2022 has the key hallmarks of a watershed moment for corporate sustainability, as broad pressure to tackle the climate crisis grows, and ESG regulation ramps up in the United States. We will see ESG emerge as a “license to operate” issue in 2022 and 2023, with access to capital on favorable terms increasingly at risk for those who don’t build rigorous measurement, disclosure, and performance practices. There are many reasons to be optimistic in the wake of the 2021 COP26 summit, as 153 countries put forward new 2030 zero-emissions targets and set mechanisms and frameworks for making progress; significant headway was also made toward financing the US$100 billion per year needed to address the most pressing climate risks. In addition, the US Securities and Exchange Commission is set to release a new set of regulatory requirements early this year to provide a standardized framework for reporting and supporting sustainable investment that covers climate risks and opportunity, human capital management, and boardroom diversity. To ensure progress toward our collective goal of a greener, more equitable world, sustainability disclosure is essential. And, for corporations, this new battery of regulatory expectations is one part of a fundamental change in their license to operate: acting to minimize their impact on the planet and on society is no longer optional; they are expected to step up and fill the gaps where the government and regulators are struggling to meet societal needs.

Some organizations will be able to confirm that they are on the right track, but the overwhelming majority will likely need to spend a lot of time and resources to catch up on what and how they have to disclose across a full range of ESG issues. Indeed, this report, Sustainability Disclosure Practices 2022 Edition: Getting Off the Sidelines, finds that sustainability disclosure in S&P 500 and Russell 3000 companies is underwhelming and patchy: 54 percent of the S&P 500 and less than a third of the Russell 3000 report on climate issues, for example. Some sectors (utilities, real estate, energy) are reporting far more often than others (health care, communications, information technology, financial services). Disparities among companies of different sizes and in different sectors persist even when looking at other metrics such as greenhouse emissions, supply chain risks, water use, and biodiversity exposure. It’s worth noting, though, that the larger companies, particularly in the utilities and energy sectors, have been under longer, more sustained pressure to address their ESG impact. Beyond climate, another area of continued scrutiny is board and workforce diversity, which will be reinforced by the SEC’s proposed rules. And the pressure is warranted: on average, among Russell 3000 companies, only 1 in 3 managers are women, despite women making up 43 percent of the workforce, and fewer than 1 in 10 companies report the number of racial or ethnic minorities in management positions.

One clear blind spot for many companies this report spotlights is how their end-to-end supply chain fares against the full range of ESG metrics, including secondhand impact on environmental and social considerations such as human rights. The report finds that only 6 percent of S&P 500 companies disclose the share of new suppliers that are screened using social criteria, and 5 percent disclose the share of new suppliers screened using environmental criteria. Yet climate-related supply chain disruption will affect all businesses, regardless of their current exposure to biodiversity, water stress, land erosion, pollution, and related risks. By assessing and addressing their ESG risks and impact, companies can make a strong case to investors, regulators, and consumers that they are managing those risks in a holistic and systematic manner.

Meeting new regulatory requirements will require additional time and resources, but however burdensome that effort may be, it pales in comparison with the cost of inaction. The price tag of not addressing climate issues could be crippling for the planet. A 2019 UN report warned of an unprecedented decline in nature, with 1 million species threatened with extinction.¹ The cost of loss of biodiversity or water sources can be assessed in dollars as well: a recent CDP water survey estimates that the potential financial impact of reported water risks was up to US$301 billion, while the amount required to mitigate those risks was US$55 billion—the former is five times higher.²

The change in the corporate license to operate also means that the role of boards and CEOs will evolve. Board members in particular will have to transition from a position of expertise that is often a natural continuation of a previous CEO or C-suite role into a very different place, where managing what they don’t know is one of their most important priorities. And that lack of knowledge on climate matters is a fact: a recent global survey Heidrick & Struggles conducted with INSEAD shows that nearly half of the board members surveyed think their boards have insufficient knowledge of climate implications for financial performance, and more than three-quarters say they need to increase their climate knowledge.

Internal and external experts could become instrumental in helping boards integrate ESG considerations into their agenda and decision-making process. They would also benefit from external validation of internal conclusions. Such efforts will build trust.

This new wave of regulations sends an undeniable signal to boards and executive teams that we are well past carefully constructed and well-meaning narratives that say companies care. Going forward, the ability to show clear results and precise data against ambitious targets will directly affect a company’s access to capital and ability to insure its business. That means boards and companies must approach ESG reporting in the same way as financial reporting and disclosure: same rigor, same risk philosophy. And being clear about where each company stands in addressing the most pressing issue of our generation is a duty for every organization, regardless of size or sector.

Foreword by

Jeremy Hanson (jhanson@heidrick.com) is a partner in Heidrick & Struggles' Chicago office and a member of the global CEO & Board of Directors Practice. He is co-lead of the Global Sustainability Office.

References

¹  UN Report: Nature’s Dangerous Decline ‘Unprecedented’; Species Extinction Rates ‘Accelerating,’ United Nations, May 2019.

²  CDP Global Water Report 2020.