The Critical Role ESG Plays in a Diversified Board

April 5, 2023

At a glance

  • Main takeaway: The dynamic of the boardroom has evolved over the last decade largely due to the adoption of ESG. While there is no “easy button” for ESG, board diversity can change the status quo and lead to better decision-making.
  • Impact on your business: It’s critical to ensure that the composition of your board is not homogenous because a diversified board will lead to better decision-making through a deeper understanding of different constituents of your employees, customers, suppliers and community. 
  • Next steps: Aprio’s ESG Services team can guide you through the process and help you determine your board’s approach to ESG. Connect with our team to learn more.

Are you ready to start your ESG journey? Contact our team for a complimentary consultation.

The full story:

No matter which side of the environmental, social and governance (ESG) lens your organization falls on, there are inherent risks. Why? Because ESG is complex with many nuances to consider, specifically at the board level, whose job it is to understand risks while focusing management on what’s important to achieve strategic priorities. 

ESG has emerged as a crux in the decision-making world because boards face an increasingly changing and competitive environment, where the risks and rewards of strategic and capital allocation decisions are amplified. Board diversity enables greater understanding of key constituents, and in doing so, can help organizations make more effective decisions that grow revenue and save costs while also positively impacting the environment and society. However, boards run the risk that suppliers, vendors or communities may not share the same ESG perspective thus risking potential market share loss.

Consider BlackRock, one of the three largest asset management firms in the world, who is caught in a political crossfire. Over the last several years, BlackRock and CEO Larry Fink have become leaders in ESG advocating for sustainable efforts at a corporate level. Despite the lengths they have gone to shape the fundamentals of sustainable investing, it has become apparent that BlackRock and Fink can’t seem to please everyone as they are deemed too “woke,” yet also chastised for not doing enough to advance ESG. While BlackRock continues to be wrapped up in this unfavorable ordeal, some states and governors, who do not share the same viewpoints on ESG, have begun divesting BlackRock from their pension funds.

So, what can boards do? Remember, ESG is not a fad, it’s an operational and risk management change and companies must reframe the way it is thought about, starting with diversifying the boardroom.

The value of a diversity at a board level

We’re all shaped by our own experiences, and those experiences have gifted us with different insights and ways of looking at the world. Two people can look at the same situation and reach very different conclusions. These differences are valuable in a board setting. More diversity at the board level can enhance the decision-making process through considering alternative or underappreciated perspectives and reduce the possibility of groupthink. If a board acts and thinks the same, they get locked into biases which can increase challenges, put a company at a disadvantage and potentially jeopardize the company’s existence.

Remember in 2021 when Engine No. 1, a relatively new climate activist hedge fund, surprised nearly everyone when they won three seats on Exxon Mobil’s corporate board? This proved to be a major wake-up call for companies slacking on ESG, especially the oil and gas industry who are feeling pressure to do more to mitigate long-term climate risks by exploring clean energy alternatives. But it also is a major proponent to the value of championing different ways of thinking and canceling groupthink.

It is critical to ensure that the composition of your board is not homogenous. It should be comprised of smart, motivated people from different backgrounds and experiences, including those who may not have been in the boardroom before, but can lend their voices to better speak to, connect with and understand your employees, customers, suppliers and the community.

The key roles governance plays in a boardroom

When you breakdown governance from a board perspective, it’s really governing the decision-making process, overseeing senior management, holding them accountable to your company’s objectives and mitigating material risks. There are two functions of governance:

  • One focuses on the role that the board plays and its composition so that risks are appropriately managed.
  • The other, is the actual part of performing the governance. So, working with senior management to ensure big picture strategies and initiatives are being executed by encouraging and challenging upper management to think about the business differently.

A diversified boardroom can provide insights into your customers that can realistically drive value by better aligning marketing strategies, the ability to sell into differentiated channels and lead to different decisions on capital allocation.

The bottom line

Whether your company is an advocate of ESG or not, there is no easy button. To put it simply, ESG is tricky, and either way you go, you could be exposed to risk. The good news is, while ESG is complex, bringing in an advisor like Aprio can help you better understand and think through your board recruitment with an ESG lens.

Aprio’s ESG team can guide you through the process and help you determine your board’s approach to ESG. To learn more about ESG, connect with our team for a complimentary consultation.

Related Resources/Assets/ articles/pages

What Does an ESG Score Really Say About Your Company?

Create Value in Your Company with an ESG Lifestyle Change

ESG Impacting Levers: How Private Equity Firms Can Drive Value Creation

A Force for Change: Limited Partners Want Top Executives Who Believe in ESG

About Aprio’s ESG Practice

Are you ready to start your ESG journey? Contact our team for a complimentary consultation.

Stay informed with Aprio.
Get industry news and leading insights delivered straight to your inbox.

Recent Articles

About the Author

Simeon Wallis

Simeon is the Chief Investment Officer of Aprio Wealth Management and the Director of Aprio Family Office. Simeon brings two decades of professional investing experience in publicly traded and privately held companies, as well as senior-level operating and strategy consulting experiences.