Sustainability and the Board’s Governance Role

Findings from a University of Oxford and Protiviti global survey suggest that North American companies are lagging behind their counterparts in Europe and Asia-Pacific in terms of ESG engagement. For example, only one in four surveyed business leaders in North America is of the view that ESG strategy will be extremely important by 2032. But that number jumps to nearly six in 10 in Europe and seven in 10 in Asia-Pacific. In addition, less than 40% of North American leaders expect greenhouse gas emissions to decline over the next 10 years, whereas 81% and 88% of leaders in Europe and Asia-Pacific, respectively, have such expectations.

There may be many reasons why the data suggests different levels of commitment, including that some North American organizations may be underrating the importance of stakeholder expectations and regulatory developments that drive companies in other regions to advance their environmental and social sustainability contributions. Is this possibly a lost opportunity? Would an ESG focus serve as a catalyst for embracing a longer-term view toward sustaining the enterprise and building trust in the marketplace?

For boards that answer these questions affirmatively, what can they do to elevate their game on the ESG oversight front as well as leverage the interest that exists in at least part of the C-suite?

Below are 10 steps for these boards to consider.

Engage stakeholders.

Boards should consider employee, customer, supplier, investor and other stakeholder interests in the context of maintaining financial vibrancy, sustaining the organization’s strategy and business model, and delivering long-term shareholder value. Interactions with shareholders, employees and other key stakeholders are opportunities to learn about their respective interests and concerns and build relationships based on trust.

Set the context for the ESG agenda with organizational purpose.

Directors should develop a shared view with executive management regarding the organization’s purpose, including the promises for which its brand stands. Purpose focuses on why the organization exists and how it will benefit the markets it serves. It lays the foundation for establishing sustainability targets and priorities while framing a narrative to the street that will resonate with stakeholders.

Integrate ESG considerations with strategy and capital allocation.

ESG should be integrated with the overall corporate operating strategy rather than rendered to a mere compliance, check-the-box disclosure activity. The pace of change in the marketplace behooves directors to be well-informed about market forces, so they can be adaptive and agile in adjusting decision-making and information-gathering structures and can pivot in response to significant market developments. It also helps to allocate sufficient agenda time and funding to strategic issues that relate to key environmental and social issues in the context of assessing strategy, risk and capital deployment.

Assess board ESG capabilities.

The board chair and committee chairs should periodically evaluate the board’s expertise with respect to environmental and social matters and the organization’s changing needs to set a context for planning board succession and onboarding new members.

Evaluate the board’s ESG oversight process.

ESG-related opportunities and risks, supported by data and metrics, should be included within the scope of the board’s overall oversight process. To that end, it may make sense for directors to review the board committee structure (including the need for a separate ESG- or sustainability-focused committee) to ensure coverage of ESG priorities while also retaining a “whole board” view of the full picture with respect to ESG strategy and reporting. Based on the review’s results, committee charters should be revised accordingly.

Set board reporting protocols.

To set the foundation for ESG oversight, the board should establish the content and frequency of the ESG reports it is to receive from the company, including management’s determination of material ESG issues and periodic briefings of the company’s current ESG market ratings and rankings (and their implications). Directors also need to work with management to define the board’s involvement in significant decisions regarding environmental and social matters, including company positions on sensitive social and political issues.

Integrate ESG matters into risk management.

As a noted author pointed out, ESG “is … a collection of … disparate risks that corporations face, from climate change to human capital to diversity to relations among the board, management, shareholders, and other stakeholders.” The board should ascertain that these risks are added to the scope of the enterprise risk management (ERM) process, with incorporation into enterprise risk assessments, integration of risk with strategy-setting and performance management, and — if critical to the enterprise — periodic reporting to the board.

Pay attention to ESG external reporting.

High-quality and transparent ESG reporting to the public is a board priority. There are a number of recommendations for directors to consider in this issue of Board Perspectives. Some companies are disclosing the board’s oversight role with respect to ESG matters.

Focus on sponsorship and accountability related to compensation.

The board should agree on the senior executive designated with responsibility for ESG and understand how the organization is driving a collaborative focus on the ESG priorities essential to the organization’s long-term success. Desirably, ESG performance measures are integrated with financial and operational performance monitoring to avoid becoming an appendage that would likely receive curt treatment in the C-suite.

Consider help from outsiders.

Board governance sets the tone for effective corporate stewardship of environmental and social issues. To that end, the board may want to consider the need for engaging outside experts, as well as the importance of educating directors, on selected ESG topics.

Notwithstanding that organizations vary in size, financial wherewithal, intellectual capital, regulatory requirements and market constraints, boards and their chief executives should be proactive with respect to managing ESG priorities. They also have a fiduciary responsibility to address the opportunities and risks posed by ESG matters as they ensure the long-term viability and well-being of their companies. Accordingly, they should focus on appropriate sustainability objectives while keeping an eye toward delivering expected financial results. In this context, board governance sets a constructive, balanced tone for effective corporate stewardship over environmental and social issues.

For more about what steps boards seeking to improve their ESG engagement should take, read the article here.

(Board Perspectives — Issue 158)