boards – specifically compensation committees – are considering whether and how to align pay to ESG goals. Given increasing stakeholder scrutiny of such pay alignment, compensation committees should be able to provide a clear rationale for how ESG goals are incorporated into the executive pay program – or if they are not incorporated, explain why.