WASHINGTON, DC – As more and more companies consider environmental, social, and governance (ESG) factors in their decision-making, many believe that the board of directors has a responsibility to ensure that these factors are taken into account.
Simone Grimes, an independent board member and Chief Financial Officer at Acadia Insurance, says that ESG considerations can significantly impact a company’s bottom line.
“Ignoring them could put the company at a competitive disadvantage,” Simone Grimes explains. “Investors are increasingly interested in knowing whether companies take into account ESG factors in their decision-making.” Accordingly, the board of directors has a fiduciary duty to shareholders to consider all factors that could impact the company’s value. Failure to do so, she emphasizes, could result in legal liability.
Environmental, social, and governance (ESG) factors are becoming increasingly important to investors and regulators.Institutional investors are integrating ESG considerations into their investment analysis and decision-making process and regulators are enhancing disclosure requirements.
“The board of directors has a responsibility to consider the implications of ESG factors for the company’s long-term success,” Simone Grimes notes. “The board should assess how ESG issues could impact the business and ensure that management addresses these issues.”
Simone Grimes believes that ESG factors can significantly impact a company’s financial performance. “The costs of environmental regulation can be sizeable, especially for ongoing cleanups, but in most cases, it can be a good long-term investment.” She understands that businesses will often lobby to reduce regulations they see as unfair but believes some regulation is necessary to protect the public from environmental and social risks.
“ESG, or environment, social, and governance, refers to the role of the company in mitigating climate change and making progress on social goals” Simone Grimes explains. “The environmental factors relate to how the company treats the environment, from the extent of GHG emissions that arise from producing its products to its handling of waste, consumption of energy, and investments in sustainable technologies.
Social factors refer to human capital management; specifically how a company treats its workforce, its customers and the community in which it operates. Corporate governance refers to the boards effectiveness (including DEI and shareholder rights), transparency in governance, the comapny’s audit controls and the extent to which the company adheres to best practices and abides by the law.”
Simone Grimes points out that there are many ways a company can improve its ESG performance. “The greatest resource available to boards of directors is benchmark data, which evaluate where the company stands relative to its peers across all metrics. This allows boards to make data-informed-decisions about where to make critical investments.”
Simone Grimes states that each company’s approach to ESG performance will be different, but there are some general best practices. She says that all companies should have an ESG strategy and policy that defines who in the company is responsible for the execution of the strategy and how ESG metrics will be quantified, measured and reported”
“It is important to communicate a company’s ESG strategy to shareholders, institutional investors and regulators” Simone Grimes says. “Transparency is an important part of a successful ESG strategy.”
Simone Grimes reveals that there are ways to be transparent with your ESG strategy. “First, you must engage with your shareholders ahead of the proxy proposal and voting process to understand shareholder expectations. Use this as an opportunity to be open with your stakeholders about your approach to ESG, share quantifiable goals, as well as the constraints the organization faces in balancing ESG goals with financial performance.
Next, ensure stakeholders understand the time it takes to implement the organization’s ESG strategy, and report on progress regularly to manage expectations about progress. Lastly, organizations need to engage in the regulatory process and be prepared to adopt ESG regulations as they evolve.”
Simone Grimes also emphasizes that stakeholders must trust that you will be committed to your ESG strategy and remain transparent. The SEC’s recent pronouncement on greenwashing clarifies that misleading claims about ESG metrics and sustainable practices will not be tolerated.
Simone Grimes, CPA is a CFO, independent board member, and entrepreneur who has a BSC in Accounting, MS in Finance, and MBA from Cornell University. She has held financial reporting roles across various industries, including financial services, public accounting, tech and consumer products.
Simone Grimes recently led a portfolio of sustainable agricultural tech (AgTech) companies through rapid growth, complex M&A strategies, and an eventual exit that yielded substantial returns to investors. Simone Grimes is committed to strengthening a company’s value through board level engagement in ESG strategies.