How Do You Govern ESG?

Exploring Different Aspects of Governance Models for ESG

As ESG programs become more prevalent at the worlds leading companies and become more popularized through the middle-market enterprises across the US and Europe, a serious questions have been looming in many corporate boards and C-suites: How do you govern ESG? What does it even mean to ‘govern ESG’ and what does ESG governance even look like?

This was the inspiration and starting point for this article, to explore further what the definition is, and how we go about designing an effective ESG governance model.

We Started With a Design Thinking Session with Experts

Recently, IBM kindly invited a group of members of the Sustainability and Innovation Committee (SNIC) at the American Chamber of Commerce (AmCham) Belgium (which I have the honor of Chairing) and other sustainability related corporate members from AON, Keystone Law, Greenomy, Grant Thornton Belgium and IBM to a design thinking ‘Garage Session’ in Brussels to explore the topic of ESG Governance in more depth. We explored the current state of our knowledge and demonstrated that we had a lack of unified response and in fact, a diversity of opinions on the topic.

Source: IBM Garage workshop with AmCham Belgium

There is clearly a lack of sufficient convergence around the topic between these leaders, and so we dived into the current research on the topic to gain more insight.

Differentiating ‘ESG Governance’ from the ‘G’ of ESG

Let’s first define the term ESG Governance and differentiate it from the ‘G’ of ESG, which refers to corporate governance.

Corporate governance is a well understood and developed notion by financial and non-financial authorities worldwide about the management and oversight of the firm’s activities.

According to Investopedia, “corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.”

The definition from the EU’s recent Corporate Sustainability Reporting Directive (CSRD) defines the ‘G’ as a set of specific disclosures “to understand the undertaking’s strategy and approach, processes and procedures as well as its performance in respect of business conduct.” Further, CSRD describes this as the actions of an undertaking cover a wide range of behaviors that support transparent and sustainable business practices to the benefit of all stakeholders.

Clearly, these CSRD standard disclosures’ definition of the ‘G’ component has an overlap with the ‘E’ or the ‘S’ components of ESG, which aligns with the Harvard Law School Forum on Corporate Governance’s scholarly article from 2020 which states, “The ‘G’ covers the governing of the ‘E’ and the ‘S’ categories — corporate board composition and structure, strategic sustainability oversight and compliance, executive compensation, political contributions and lobbying, and bribery and corruption,” and goes beyond the traditional ‘corporate governance’ considerations.

ChatGPT described the difference well:

Whereas ‘ESG governance’ is a subset of the broader “G” in ESG, it refers to the specific assessment of how a company’s management and board are ensuring sustainability and ethical practices. It goes beyond traditional ‘corporate governance’ considerations to encompass environmental and social aspects of business operations and decision-making.

Converging on a definition

Going back to the IBM workshop, we found that there many interpretations of the definition, ranging from “structuring and taking decisions” through describing an “operating model”, and extended to “boards, plans, people, skills”, and “managing across silos”. Some of the opinions also included “managing impact from inside” and the articulation of “a clear roadmap of how to achieve prioritized ESG targets by including stakeholders, metrics, and reporting.”

However, the definition that got the most votes was “ESG Governance is a framework for rules and decision-making through the ESG lens.”

Source: IBM Garage workshop with AmCham Belgium

Design Principles for ESG Governance

Using the IBM Garage methodology, we set out to create some design principles for creating a framework for ESG Governance. We came up with four key design principles:

• Inclusion: ESG Governance must be designed in an inclusive manner through stakeholder engagement and across industry players so as to be standardized.
• Technology Enablement: Technology must be a core element of any ESG Governance framework as so much of the decision-making and tradeoffs revolve around having the visibility and transparency of cause-effect relationships.
• Ecosystem: Since all firms operate in and are measured within a networked ecosystem of industry actors (suppliers, complementors, customers), having an ecosystem view is an imperative when designing ESG Governance.
• Resilience: ESG Governance must cut across organizational boundaries and be resilient and durable to operate through organizational and industry transformation programs over time.

Ideas for ESG Governance Model Design

To bring these design principles to life, we then formulated key questions around the 4 key design principles to tease out some concepts:

• Inclusion: How might we incorporate diverse perspectives in the development and implementation of a standardized ESG governance model?
• Technology Enablement: How might we leverage technologies and innovation to facilitate the structuring of a standardized ESG Governance model?
• Ecosystem: How might we foster collaboration and knowledge sharing amongst industry stakeholders to advance ESG Governance toward leading practices and standards?
• Resilience: How might we ensure that our ESG governance model works effectively across the organization and is sustained over time?

Conclusions and Actions for ESG Governance Model Design

Based on these four questions, we were able to conclude with the following design considerations:

Inclusion

• Conclusion : Continuous collaboration across silos and within the organizations involving the right stakeholders and decision-makers is key to push forward the topic of the ESG Governance model design on the strategic agenda of the organization.
• Actions: this can be done through: a) employee ideas and surveys; b) interviewing the relevant stakeholders and through other means of engagement; c) perhaps using AI to pinpoint the most relevant considerations across the organization; d) further inviting outside perspectives; and e) more IBM Garage design sessions, JAM sessions involving people from different functional or organizational domains, town-hall meetings, and other means.

Technology Enablement

• Conclusion: Technologies can help us bring an ESG Governance framework to life but before getting there we need to better understand what the right metrics and parameters of data would be relevant for this governance model.
• Actions: This can be done through: a) more active participation and open discussions between technology teams and functional teams; b) data collection exercises and information sandbox initiatives to better shape the data logic; c) using AI to design the architecture and requirements for the appropriate governance model; d) building a data platform using agile methods to iterate through changes with the thinking and sense-making exercises of the ESG Governance model design; and e) infusing principles of business model innovation into the ESG Governance design methodology.

Ecosystem View

• Conclusion: By promoting open communication, sharing information, and encouraging cooperation, we can create an environment that facilitates the exchange of ideas, knowledge, and resources across the ecosystem. Fostering collaboration will require open standards and transparency. We must understand the benchmarks first and eventually adopt an open ecosystem model.
• Actions: This can be done through: a) creating open standards for the design; b) transparency of initiatives and sharing the model across the ecosystem; c) ecosystem partnerships and open networks; d) adopting an ecosystem perspective and inclusive approach across the industry; and e) conducting a benchmarking analysis across the ecosystem.

Resilience

• Conclusion: In order to effectively sustain an ESG Governance model within the organization or ecosystem, it is important to have a clear approach and management structure in place. An opportunity would be to have a service model that can take care of this cross-cutting work from and end-to-end perspective, and perhaps even operated by a third-party, using the notion of ‘stewardship’.
• Actions: This can be done through: a) having a transparent approach; b) integrating ESG principles into the business model of the company and the ecosystem; c) creating clear ownership and leadership structures; d) creating clear guidance and performance reporting across the ecosystem; e) conceptualizing an ‘ESG-Governance-as-a-Service model; f) creating financial incentives around the model; and g) creating clear roles and responsibilities within the ESG Governance model.