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In the latest installment of the Salzburg Questions for Corporate Governance, Mathilde Mesnard, deputy director for financial and enterprise affairs at the OECD, explores how the demand for ESG accountability will require changes in corporate governance mechanisms and frameworks
This article is part of the Salzburg Questions for Corporate Governance series by the Salzburg Global Corporate Governance Forum
There is a strong and growing demand for environmental, social governance (ESG) investing. No need to elaborate, as the evidence is clear; ESG investing has evolved from marginal, values-driven niche investing to something mainstream and value-driven in a number of financial markets. Many factors have triggered this change, including the environmental urgency and, more recently, the COVID pandemic that further opened our eyes and focused our attention on the need for sustainability and resilience.
With this ESG demand, the pressure from shareholders, stakeholders, stock exchanges, regulators, and policymakers on companies to report on their ESG performance is increasing. But this reporting remains a significant challenge due to the lack of consistent data, comparability of criteria and methodologies, and reliability of most available ESG metrics and ratings. These factors often lead to a lack of correlation between the ESG ratings supplied by different providers. It even questions the alignment with effective sustainability in the long term, particularly the environmental pillar of ESG ratings with a de facto low‑carbon transition (1).
But beyond these quality and integrity challenges in ESG measurement and disclosure, which could compromise market integrity and erode investor confidence, the demand for ESG accountability requests other adjustments in the corporate governance mechanisms and frameworks.
First and foremost, boards need to be up to the challenge and equip themselves to monitor the company’s performance in the three dimensions of E, S, and G. They need to understand the fundamental value of ESG information and grasp its materiality for the company’s performance and resilience. This understanding requires boards to get the right skills to challenge management meaningfully and ensure effective oversight of the company’s performance in these different dimensions.
They then need to develop an ESG strategy with clear, credible, and measurable goals and decide which metrics are relevant for the specific industries, sectors, and markets they operate. They must organize regular discussions on the most relevant dimensions of ESG at the whole board level and not only within a specialized ESG committee.
Last but not least, the board must integrate the ESG performance into the parameters of executives’ compensation, as a clear signal that they not only have the “permission to care” but are required to focus their attention on this ESG performance. These changes in the boards’ responsibilities, skills, and mechanisms are the same required to ensure that a company conducts itself responsibly and carries out due diligence along its entire value chain, as required by the OECD Guidelines for Multinational Enterprises and related OECD Due Diligence Guidance.
These adjustments or changes might trigger, in time, a deeper shift in the corporate governance model toward a less exclusive focus on shareholders’ value but a better balancing of the interests of different stakeholders. The current debate on “financial materiality” versus "double materiality" could to some extent be resolved through "dynamic materiality", underscoring this shifting paradigm.
To fully integrate an ESG perspective in the governance of companies, board members must look after not only their shareholders’ value but how the company’s actions might impact its employees, the environment, and its community. Therefore, the upcoming review of the OECD Corporate Governance Principles will have to reflect these deep tectonic moves and adapt the corporate governance rules and practices to other pre-COVID trends related to, among other things, ownership concentration and digitalisation.
(1) OECD, ESG investing and climate transition: market practices, issues and policy considerations, Discussion draft for the G20 Sustainable Finance Working Group, July 2021.
Mathilde Mesnard is deputy director of the Directorate for Financial and Enterprise Affairs of the OECD. She provides intellectual leadership across the policy areas of anti-corruption, corporate governance, and responsible business conduct. In addition, Mathilde supports the coordination and management of the directorate’s program of work and its committees. Previously, she was coordinator of the New Approaches to Economic Challenges Initiative and senior advisor to the OECD Secretary-General. She launched an OECD-wide project on integrity and anti-corruption. From 2001-2009, she was an economist working on corporate governance and developed the OECD Guidelines on corporate governance of SOEs. Mathilde previously held positions as management consultant with Deloitte & Touche and Financial Analyst at Citibank. She holds a Ph.D. in economics from the École des Hautes Études en Sciences Sociales, an M.A. in finance from the École Supérieure de Commerce de Paris, and an M.B.A. from Drexel University, USA. Mathilde is a Fellow of Salzburg Global Seminar.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org. To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter