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Overcoming Challenges: The Path to Successful ESG Program Implementation

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While the adoption of environmental, social and governance (ESG) programs is becoming increasingly important for building a sustainable future, implementing such initiatives does not come without its challenges. Cost, ROI, engagement and clear messaging are just a few of the many factors to consider when it comes to corporate sustainability.

Below are some common concerns with commonsense solutions that may help companies better prepare for ESG deployment.

  • Capital allocation: Investing in and implementing ESG initiatives may require significant financing, which can be a hurdle for some companies, especially smaller organizations with limited resources. Not all ESG programs are costly, however. Starting slow and building a longer-term strategy over 2-3 years is good practice. It could be something simple, such as reducing a company’s carbon footprint by using energy-efficient lighting or adopting a hybrid workplace.
  • Complexity and measurement: Determining the right indicators, collecting reliable data and establishing standardized frameworks can be arduous. Companies can overcome this challenge by leveraging emerging technologies, collaborating with industry peers and engaging with ESG consultants and experts to ensure accurate and transparent reporting.
  • Benchmarking: It is important that organizations perform in a manner to maintain their performance, and at the same time, mitigate risk and capitalize on the potential benefits of sustainable business practices. Falling behind on these initiatives may lead to missed business opportunities. A good rule of thumb is to set realistic, achievable goals aside from regulatory obligations.
  • Stakeholder engagement: Balancing the diverse expectations of multiple audiences can be very demanding. Companies can use existing technologies to set up open communication channels with each of its targeted communities, from employees and investors to customers and suppliers. Social platforms can be used to garner support and to ensure that ESG programs align with stakeholder needs.
  • Integration and alignment: ESG programs often require changes to organizational structures, investment decisions and risk management practices. Since companies are constantly evolving, meaningful ESG practices can slowly and strategically be integrated into existing operations. What’s needed are leadership commitment, employee education and training and clear ESG goals that align with the company’s mission and values.
  • Regulatory environment: Compliance with multiple reporting frameworks and keeping up with varying regulatory and local jurisdictions often can lead to uncertainty. Engaging with policymakers, industry associations and subject matter experts can help companies stay informed and adapt their ESG programs to meet evolving requirements.

Today’s business and social climate are having a trickle-down effect on ESG. Large organizations, for example, are requiring smaller companies to adhere to ESG criteria as part of their global supply chains. Moreover, a growing number of institutional investors will not invest in companies without an ESG program in place.

Lack of standardization, inconsistent data quality and subjectivity are adding to the confusion when it comes to ESG. As a result, Bloomberg predicts more ESG-related shareholder lawsuits this year, which was highlighted in a recent Morgan Lewis webinar.  

Studies suggest that those companies embracing ESG will be competitive leaders and drive long-term value creation. ESG is not as complicated as it may appear. Deploying a program that does good – without breaking the proverbial bank – not only enhances brand reputation, but also will be well received among investors.

George Medici, gmedici@pondel.com

For Public Companies, It’s Always Something

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It seems like every day there is a new article or hypothesis about corporate boards and governance.  Diversity…Say on Pay…Proxy Access…Tenure.  You name it, it’s been debated.

A new Ernst and Young study takes on the topic of board member skills, or more specifically providing more disclosure to investors about the skills and experience of board members.  According to Ernst and Young, “Investors increasingly seek confirmation that boards have the skill sets and expertise needed to provide strategic counsel and oversee key risks facing the company, including environmental and social risks.”  Of the 50 institutional investors interviewed, more than three-quarters do not believe companies do enough to explain why they have the right people in the boardroom.

The Wall Street Journal reported that a thorough approach to selecting directors is more important than lower mandatory retirement ages for board members.  It only makes sense that investors be more concerned about what each director can bring to the table (pun intended) than how old that director is or how long they have been serving.  Although, these issues are also hot buttons for today’s boards.

As we tweeted earlier this week, there are more than 100 proxy access proposals thus far in 2015, up from just 17 last year, signaling that institutional investors want to be part of the process for selecting who will be guiding the companies they own.  Fourteen corporations are taking a more proactive approaching by voluntarily agreeing to give investors the ability to nominate their own directors.

It will likely be some time before corporate America turns over the board selection process, but in the meantime, we continue to believe that disclosure and transparency in governance for listed companies are the best way to build and maintain credibility and goodwill.

