Leslie Noble is a founding principal of StrategyCorp, a strategic advisory firm, and routinely advises boards and companies on environmental, social and governance risks.
In the 25-plus years I have been advising companies on managing the risks they face, I have seen a massive growth in the types and complexity of risks being encountered. Every decade or so there is a step-change evolution as new threats, driven by new social or business standards, arise.
The age of the ethical investor is fully upon us and companies face an unprecedented level of scrutiny on a wide variety of issues, and not simply around performance and returns, reputation, safety, legal or regulatory matters. Today, companies are assessed through multiple lenses, including a “values lens.”
The rising power of millennials and the next cohort of Gen Z is transforming the way products are bought, opinions are formed and reputations are built and lost. This wave is affecting which government is elected, which policies and regulations are pursued and, ultimately, what much of society deems acceptable.
Ethical investing is no longer the domain of Scandinavian pension funds. It is a philosophy that permeates most investment decisions and is creating pressure on many service providers to restrict who they work for. Today many companies are finding that it’s not just their institutional investors who are challenging them, but also their lenders and insurers as well – because their customers are challenging them to become “better.”
But it goes beyond better behaviour. The political environment means that companies don’t have to just be better, they must also be perceived as better. Recent pipeline protests and rail blockades demonstrate how the perception rather than the reality of social licence is being used to justify actions that only a few years ago would have been unacceptable.
The corporate response to the coronavirus and COVID-19 will also challenge public confidence in companies as they struggle to find the right balance between community safety and economic viability – and the political environment will once again create different and fewer fact-based hurdles to be overcome.
These types of risks are the next big thing, much as consumer-protection acts Sarbanes-Oxley was in 2002 or Dodd-Frank was in 2010. However, there is a fundamental difference. These new types of issues are not easily regulated and they aren’t always matters of right or wrong, but rather are often subject to interpretation. Issues such as these, with significant nuance, are exceedingly difficult to predict or manage.
Constant and wide-ranging trend analysis has become an indispensable tool in visualizing and assessing new threats before they become value-destroying realities. Probability assessments, once the domain of the finance team and largely reserved for internal rate of return calculations, are now key components of the prospective issue matrix – the domain of the public-affairs team.
Historically, corporate organizations have viewed public and corporate-affairs departments as cost drivers. Increasingly, these new risks are becoming the “bet the company” issues, and it’s not hard to see why those who manage them effectively are driving positive bottom-line impact.
As entire value chains come under pressure, environmental, social and governance risks are a growing priority that every corporate board has a strategic and fiduciary responsibility to not only simply understand, but also to have the experienced judgment necessary to capably and effectively advise and support management.
While ESG rating agencies allow for measurement of past performance against peers and are good reporting tools, they can’t replace the individual perspectives of seasoned corporate directors in guiding forward-looking strategy.
With the goalposts constantly changing and the feeding-frenzy environment created by a social media savvy generation, experience is critical to effectively steward corporate value. Failure on the ESG file risks the wrath of the public, depressed share price and ultimately invites shareholder backlash.