Boards Need to Push ESG Out of Silos: Prioritizing environmental, social and governance matters requires sustained effort.

• Author: Whalen, Dennis T.
• Position: ON THE GOVERNANCE AGENDA - Environmental, social, and governance

Environmental, social, and governance (ESG) issues are increasingly factored into corporate performance.

Many investors recognize that poor ESG practices pose environmental, legal and reputation risks that can damage the company and the bottom line. And they are increasingly aware that companies with strong ESG performance have a better brand image, a more loyal and stable customer and employee base, lower cost of capital, better access to financing and, ultimately, a greater focus on long-term value creation.

In fact, the US SIF Foundation estimates that $12 trillion, or one-fourth, of all professionally managed assets in the United States incorporated ESG factors at the beginning of 2018, up 38% in two years.

For companies and boards, however, transforming ESG from a siloed, ancillary issue to a core competency requires significant and sustained effort. ESG often means different things to different people. And there's no single model for organizations to follow.

Even for conscientious CEOs and boards, integrating ESG into corporate strategy isn't easy. Among nearly 150 directors we surveyed in October 2018, just 22% said ESG is directly linked to the company's strategy.

Still, the issue is on the radar for many boards; half of the directors responding to the National Association of Corporate Directors' 2018-2019 Public Company Governance Survey said they would like their boards to link ESG to corporate strategy.

To explore how boards are addressing these issues, the KPMG Board Leadership Center interviewed directors and officers of major corporations that are recognized leaders in addressing ESG and sustainability issues. Based on those conversations, we offer the following observations.

The catalyst behind a company's decision to focus on ESG issues is generally some combination of:

1) people understanding the importance of ESG and driving the company's focus;

2) an increasingly intense focus by the board and management on enterprise risk management and strategy, which elevates the strategic importance of ESG issues as a risk and opportunity;

3) expectations of investors, customers, and employees.

"ESG issues are not static, they evolve," as one director told us. "And if you look at our sustainability committee agendas, you will find that it's been a totally evolutionary process. The implications of climate change for our strategy, including fuel efficiency and our carbon footprint, have been on the board and committee agendas for some...