By Nicola Williams Partner at Eversheds Sutherland
Do customer voices in the boardroom improve ESG reporting and how can water company Boards remain engaged? Nicola Williams, Partner and regulatory lawyer in the Energy and Natural Resources team at Eversheds Sutherland, investigates.
“ESG is beyond redemption: may it RIP” stated Aswath Damodoran writing in the FT recently (23 October 2023).
Reports of the death of ESG are frequent in the investor community, and some multi-national corporates have already eschewed the term, even though the fundamental drivers of the Environmental, Social and Governance (ESG) descriptors are still highly relevant.
At the same time, company Boards are increasingly wary of greenwashing claims in light of recent investigations opened by the Competition and Markets Authority. Increased due diligence in relation to ESG has added to the burden of finalising annual reporting.
There was always a risk of something a bit “emperor’s new clothes” about the term “ESG”. At the heart of ESG is a focus on company purpose and communication with a wide range of stakeholders, already a key element of companies’ obligations under section 172 Companies Act 2006 and the Corporate Governance Code’s requirement to ensure that reporting is “fair, balanced and understandable”.
Whatever the future of ESG, organisations will continue to report on the steps taken to reduce the impact of their operations on the environment, and their positive impact on communities and workforces, within a framework of strong governance and values.
Part of the challenge of reporting against the broad scope of ESG themes has been the relative slowness in codifying numerous guidance sources. A set of mandatory ESG reporting standards, the European Sustainability Reporting Standards (ESRS), are set to enter into force in the EU at the end of this year.
Despite the UK government’s backtracking on audit standards reform, a new Corporate Governance Code is due to be published in the UK in January 2024. Comment from the investment manager community suggests that ESG ratings will become part of their assessment toolkit in the same way as GAAP accounting.
Even the existing guidance on reporting and good governance practice, however, has had an important impact. ESG has provided a positive framework within which Boards can challenge Executive and Senior Leadership teams on the things that matter.
To take one example, putting values on the risks and opportunities of climate change adaptation and mitigation in order to comply with guidance from the Task Force on Climate Related Financial Disclosures (TCFD), has provided an opportunity and a framework for Boards to engage in meaningful debate and problem-solving about important but sometimes intangible issues.
Analysis of some of the most significant corporate failures provides clear evidence that failure to engage meaningfully – possibly caused by concern to avoid conflict around the Board table, can inhibit good governance. There is a wonderful Ted Talk on this by Margaret Heffernan (author of Wilful Blindness (Simon & Schuster, 2011)). She argues that conflict, debate and argument allows everyone around the table to be creative, in order to solve problems.
ESG reporting may become part of the wider toolkit but could still provide a useful framework for fruitful debate. The key will be to avoid a tick-box approach to compliance despite the increase in codification and regulation which seems inevitable.
Water companies are in a particularly strong position to demonstrate a clear purpose for their organisations, providing a 24/7 service which benefits their communities.
Whilst water company Boards will be wary of greenwashing allegations, engagement with customers and other stakeholders (most obviously, eNGOs) at a grassroots level provides a great opportunity to ensure that those sometimes-awkward conversations and vigorous debate can continue to take place around the Board table, providing further opportunities for creativity and problem solving.
Ofwat has encouraged this approach in the water sector with a revamped approach to customer engagement for the current price review – “putting the views of customers at the heart of the process”. Each company is required to conduct its own customer research and to hold two public meetings in the course of 2023. The potential benefits of these sessions could last well beyond PR24.
Five ways that water companies can ensure customer voices are present in the Boardroom:
- ensure truly diverse representation at the Board table – Board members are inevitably also customers
- engage with third sector organisations that represent difficult-to-reach customer groups, as well as community groups and eNGOs
- get out and about and talk to “shop floor” operational teams about their direct experiences of dealing with customer issues
- establish youth and shadow Boards
- encourage – and allow time on the agenda for – open debate and wide-ranging conversations around the Board table, so that the implications of decisions for customers can be worked through.
The value of customer voices in meeting ESG expectations cannot be understated. In what can be an ambitious and unwieldy task of bringing together multiple parts of a business to satisfy reporting requirements, customer voices can be the “golden thread”. The death of ESG has been overstated. And companies have an opportunity to use customer voices to breathe life into ESG reporting.
