esg standards

Why Board Members Need to Understand ESG Standards

On Tuesday morning, January 16, Laurence Fink—founder and CEO of the investment firm BlackRock—sent an important letter to the CEOs of the world’s largest companies. In that letter, he explained, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

BlackRock is the largest investor in the world—thereby giving Fink’s voice a great deal of power and influence. But what exactly do his statements mean?

Put simply, Fink’s letter advocates for Environmental, Social and Governance criteria, which is commonly referred to as ESG. Investopedia defines esg standards as “a set of standards for a company’s operations that socially conscious investors use to screen investments.”

The environmental element examines how a company is handling their impact on the natural environment.

The social portion of the criteria scrutinizes how the company handles its relationships—with employees, partners, customers, its local communities, and more.

The governance component analyzes exactly what you’d expect: executive leadership as well as pay, auditing processes, shareholders rights, etc.

The idea that social responsibility can live in harmony with financial growth and success is a relatively new one. For most of the 20th century, business leaders and investors believed that philanthropic interests would negatively affect financial performance and bottom lines.

However, as the public’s perception of corporate America began to shift amid scandals in the late 80s and early 90s, some prominent business leaders saw the potential for social responsibility and corporate success to go hand in hand.

Fink’s letter takes that potential a step further by insisting, “Without a sense of purpose, no company, either public or private, can achieve its full potential.” In other words, his firm believes that ESG standards criteria are not only a helpful suggestion, but absolutely integral to the long-term success of any corporate venture.

New York Times writer Andrew Ross Sorkin highlighted just how momentous BlackRock’s position is: “Mr. Finks declaration…pits him to some degree, against many of the companies that he’s invested in, which hold the view that their only duty is to produce profits for their shareholders.”

Regardless of whether board members at other major corporations and investment firms agree, they will have to take note of BlackRock’s pronouncement as it illustrates the way that the world’s largest firm will make future investments. Many companies are likely to find themselves in the position of needing to reassess their relationship to the ESG criteria.

Directorpoint’s board management software provides an ideal platform for board members to discuss Fink and BlackRock’s position. Schedule a free demo of our easy-to-use software, so your company can make better decisions across the board.

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