The current unprecedented challenges to ESG commitments – will business lead the way?

Until the start of the war in Ukraine at the end of February, there were plenty of signs that the conversation in the boardroom around the ESG agenda was progressing at pace, with a particularly strong focus on climate. Increasingly stringent disclosure requirements, accelerated focus on sustainability, with momentum towards action rather than mere commitments, all seemed to spell good news for the net-zero agenda.

However, as we look with horror at what is increasingly looking like a prolonged conflict in Ukraine, add in soaring energy prices, economic and political uncertainty, the cost of living crisis with increasingly fragile political leadership, some commentators are questioning whether Climate will take a back seat, and will boards continue to hold their course?

Investors are holding the line on climate

 Although there has been significant coverage of the scramble to replace Russian gas, with the resultant coal fired plants back online, and increased investment in E&P, we also continue to see exponential investment in clean energy. Equally, climate activists continue to push for more aggressive proposals with asset managers rejecting or unwilling to follow environmental proposals. So far this year, only 20% of environmental proposals have passed – so investors it appears that investors are holding the climate line.

 The “S” of ESG is coming to the fore

Ukraine’s tireless campaign of keeping Western media and government attention on its plight is widely regarded as one of its biggest successes in the fight against Russia. The fact that this approach has managed to drive so many firms to pull out of Russia is absolutely unprecedented.

However, even before Ukraine, Covid-19 shone a spotlight on the inequity of the wealth divide, DE&I and of course mental health. Now, the fallout of the Ukraine conflict has rightly catapulted companies’ social values straight into the spotlight with Board’s facing the “spotlight of shame” on firms that maintain their Russian operations.

The social shift that we previously witnessed after a former finance minister for Ukraine wrote an impassioned piece in the FT, in which she challenged the business community to “walk the walk when it comes to [the Russian government’s] serial social and governance violations,” are yet another examples of Boards needing to lead on ESG in ways they may not have felt they needed to before. Equally we understand that some board discussions, particularly in Northern Europe and Scandinavia, have had to finely balance an abhorrence of the Russia’s actions, not only with often multi-billion dollar sunk costs, but critically with their duty of care to valued Russian employees and their families. It is clear that stakeholders expect corporations to strike the right balance here. Indeed in the US, a full 70% of voters strongly agree that CEOs have a role to play in income equality, while 64% say the same of racial equity and 35% of maintaining democratic stability. By comparison, only 32% of voters care about CEOs helping to maintain national infrastructure.

Risk, Governance and Reputational Risk

The Ukraine conflict also brings governance into the spotlight, particularly across the financial services sector. Banks and other financial firms have had to rapidly ramp up risk management protocols and operations in response to the aggressive sanctions imposed by Western governments. Professional services firms have also had to carefully review who is “acceptable” as a client; with media shining a spotlight particularly on leading international law firms.

Balancing the Focus

Given the increasing value placed on authenticity and transparency, merely paying lip service to the idea of addressing racial inequity, income inequality or environmental commitments is risky indeed -as we have seen with recent high profile “greenwashing” scandals. It is clear that ESG across all its facets need to be embedded and aligned across all company policies, processes, and practices if executives are to gain a strategic advantage from being socially inclusive and environmentally responsible.

The ongoing uncertainty being witnessed throughout the world is showing no signs of abating, and it’s quite likely that external factors will continue to throw new curveballs for executive teams and their Boards. However, these trying circumstances offer the best possible opportunity for firms to demonstrate that even when the going gets tough, they’re prepared to stand by their commitments to do the right thing. It is a question of leadership.