NB Opinion
ESG is both a Challenge and an Opportunity
Tanya Gass
NB Partner | Board Practice
Despite widespread recognition of the importance of Environmental, Social, and Governance (ESG) factors, smaller and mid-cap UK boards face significant challenges in embedding these principles into their core business strategies. This disconnect between recognition and action has become increasingly apparent, raising concerns about the long-term resilience of businesses in the face of mounting global challenges
Our research in partnership with BDO, among 200 UK small- and mid-cap board members, revealed a startling gap in ESG prioritisation. The majority of respondents did not rank environmental and social pillars as top risks for the next three to five years. More alarmingly, despite the well-documented climate emergency, environmental issues ranked a distant 11th on the list of board concerns, far behind immediate economic and people-focused challenges.
These findings should serve as a wake-up call for UK boardrooms. While the inclination to prioritise short-term survival during economic uncertainty is understandable, businesses risk undermining their own financial stability by sidelining ESG.
The dangers of ignoring ESG
The consequences of neglecting ESG can be both immediate and far-reaching for business, leaving aside the wider impact on society. In the short term, companies may face lost investor confidence, missed funding opportunities, and potential exclusion from increasingly ESG-conscious supply chains.
Looking ahead, the risks of inaction on ESG issues become even more pronounced. Companies that fail to address these concerns may find themselves vulnerable to sudden shifts in regulation or rapid changes in consumer behaviour. Such shifts could trigger abrupt costs or revenue losses, potentially destabilising even well-established businesses.
Addressing these issues now can offer protection from volatile economic cycles, secure access to emerging markets where ESG performance is rapidly becoming a key differentiator and enhance a company's resilience to regulatory and market changes.
Bespoke frameworks to tackle unclear guidance
As the role of the Non-Executive Director (NED) has evolved from a light-touch position to a more complex and demanding profession, today's NEDs are often tasked with overseeing strategic initiatives like ESG. While many face difficulties due to a limited understanding of these issues and how to apply relevant frameworks to their company’s context, many NEDs have the skills to navigate these complexities effectively – especially when provided with targeted training.
The ongoing ambiguity surrounding a universal definition of ESG can create hesitation in boards' development of a coherent strategy, underscoring the necessity for organisations to recognise that there is no cookie-cutter approach. ESG is not a separate issue—it’s systemic and must be embedded in every business decision, much like any other critical governance area. To ensure this integration, each company’s ESG strategy should be a standing item on board and committee agendas, featuring tailored approaches that reflect specific risks, opportunities, and industry demands.
It’s not about adopting a one-size-fits-all ESG framework. Businesses must evaluate risks and opportunities in ESG similarly to areas like AI or cybersecurity, establishing a framework that fits their specific needs and context. While larger FTSE firms often have established ESG frameworks, small and mid-cap companies may lack this clarity and direction.
This is where NEDs can leverage their experiences across multiple boards to identify the ESG elements most relevant to each company’s unique circumstances and challenges. By helping boards focus on the most significant ESG issues for their industry, NEDs play a vital role in the creation of bespoke frameworks that align with the company’s goals. Using their insights, businesses should establish tailored ESG strategies integrated with their overall company strategies, reflecting their unique circumstances and industry demands. However, for this process to be effective, it is essential that boards provide NEDs with the right tools, data, and resources to guide the company's ESG strategy effectively.
While there is no universal approach, boards must prioritise issues of broader significance to their business to shape their ESG journey. Simultaneously, there is a growing need for sector-wide coordination. Boards should not operate in isolation; they must align their approach with broader industry frameworks where available to ensure consistent progress. Industry trade associations, membership groups, and, where appropriate, regulators, all have a role to play in sharing best practices and shifting perceptions around the importance of ESG.
Identifying responsibility within the boardroom
Broadly speaking, companies have four options when it comes to board oversight of ESG: to set up a specific board committee, incorporate ESG oversight into an existing committee; integrate ESG into main board decision-making; and/or appoint an ESG NED ‘expert’. Again, no one approach fits all circumstances, but the goal should be full integration.
Increasingly, we are seeing ESG incorporated into full board decision-making with 31% of companies claiming to have fully integrated it into their Governance, according to the INSEAD Governance Centre.
For the first time in 2024, sustainability committees were referenced in the Financial Reporting Council’s Guidance associated with the Corporate Governance Code. The Guidance specifically mentioned that there has been a growth in the number of companies with ESG committees. While the establishment of such a committee is not a formal requirement, they can be an effective form to support the board in monitoring and overseeing sustainability targets, metrics and reports.
More worrying, however, is that the current level of ESG expertise and knowledge among NEDs does not always match these responsibilities. Our survey of UK board members clearly highlighted that NEDs understand the need for further education on ESG within their Board education plans. The message is clear. NEDs need (and want) upskilling.
ESG as an Opportunity
The challenge in the coming years for boards both large and small, is to ensure that ESG isn’t seen as a burden, but as an opportunity. With the right strategy and monitoring mechanisms in place, boards will realise ESG’s positive influence on profitability, cost reduction, waste reduction, employee engagement, and its ability to attract investment. Well-considered, and truly integrated ESG strategies and frameworks can help to develop businesses that are not only financially resilient but also capable of adapting to future risks.
The right approach will differ by sector, but the principle remains the same: ESG must be integrated into the company’s DNA. This will allow boards to address the short-term pressures of today while laying the groundwork for long-term success.
For NEDs, the call to action is clear. Boards must move beyond the purely reactive measures and embed ESG into the heart of business strategy. The time for hesitation has passed. In a world that is rapidly evolving to counter climate change, boards must rise to the challenge, or risk being swept away by it.