Companies and corporate boards will be most successful in achieving environmental and social goals if they start their ESG strategies not with the “E” or the “S,” but rather with the “G” of governance.

Sound corporate governance is the foundation of any long-term corporate strategy. ESG strategies are no exception. A company’s corporate governance policies will go a long way to determining how effective its strategy will be at addressing key ESG issues and maintaining investor support for the board of directors in the face of increased scrutiny from shareholders, regulators and other stakeholders.

Because it is the board’s job to assess all material risks and opportunities facing the company, ultimate responsibility for ESG issues falls to the full board of directors. As such, when it comes to sustainability, the first governance imperative is for all directors to develop a real understanding of ESG.

From an operational perspective, most boards assign ESG responsibility to the governance committee, sometimes with input from the audit committee, and often with overlap from other committees. Chad Spitler, the founder & CEO Third Economy, points out that although all board members should be educating themselves, it is especially important that members of these committees take the deep dive to “learn the language of ESG.” Large institutional investors are asking for meetings with directors with ESG oversight. In those meetings, they are weighing not only the strength of the company’s ESG strategy, but also the competency and commitment of the board to ESG goals. To pass that test, directors should be able to speak knowledgably about topics like the difference between Scope 1, 2 and 3 greenhouse (GHG) emissions, and be able to explain which ESG risks, and opportunities are most material to the business.

Leslie A. Brun, Lead Independent Director of Broadridge, notes that, in those meetings and in other communications, the board should be doing more than answering questions. To effectively convey the company’s ESG strategy to the marketplace, directors cannot just react to investor queries. To the contrary, Mr. Brun says they should be proactively telling the story of the company’s ESG journey. He added that rather than allowing outside third parties to set the narrative, board members should be the ones who define the company’s ESG risks and explain the strategy for addressing them.

Companies and their boards should keep several principles in mind when communicating that narrative. First, be transparent. Give investors an honest assessment of where the company was in terms of ESG risk at the start. Tell them where the company is today and explain the plan for the future. Second: Don’t settle for the minimum. Investors will not be satisfied with companies that are doing the bare minimum required by regulation. Show them you truly understand ESG risks and opportunities, and that the company is fully committed to a comprehensive ESG program. Finally, keep it simple. When creating an ESG program, don’t get distracted by the countless ESG metrics and standards available to corporate boards. Conduct a materiality assessment to determine what to track. Pick a few of the most relevant and material metrics, monitor them rigorously and report them honestly. TIP: Keep track of the metrics and disclosures that your peers and industry are providing since they will likely serve as comparison points for your stakeholders. That basic approach will have more impact with investors than any 200-page sustainability report.  

The fact that the board will play such a major role in defining and delivering ESG strategy illustrates a cold, hard fact about corporate governance today: Companies cannot afford to have weak board members. The days of stocking boards with retired CEOs who show up for meetings but contribute little are over. Companies today need directors with relevant skills who are highly engaged and capable of performing a range of tasks that includes setting strategy, building relationships with investors and driving the company’s story in the marketplace.

The quality and strength of a company’s directors will become more important than ever in the coming proxy season. The debut of the Universal Proxy Rule will make it easier for investors to cast their ballots in support or against individual directors. Dissident shareholders and activists will try to use this new leverage to target board members for replacement. Yumi Narita, Executive Director of Corporate Governance in the Office of the New York City Comptroller’s Bureau of Asset Management, says the new rules have the potential to make investor groups de facto “nom and gov committees.”

To maintain both the current ESG strategy and the integrity of the existing board, companies will have to do a better job explaining why board members nominated for reelection deserve investors’ votes. That means putting more effort into nominee bios and disclosing more information about skills and experiences that make the nominee a valuable part of the board. Companies should consider introducing a director skills matrix that highlights the expertise of individual directors—especially in HR, technology and other areas relevant to ESG—and shows how this expertise contributes to the overall strength of the board. 

Additional SEC rule changes making it harder for companies to reject shareholder proposals mean companies likely will face a growing number of proxy initiatives, many of which will focus on ESG. Here again the strength of the board of directors will be put to the test. Companies whose boards have engaged with key investors and forged strong relationships can expect these investors to spurn any extraneous proposals from “gadfly” shareholders. By the same token, companies who have devoted resources and attention to the governance of sustainability should win more support for their own ESG policies—and for the board members that help create and communicate them.