Boardroom conversations almost always focus on enhancing shareholder value, while safeguarding or improving the company’s reputation. The problem is that not too many Board members understand the financial impact of ESG regulations and reputational impact of ESG-related controversies.

This inadequate understanding of ESG impact has resulted in a number of global and Indian corporate failures, such as the Volkswagen emissions scandal, accounting fraud at Satyam Computers, CEO/Promoter compensation controversies at ZEE and Balaji Telefilms an even ouster of the CEO in ICICI Bank. Evolving regulations like CBAM, carbon price on shipping and EU Emissions Trading Systems will substantially alter market dynamics and price competitiveness.

The above controversies and many others have resulted in legal repercussions, market cap losses, and reputational damage underscoring the urgent need for Board members to understand the full range and ESG issues. While the looming regulatory changes will without a doubt impact future profitability, Boards need to urgently recognise that the company’s impact on all stakeholders including customers, employees, communities, and the planet can substantially alter business and profitability outcomes. Hence, ESG metrics need to become integral to all decision-making.

Integration of ESG

Integration of ESG in governance requires a cultural transformation. In addition to the current profit centricity the Board needs to define and percolate ESG goals for the organization including transparency, long-term environmental sustainability, stakeholder engagement customers care, employee welfare and community development. To manage emerging regulation, the Board needs to aggressively define revenue targets for environmentally and socially responsible products.

To accelerate ESG integration in governance, investors are already pushing for aligning executive incentives with ESG goals, demanding the incorporation of ESG metrics into compensation structures and evaluating Board effectiveness using ESG metrics. Organisations also have to redefine the charter of the Nomination and Remuneration Committee, where understanding ESG issues become an important criterion for selection of Board members and designing compensation.

In conclusion, making ESG a boardroom conversation necessitates a concerted effort to transform cultures, engage stakeholders, strengthen governance, and align incentives. It requires a commitment to education, awareness, and technology adoption. As businesses embark on this journey, they signal not just a shift in rhetoric but a fundamental reorientation of corporate values toward responsible, sustainable, and long-term success. The key lies in fostering a boardroom culture that views ESG not as an obligation but as an integral part of a thriving business strategy.

The author is the Co-founder and CEO of ESGDS, a leading provider of comprehensive ESG (Environmental, Social, and Governance) solutions.