By Stuart R. Levine
Published In, Forbes

Corporations are now moving from an increasing awareness of ESG (Environment, Social and Governance) to a more proactive stance. Directors are considering what impact ESG has on their role in overseeing strategy and succession planning. The catalyst for this thinking is coming from investors and stakeholders. They are focused on making sure that boards effectively address issues of climate change, waste, pollution, water resource depletion (Environment), working conditions, human rights, employee diversity, gender inequality (Social), board diversity, ethics and executive pay (Governance).

Why is this happening now and is this awareness here to stay? What does it mean to you, your company, your management and your board? What responses needs to be made? Companies need to be increasing their communication to the Street on how ESG is impacting their business strategy and its alignment with their employees, customers and shareholders. This spans the awareness of embracing diversity in the workplace and the environmental impact of not only your business, but the entire supply chain of goods and services you purchase and the impact it has on your customers.

According to Rivel Research Group, a firm that specializes in delivering actionable insight based on in-depth measurements of the investment community, ESG has six pillars: enhancement of market and accounting performance; lowering the cost of capital, a means to engage key shareholders; improving business reputation; fostering new revenue growth through product innovation; and aligning company and strategies with increasingly diverse constituents of the three-legged stool – customers, employees and shareholders.

The strong focus on ESG is coming from significant institutional investors like BlackRock and Vanguard, who are taking a longer view of performance. These institutional investors are massively impactful in influencing the allocation of capital, share price and the election of board members. Now, in addition to the ongoing short-term quarterly reporting pressures, there are issues such as environmental risk mitigation and gender diversity that large investors believe can impact the bottom line. Investors have ongoing concerns for the future that need to be addressed. These issues include aligning business strategies for the greater good and being responsible to the business communities they serve.

Last year as an example, the $2.6 trillion asset manager at State Street made it clear to the roughly 400 publicly-traded American companies that they will not stand for lack of diversity on boards. State Street voted against the re-election of the chair or most senior board member of the governance or nominating committee on male-only boards.. Their stance has been supported with financial research conducted by both Credit Suisse and MSCI published in the last three years that companies with female directors generated better returns than those without.

ProxyPulse, based upon analysis of 3,379 shareholder meetings held from January through June 2017, reports that BlackRock, Vanguard and Fidelity voted for shareholder proposals related to climate change disclosure. 66% of Institutional shares were voted for climate change proposals vs. only 13% of retail shares. You have to be current in your thinking about the best deployment of human and financial capital and companies need to reflect the needs of their customers, employees, shareholders and stakeholders.

ESG is not just a temporary “feel good” exercise or the latest buzzword . Most companies today are serving diverse markets and should have board members with diverse backgrounds and experiences to make better grounded financial decisions on their products and services provided. Instead of winking and nodding or just checking the box, this is about very sound business that acknowledges strong demographic shifts in society and the consumers they serve.

The best companies are responding effectively and positioning themselves for future growth. They are making decisions that will speak to the talent pool in the workforce today such as Millennials that make up 34% of the labor market, and Gen Z that represents 21% of the U.S. population and growing in consumer market importance. As an impactful example, 47% of Millennials believe that CEOs should speak out on issues that are important to society and would be more loyal to their organizations if they did.

New Bosses Of The Boardroom: Millennials and Gen Z

The most important advice I can provide to directors and boards is to continue linking ESG to your strategies , associated risks and continue to learn from current information. Environmental and social discussions will continue for many years and reflects the evolution of business and capitalism. Despite the constraints that ESG may place on their organizations such as higher labor costs, increased costs of goods and increased costs of human capital the fact is that focus on ESG benefits massively outweigh the potential risk of increased cost. ESG policy can assist in attracting better human capital, establishing more reliable supply chains, avoiding conflicts that are distracting and innovating new products which can make a huge positive impact.