Shareholders Push Boards to Manage Social and Environmental Risks

Shareholders are demanding at increasing rates that boards of directors engage in more focused efforts to manage risks and explore opportunities derived from social and environment factors.  Investors are recognizing that social and environmental issues can have a significant impact on an organization’s business.

A recent thought paper released by Ernst & Young discusses that a growing number of shareholder proposals are particularly focused on corporate social responsibility and environmental concerns.  These growing trends highlight how shareholders are signaling to management and the board that they value effective oversight of social and environmental issues.  In fact, a 2010 survey by Institutional Shareholder Services shows that over 80 percent of investors believe environmental and social factors can have a significant impact on shareholder value over the long term.

Ernst & Young estimates that half of all shareholder proposals will focus on social and environmental issues in 2011 and expects future changes in corresponding regulations. As a result, more pressure has been placed on organizations to manage risks and opportunities associated with social and environmental factors. The thought paper highlights several ways to improve corporate social responsibility governance, including:

• Incorporating emerging environmental and social issues, as well as opportunities and risks, into the board’s agenda.
• Utilizing a sub-committee of the board to supervise the organization’s management of environmental and social issues.
• Ensuring that committees are composed of directors with the expertise necessary to assess the organization’s progress.
• Implementing a systematic process to establish key social and environmental issues relevant to the organization.
• Documenting progress and establishing accountability for environmental performance.
• Applying clear frameworks for reporting on relevant issues to the organization, such as a sustainability report.
• Obtaining internal and external assurance of reports to gain independent insights.

Lastly, in order to respond to shareholder proposals and anticipate future shareholder concerns, the thought paper recommends that organizations be prepared to do the following:

• Improve communication with shareholders and enhance disclosure in key areas.
• Make sure that directors’ skills are aligned with key areas of stakeholder concerns.
• Consider utilizing non-traditional performance metrics and goals to align risks, strategy, and compensation.
• Anticipate shareholder concerns using forward-thinking to improve preparedness.

Original Article Source: “Shareholders press boards on social and environmental risks – Is your company prepared?“, Ernst & Young, 2011