— Laurie Berman, lberman@pondel.com

What They’re Still Sayin’ about Payin’

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Say on Pay

Photo credit: Flickr, Tind

With proxy season nearly upon us, a couple of thoughts may be in order about Say on Pay, one year after
we first blogged about these new guidelines going into effect.
 
On the positive side, last year nearly all companies had their executive pay plans approved by at least a majority of their shareholders, according to a recent research report from IR Insight in a survey of 181 companies.  Moreover, the vast majority of the companies received a “yes” vote from 70 percent or more of their shareholders on their executive pay plans.
 
With only two companies surveyed receiving a majority of “no” votes, Say on Pay is nevertheless not lessening in importance.
 
“Egregious pay packages are by and large a thing of the past,” according to Robin Ferracone, a consultant with Farient Advisors, an independent executive compensation firm.  Ferracone believes that investors were “forgiving” last year.  She said institutional investors are set to grade companies’ pay plans “a lot harder” in 2012, although if companies’ performances and the markets improve, investors may not question executive pay much at all.
 
Narrowly approved pay plans may not be out of the woods.  Modest changes to the investor base could put these companies in jeopardy of receiving enough “no” votes to reject the pay plan.  Executive compensation experts advise corporate secretaries and investor relations officers to contact top holders at these companies to learn about investor concerns, and either explain the purpose of the questionable provisions, or modify the plan.
 
Going forward, the expectation is investors will more closely scrutinize how executive pay is
determined.  They want to see companies disclose how they have appropriately aligned performance with pay.  Ferracone believes this means more use of objective criteria, benchmarking and third-party diagnostic tools.
 
Finally, the SEC has delayed until the second half of 2012 the final rules on a number of pay disclosures under the Dodd-Frank Act.  Ira Kay, managing director at Pay Governance, a firm that provides independent executive compensation advice to boards, says the “pay versus performance” disclosure rules are difficult to craft, and the SEC may get ideas from companies tackling the issue on their own.  We’ll soon see.

 

— PondelWilkinson, investor@pondel.com
 
 

Dodd-Frank Act Defined for Public Companies

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With more than a month since the Dodd-Frank Act was approved and signed in to law by President Obama, the interpretative dust is beginning to settle.
 
According to Skadden Arps, The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affects almost every aspect of the U.S. financial services industry.  Its goal is to restore public confidence in the financial system and prevent another financial meltdown.  Put simply, it significantly increases regulation.
 
But, from a practical standpoint, what does it really mean?
 
Among other things, regulators will have the authority to take control of and liquidate troubled financial firms if their failure would “pose a significant risk to the financial stability of the United States.”  The Federal Reserve will have the authority to extend credit in “unusual and exigent circumstances.”
 
Most important from a public company standpoint, the SEC’s enforcement program will be enhanced, disclosure of executive compensation will become mandatory, and shareholders will have the right to a “say-on-pay” vote on executive compensation.
 
SEC Enforcement
 
New SEC enforcement programs will effectively “increase the flow of enforcement tips from potentially knowledgeable insiders.”  Skadden Arps recommends “robust compliance and self-evaluative programs for all entities that are subject to SEC regulation.”  The Act also expands the SEC’s authority to bring enforcement actions against those who aid and abet violations of the securities laws.
 
Corporate Governance
 
One likely outcome of the Dodd-Frank Act is increased contesting of annual director elections.  Activist investors will have more leverage to pressure companies to take short-term-focused actions rather than allow boards to focus on the long term.  Skadden Arps notes that this could keep qualified directors from continuing to serve on public company boards.  In keeping with PondelWilkinson’sview of investor communications, public companies should work to increase engagement with shareholders now, to develop and maintain long-term, mutually beneficial relationships.
 
Cravath, Swaine & Moore notes that public companies will also need to disclose in their annual proxy statements the reasons why the positions of chief executive officer and chairman are filled by the same person or by different people (although the SEC has already adopted rules requiring this disclosure).  In a follow on to last year’s New York Stock Exchange ruling, which eliminated broker discretionary voting with regard to director elections, the Act also prohibits broker discretionary voting with regard to shareholder votes on executive compensation matters.
 
Executive Compensation (Say on Pay)
 
During a recent speech, SEC Chairman Mary L. Schapiro said that investors’ “concerns must be addressed to fully modernize our system and ensure that our markets continue to foster capital formation and serve as an efficient engine for turning savings into jobs and economic growth.  And, I believe that the recently-enacted regulatory modernization legislation goes a long way to addressing them.”

 

— Laurie Berman, lberman@pondel.com