Boards & ESG: Who exactly is responsible?

There are a number of ‘right’ answers to this question. In fact, the only ‘wrong’ answers are ‘I don’t know’... or ‘no one’. 

With investors’ laser focused on ESG, boards must consider and review which ESG oversight model is best suited to the businesses they oversee.

Accountability and governance play crucial roles in the credibility of your ESG plans and performance. Here we look at why having a robust answer to the question above is important to your company’s credibility when it comes to ESG.

Who wants to know?

While all of your key stakeholders will have an interest in this area, it is your investors who are most concerned about the governance of your ESG agenda.

In a recent study, we interviewed the top 20 institutional investors of one of our clients and asked if there were any specific areas that drive their investment decisions.

Accountability at board level was mentioned by each and every one.

Investors want to understand how a business is managing its ESG agenda. They want to know who is ultimately making sure that the board owns this from a legislative point of view.

Disclosure rules are now forcing companies to be much more transparent about the various topics that sit within the ESG agenda, from climate risk management to cyber security management, to privacy data.

Your board needs to be able to demonstrate robust governance on the management of them all.

Do we need a dedicated ESG board committee and director?

There is no “one-size-fits-all” approach with respect to board responsibility for ESG oversight; some form a new committee, some give the duties to existing committees, others might nominate one board member to have oversight of all ESG responsibilities.

Whatever the approach, boards must identify synergies when distributing ESG oversight within the board and its committees. As ESG is a fundamental lens through which to see the context the business operates within, it is inevitable, and indeed expected, that some ESG concepts overlap with issues that corporate boards already prioritise – such as diversity, equity and inclusion, and board representation.

For example, a natural place to house oversight of corporate diversity efforts in this regard is often the nomination and governance committee, which may already have been tasked (for listed companies) with oversight of and compliance with the Financial Conduct Authority’s (FCA) board diversity disclosures.

Disclosure, legislation and guidance

Companies on the front foot are already disclosing how their boards oversee the management of the organisation’s impacts on people and the environment. But this will become a requirement for a significant number of companies as upcoming regulation mandating boards to demonstrate how they are taking accountability for ESG comes into force. Even for companies for whom the regulation doesn’t yet apply, the direction of travel is very clear.

In Europe, the upcoming Corporate Sustainability Reporting Directive (CSRD) mandates that qualifying companies must disclose how sustainability matters are managed at board level, by who, and how sustainability is integrated into directors’ incentive schemes.

The Corporate Sustainability Due Diligence Directive (CSDDD) will specifically obligate company directors to consider human rights, climate change and the environment in their decision making.

In the UK, listed companies are required to explain how their directors fulfil their duties under section 172 of the Companies Act which covers the impact the company has on employees, the impact of the company’s operations on the community and the environment, and the desirability of the company maintaining a reputation for high standards of business conduct. In addition to this, any UK company with EU-based subsidiaries will come under both the CSRD and CSDDD regulation requirements.

In the US, Securities and Exchange Commission (SEC) rules governing certain environmental disclosures create a fairly urgent (and possibly new) need to assign responsibility for environmental disclosures (and indeed expertise, if the rules are adopted as proposed).

Depending on its charter, the audit committee may be an appropriate choice to oversee climate-related disclosures, as audit committee members are typically responsible for ensuring compliance with public reporting and disclosures to government agencies. If the audit committee currently lacks a member with the environmental expertise that the proposed SEC rules encourage (and may soon require), an individual with the right background should be assigned to that committee. Alternately, other directors may need to be identified with the expertise required to ensure adequate environmental disclosure oversight.

How to get started

Work out where your most material ESG topics sit. Are they covered by existing committees?

If not, consider establishing an ESG committee, or expand your risk and audit committee.

The most important action is to ensure clear accountability is established. So, start with the structure you deem optimal for your organisation and retain a watching brief to understand what changes may be required to ensure effective oversight of what is an increasingly critical area for all boards.

If you would like to discuss how we can help you develop your ESG strategy, please get in touch.

This blog was written by Jane Dennyson from Thrive. Click here to read more on our partnership.