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ESG Priorities for UK Companies 2022

24 January 2022

Silvia Ricciardi

ESG

An incisive Environmental, Social and Governance profile attracts possible clients and efficient employees, setting the tone for the company’s commitment. This is the reason why the Institute of Directors has outlined a number of ESG priorities for 2022 applicable to most entities in the UK landscape of emerging and well-known firms.

The key macro-areas analysed by the IoD are stakeholders and business purpose, sustainability, inclusion and diversity, governance and executive remuneration.

 

Stakeholders and Business Purpose

Business activities should be guided by a ‘balanced stakeholder orientation’, not focusing on short-term shareholder returns. The IoD states that ‘the doctrine of shareholder value maximisation, which dominated corporate decision-making in the 1980s and 1990s, is increasingly incompatible with current societal challenges, given its tendency to promote short-term decision-making and negative environmental and social externalities.

A ‘purpose’ which aligns with the interests of wider society should be clarified by companies and it should not be purely connected with the generation of financial returns. The firm should provide a strategy to deliver a positive social and environmental impact.

 

Sustainability

The decarbonisation process needs to be accelerated in order to limit the extent of destructive climate change. But it must also occur in a phased manner, so that business can adjust in an orderly way to the challenges and opportunities of a Net Zero economy.

Among the suggestions exposed in the policy document, board members and senior executives are invited to acquire the necessary skills to oversee the transition to Net Zero, providing suitable board training initiatives or changes to board composition if required. Companies should also determine how they intend to transition their enterprise to Net Zero and announce a target date for the achievement of that objective. It would be ideal to become signatories to the Net Zero Pledge.

 

Inclusion and Diversity

The IoD reminds that ‘companies should aim to achieve gender balance on their board of directors and in senior executive positions. In cases where the under-represented sex forms less than one-third of board members, the company should describe how improved gender balance will be achieved […] In cases where there are no board members from an ethnic minority background, the company should describe how it intends to improve the situation.

 

Governance

The IoD believes that ‘a robust governance framework is essential in order to promote accountability, effective decision-making and sustain the trust of stakeholders. Large companies should split the role of a Chair and CEO, and include a significant number of independent non-executive directors on their boards […] A chair or board member should not remain in their role for an excessive period of time without a credible justification – given the importance of refreshing board composition and enabling the company to benefit from new experiences and insights.

 

Executive Remuneration

Performances should be key in getting a promotion and senior managers and executives should be rewarded in conjunction with the company’s progress in transitioning to Net Zero, in addition to considering that ‘pay and rewards structures should be designed to align the interests of stakeholders (including shareholders) and management.

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