By Santhosh Jayaram
Recently I was invited to share my thoughts at a conference in Africa. The subject assigned to me was very intriguing: ESG—The Elephant inside the Board Room. It reminded me of the well-known fable ‘The Elephant in the Dark’, wherein a group of blindfolded guys are attempting to conceptualise what the elephant is like by touching it.
The initially individual feels the trunk and proclaims it is like a snake. The one who feels the ear says it is like a fan. The next touches the legs and summarises that it is a pillar, and the fourth one who feels the tail announces it is like a rope. The parable illustrates that one’s subjective expertise can be genuine, but it could be pretty distinctive from the objective reality.
Environmental, social and corporate governance (ESG), as well, is becoming interpreted in quite a few methods. For the sake of this piece, let’s take up 3 biases that frequently abound in the boardroom.
The initially is confirmation bias, which seeks details that confirms the initial judgment of the person.
It is achievable that due to the collective wisdom of the previous, the board would like to see proof that confirms a postulate. Can anyone have proof to show the future? There should be deliberate discussions on possible scenarios and hedging across possible futures.
The ‘inconvenient truth’ of climate alter is currently precipitating. The other inconveniences include things like diversity, executive spend, polluted air, polluted water, human rights, hazardous waste and plastics, amongst other folks. No resulting influence will be black swan events these are grey rhinos marching at us.
The second is choice bias, which benefits in unintended choice outcomes mainly because of a lack of representation in a sample. Of late, we are witnessing more and more providers requesting benchmark research about ESG. These requests come most normally with a sample list of organisations in the exact same sector and possibly in the exact same geography. There is a choice bias to this strategy, which closely ties with the herd mentality. Many enterprise models are impacted not by somebody in the exact same sector. With technologies proving to be an ultimate leveller, attempting to study equivalent industries can be a vital error.
The third one is hyperbolic discounting bias, exactly where the concentrate is quick-term gains rather than longer term. For lengthy, this bias in quite a few boardrooms has managed to maintain out the discussion on ESG, but any longer will be drastic.
In most boards’ remit, it is pretty clearly described that the board’s function is to create a technique for the enterprise’s lengthy-term results. ESG is the vital element to lengthy-term results, and that has been verified with information more than some time.
To be fair, it needs a higher level of conscious work to overcome these biases and chart a meaningful technique encompassing ESG. One of the proxies for the diversity of believed and lowering these biases is demographic and talent diversity on the board. ‘Great minds need not think alike’ must be the motto inside the boardroom. There must be voices inside the boardroom representing stakeholders who are impacted. It must include things like workers, buyers, vendors, suppliers, the atmosphere, and even the future generation.
The updating of influential groups like the WEF and Business Roundtable in favour of stakeholder capitalism signals the finish of Milton Friedman’s doctrine. Today, boards will need to be organised to include things like this alter. There have to be clear responsibilities and evaluation metrics for the boards’ performances on ESG, and this also wants to be transmitted to the executive level.
ESG is right here to keep and will continue to disrupt enterprise models and the boards that lead and direct providers with the suitable strategy by overcoming such biases will make certain the results of providers into the future.
The author is companion & head, Climate Change, Sustainability and CSR Advisory, KPMG in India