ESG: 10 considerations for UK directors

The COVID-19 crisis will strengthen the ESG momentum as society re-prioritises what is most important. “We are never going back to the place we started from”⁽¹⁾. We are already seeing a greater focus on the ‘S’ and the ‘G’ (whereas previously the focus was much more on the ‘E’ ). People are very interested in how companies treat their employees, customers and suppliers during the crisis and following it. In April 2020, Legal & General Investment Management urged companies to treat staff and suppliers well, warning that those who failed to do so would be held to account. And we are seeing governance coming into even greater focus – there is much discussion and consideration of how to govern during the crisis in terms of factors to consider, practicalities of remote decision-making etc.

ESG was already getting an ever-increasing focus due to a mixture of factors, such as changes in society’s expectations, trust in business, the viewpoint of younger people, regulation, performance and more. As a result of this crisis, the link between global risks and those companies with socially acceptable conduct and sustainable businesses is becoming more apparent.

As ESG factors continue to be a focus area for shareholders and other stakeholders, so they are a focus and opportunity for businesses. And this is both ESG relating to the actual business type and the type of investments that are made and also internal ESG – looking at how businesses themselves are operated. Regulation and pressure from stakeholders, along with moral and ethical concerns, are resulting in an ever-increasing need for all companies to embrace ESG factors fully and to communicate how they are addressing them. And this is being fuelled by evidence of ESG financial return and value.

We’ve created a top 10 checklist to help directors focus on ESG requirements:

1. How do ESG factors affect your company?
2. Do you need an ESG strategy?
3. How does ESG impact your decision-making?
4. How does climate change affect your long-term sustainable success?
5. Can you show you understand the ESG impact on your shareholders/stakeholders?
6. Is your board diverse enough?
7. What about ESG and your workforce?
8. Does ESG impact how you market your products?
9. How does ESG affect your supply chain?
10. How are ESG factors affecting M&A transactions?

It focuses on UK directors of companies that are not FCA regulated and therefore not subject to the Senior Managers & Certification Regime. For those firms, it contains matters of broad relevance to them and to the companies in which they invest, finance or advise.

It should be read alongside our other client insights such as Top 10 things asset managers need to know about the EU ESG Initiative. See also our Sustainable Financing and ESG Investment feature.

^{1 Professor Linda Gratton, London Business School}