Companies are recognizing the very real benefits of creating value for all of their stakeholders rather than focusing exclusively on creating value for their shareholders. ESG investing has been elevated among investors due to the many risks confronting our world today. Whether or not it’s the “E”, the “S”, or the “G”, we can’t get it wrong in the long term and risk leaving it too late to make change.

ESG, broadly, involves seven key stakeholders: employees, customers, communities, suppliers and vendors, shareholders, the environment, and the corporation itself. Importantly, it is the shareholder community who often take on the initial financial risk. ESG is a longer-term approach to investing. Practically speaking, ESG is here to stay so maintaining a more informed understanding of ESG considerations is a prudent approach to both investing and corporate leadership.

Increasing large scale investments in ESG have developed quickly since the 1980’s with increasing impact on society, mainly due to major technology breakthroughs. For example, developments in technology augmented our rapid understanding of COVID-19 and accelerated the development, testing and delivery of vaccines from AstraZeneca, Moderna and Pfizer. This is one example of a rapid response public-private partnership working together in an evolving ESG-based investment-oriented world.

The board of directors’ primary role is to do two things: to identify and support the CEO, and to provide proper oversight from an independent perspective on behalf of stakeholders. It’s the management team’s responsibility to deliver and execute on strategy.

The key indicators for ESG are often found within proxy reporting and the information disclosed by companies within their annual report. I’m seeing the more forward-looking companies disclose more about their people, about how they’re addressing the climate, and their overall approach to governance.

And that a one key indicator of good ESG practices is to review what a company is disclosing in their annual proxy statement.

In terms of best practices regarding proxy disclosures, I find the best ones are readable and successfully tell a story beyond the taxonomy of ESG reporting to bring the numbers to life. Some companies are thinking holistically as a corporation about how their strategy aligns with the evolving ESG landscape.

First, ask the CEO and the management team to work on adding ESG discussions to the quarterly board meeting agenda. This allows the board to become increasingly educated as to how the company’s strategy does or does not align with ESG risks. Remember, due to board composition changes and board refreshment cycles, directors may be added or subtracted every few years. Therefore, new directors will impact the board’s oversight of ESG. As the board progresses its understanding of ESG, it’s also advancing its oversight of what the company is specifically doing in terms of both ESG activities within the company and, of equal importance, how they are reporting those metrics to the public and the investor community.

A quick follow-up on that too, is that companies are specifically assigning oversight of critical, more granular ESG tasks to different committees. So for example, the “E”, depending on the company, could be a part of both an audit and an ESG committee, which I’m seeing more and more as the name of a committee today. Moreover, ESG could be a reporting component for the compensation committee because the board may be putting incentives into compensation for senior executives around ESG.

From the private equity perspective, one could argue that as a GP you don’t want to fall behind on implementing good governance. I’m a big proponent of establishing a good governance focus early in the life of an organization, and that’s often the GP’s responsibility. If your portfolio companies are ramping up getting the disclosures and the reporting done earlier, it can be beneficial in the long run.

I mean, technically when a company is conceived, its governance process has started. A well governed organization should outperform a lesser one. I offer that founders, advisors and board leaders shouldn’t leave their governance development to chance.

It’s important to start by specifically identifying who’s responsible for what, in the areas of “E”, “S” and “G.” As a company matures, it will naturally do things like appoint a head of human resources, a role that’s overseeing a large percentage of the “S” piece given the alignment with corporate culture and human capital management. When is the right timing for having those teams in place respective to the size and shape of the organization? Earlier rather than later. Getting those things done earlier, makes an easier life for the CEO, other members of senior management, and ultimately for the board.

Well, it’s about accountability. I would encourage companies to approach ESG reporting quite seriously, partly because it’s being watched closely by a growing group of stakeholders, not just investors. This has been an interesting phenomenon to observe in the last three years, having been involved in governance now for over 20 years, to see such analysis intensify in this one area. There is no single, standard reporting framework – there’s ISS, SASB, TCFD and GRI, among many others – and these reporting frameworks are all evaluated by boards and executive teams who are also being evaluated by the investment community. ESG scrutiny is more in the spotlight than any single area I’ve seen in corporate governance in the last 20 years. This is a hot topic globally.

I observe more and more that boards and management teams are working to understand how ESG is impacting the corporate landscape. As the long-term caretaker of the company, boards are making ESG a quarterly agenda item. Many boards are accelerating ESG action by linking related targets and initiatives to compensation, for example, and publishing those targets in their annual proxies.

In the case of “E,” an interesting example is banking; some financial institutions are now looking into their lending portfolio and evaluating the potential ESG risk; if the past two years are a long-term indicator, companies that ignore this trend may be dramatically impacted by new environmental targets that are being considered over the next 10 years.

My hope is that ESG is fully integrated into our thinking, and not a moment the marketplace moves away from. I am hopeful that we will emerge from the last 20 years of evolved governance thinking in business to where it is more stakeholder oriented.

I believe that capitalism has solutions, but we arrived at the point where there was an overriding thinking around capitalism as always maximising profits by all means. I think that capitalism is about free enterprises and encouraging people to think creatively, to improve their lives and the lives of their communities. As we integrate the concepts around ESG, I think we improve society and it encourages young people to think about their futures in a more optimistic way.

For public-private partnerships, I think there will be a clear integration of ESG. I’m personally very optimistic today about the future for ESG investments. As I work with boards, the perspective or culture of business I hear today from directors is shifting toward understanding that ESG isn’t just some imposition being placed on businesses, but that it is a way of thinking about life in an improved way. This perspective creates a better work environment, which ultimately leads to better outcomes for clients, and therefore for investors and other stakeholders of the company.

That mindset and the subsequent adoption of an effective ESG framework opens a window for solutions that allow companies to in a real sense work with the planet rather than destroy it, while continuing to engage business in a capitalist way. So in closing, I think that an investment in ESG has become viewed as a healthy investment.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. or its subsidiaries.

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