Leadership comes from the top and – amid rising global urgency surrounding environmental, social and governance (ESG) issues – there is an obligation for corporate leaders to ensure that long-term value creation goes hand in hand with sustainability.

The shift in priorities is reflected by shareholder activism trends with endorsements for ESG-related shareholder proposals by large institutional investors, and proxy voting against the re-election of directors who lack ESG competence, especially on climate governance.

Earlier this year, BlackRock Chief Executive Officer Larry Fink sent a letter to fellow CEOs advocating stakeholder capitalism, stating that businesses should serve the interests of their divergent stakeholders rather than just shareholders.

As a result, BlackRock announced it would give a select group of its institutional clients, including pension funds that collectively support 60 million people, the option to participate in the proxy voting process. 

Closing the knowledge gap

To achieve effective ESG oversight, corporate boards must turn away from a compliance mindset to a sustainability-focused strategic mindset. It is now common for external experts to be brought into board meetings and for directors to participate in professional development programmes such as the Cambridge – Earth on Board Programme for raising board awareness of ESG issues.

These initiatives often include information about the latest megatrends, market and regulatory developments, and evolving stakeholder expectations. Boards can also draw on industry guidelines and benchmarks to ensure their agendas align with global standards.

Resources include the International Energy Agency’s Net Zero by 2050: a Roadmap for the Global Energy Sector, the Climate Action 100+ Net Zero Company Benchmark, the World Economic Forum’s guidance on effective climate governance, the Director’s Guide to the SASB Standards, and the United Nations’ Global Compact Board Programme.

Companies can also consider forming specific board committees to direct appropriate attention to ESG-related areas. This can supplement the entire board’s oversight of how sustainability is integrated into the company’s strategic priorities and talent and risk management.

Furthermore, sustainability and climate-related performance metrics can be considered being incorporated into the remuneration policies of the governance body, encouraging boards to take a vested interest in creating sustainable value for stakeholders. 

By publishing a corporate purpose statement, companies can make clearer the connection between their ESG strategy and their annual disclosures, providing evidence of strong board effectiveness.

Enhancing diversity

Investor demand for board diversity is also growing. Boards are expected to increase their efforts to recruit directors not only from different professional backgrounds, but also from different genders, ethnicities, races, and age groups, to help consider broader ESG issues.

Asset manager BlackRock, for instance, stated in its 2022 proxy voting guidelines for U.S. securities that boards should aspire to 30% diversity of membership, with at least two female directors and at least one member from an underrepresented group.

In Hong Kong, listing rules have been revised to stipulate that a single gender board is not considered as a diverse board. Existing listed issuers with single gender boards have until 31 December 2024 to appoint at least one director of a different gender. For initial public offering (IPO) applicants, they have had to identify at least a director of a different gender since 1 July 2022. To assist issuers’ compliance with a set of new requirements, guidance is provided in the Corporate Governance Guide for Boards and Directors by the Stock Exchange of Hong Kong Limited.

Staying on top of the board

A strong board mandate is needed to shift corporate purpose towards advocating sustainable development. 

Investors are now sending a clear message that companies lacking the vision to drive their businesses in a sustainable direction will face increasing critical shareholder scrutiny.

More than ever before, boards must recognise that their responsibility is no longer just about leading profitability but also ensuring their business is a leader in doing the right things for our planet.