ESG QUICK TAKES

Cartica's perspective on ESG in Emerging Markets

DOES YOUR BOARD HAVE BEST-IN-CLASS

ESG PRACTICES?

(3-minute read)

As stewards of long-term performance, Boards play a crucial role in making sure companies manage their ESG risks and opportunities. As ESG gathers more scrutiny, it will be vital for Boards to ensure companies are able to navigate the evolving environment. Yet, many do not have the experience, skillset, or structure to do so. Cartica outlines strategies for Boards to spearhead their organizations' ESG efforts.

1. Define the Board's ESG governance infrastructure

The first step for responsible Board oversight is getting organized. Best-in-class Boards have a standalone Sustainability or ESG committee, though ESG issues can often initially be addressed by existing committees. An ESG-focused committee ensures appropriate time is dedicated to understanding material ESG risks and that a robust process to address issues is installed. From there, the Board and management can establish an ESG organizational chart that extends throughout the company to facilitate data collection, progress monitoring, and regular ESG reporting. A formal oversight structure also signals to key stakeholders the firm’s commitment to ESG values. 

2. Ensure ESG aligns with corporate goals

Board Members should work with management to set ESG goals aligned with the company’s overall business goals. They should ensure ESG risks and opportunities are integrated into the company’s long-term strategy. Cartica believes the Board of Directors can and should be a resource for management on ESG risks and opportunities. The Board should work closely with management to set ESG key performance indicators (KPIs) and build a framework to collect data and monitor progress. Above all, Boards should ensure that these KPIs are the most material to the business’s risks and opportunities.

3. Build Board knowledge of ESG issues

Many companies have Boards that lack the background to provide effective oversight of material risks. Companies should cultivate a Board that has ESG expertise, fluency, and openness to continual learning. One or more Directors should have ESG subject matter expertise, such as having a strong background in labor rights, data privacy, or sustainability. The entire Board should understand the company’s specific ESG risks. Boards also need to commit to continually update their understanding of the most material ESG issues.

4. Integrate ESG into compensation

Once companies have formalized ESG oversight and goals, Boards and management can explore linking executive compensation to ESG performance. Connecting compensation to ESG performance signals to investors that companies are taking these issues seriously. S&P 500 companies are increasingly linking executive compensation to the most relevant ESG KPIs and setting clear and time-bound goals to improve them.

5. Find ESG opportunities and help communicate ESG strategy

In addition to being aware of ESG risks, Boards should ensure their companies are evaluating the upside of ESG trends. This includes the potential for new technologies and products that meet shifting customer preferences. Cartica has seen that companies with strong ESG practices and policies often have a competitive advantage over their peers, especially if they communicate their practices effectively to the market. Boards should ensure that companies are supplying investors and customers with regular updates and strong reporting on their ESG work. This includes overseeing the company’s annual ESG report. This is the key document for investors to understand a company’s commitment to integrating ESG factors into its business strategy. 

BOARD APPROACH TO ESG OVERSIGHT

ESG is no longer a "nice-to-have" for most Boards. Companies are increasingly building approaches to ESG management at the Board level. According to a May 2022 survey by the Diligent Institute and Spencer Stuart, 43 percent of respondents required the full Board to be involved in the ESG oversight process and 15 percent had created a dedicated ESG/Sustainability Committee. Only 2 percent of respondents reported that their company lacked Board-level ESG oversight.

Note: Totals may not add to 100% due to rounding

Source: Diligence Institute and Spencer Stuart May 2022.

TOP 3 MUST-READS THIS MONTH

Asia starts its journey out of the ESG 'desert'

Investors seek out 'S' factor in ESG

Creating sustainable enterprises with digital technology and greener supply chains

CONFIDENTIALITY AND SECURITY NOTICE: This communication, including attachments, is for the exclusive use of addressee and may contain proprietary, confidential and/or privileged information. If you are not the intended recipient, any use, copying, disclosure, dissemination or distribution is strictly prohibited. If you are not the intended recipient, please notify the sender immediately by return email, delete this communication and destroy copies. Cartica Management, LLC and its affiliates ("Cartica") retain all proprietary rights they may have in the information. We cannot give any assurances that this email or any attachments are free of viruses or other harmful code, and emails are susceptible to corruption, change, interception and delay. We reserve the right to monitor, intercept and block all communications involving our computer systems. Please note that the contents of this email should not be construed as investment advice unless explicitly stated as such in the text of the email. Further, any information contained herein is neither an offer to sell nor a solicitation to buy any interest in any fund that may be advised by Cartica. An offer can only be made by the approved offering memorandum, which contains important information concerning risk factors and other material information and must be read carefully before any decision to invest is made. Finally, please note that (to the extent that performance information is contained in this email) - past performance is not necessarily indicative of future returns.