ESG & The Role of the Board
ESG has been discussed in Boardrooms long before the acronym was coined. For decades, health & safety, employee issues, and governance structures have had regular placements on Boardroom agendas.
With increasing ESG awareness and expectations, company boards are starting to look different – in some cases being restructured to include ESG sub-committees, or inviting in non-executive directors who specifically have ESG attributes, and even placing ESG-related STI/LTI’s on key management stakeholders.
Boards are utilised to provide oversight on financial and non-financial topics relating to the company. Whilst there is no “one-size-fits-all” approach to allocating ESG oversight at the Board-level, there are factors to consider in determining its depth of appropriation, such as the company’s industry, Board structure and composition, the company’s ESG maturity, and levels of expertise.
As a company’s ESG approach matures, both the prevalence of ESG topics discussed at the Board-level will increase and governance structures associated with ESG will develop.
In the Industry:
The Australian Institute of Company Directors (“AICD”) reports that pressure and interest from investors, customers, and employees is moving the dial for Boards on ESG from a “nice-to-have” to “an “essential ingredient tied to organizational purpose, strategy and culture”. The AICD has developed commentary for its directors that ranges from how to initiate ESG conversations within a company, through to raising awareness of the risk of greenwashing due to potentially overinflated ESG credentials.
Greenwashing poses a particularly heavy risk for company directors, who may face personal liability if identified. Directors should ensure that the Board is aware of these potentially misleading claims and whether their intent has been rigorously examined. Ongoing education of company directors in this area will assist in increasing the overall ESG awareness at the Board-level.
In the Company Boardroom:
Companies that prioritise ESG will position themselves ahead of peers. Stakeholders want to understand how companies are weighing up ESG-related risks and opportunities, and shaping their business strategy accordingly. By positioning ESG in the Boardroom, a positive “tone from the top” is established.
Another risk for a company’s structure is that lack of awareness of ESG across the Board may lead to asset managers or investors voting against directors during Annual General Meetings (“AGMs”) or similar. For an investment house, the identification and management of a company’s material ESG issues is crucial to ensure ongoing resiliency, risk mitigation, and confidence in strategy execution.
Companies are iteratively determining their own optimal approach to structuring ESG at the Board-level. There are many examples to showcase, including identifying ESG as a risk within Audit & Risk Committees, developing an ESG sub-committee of the Board, or even having an empty seat at the table to remind the group that ESG should always be considered. To start, however, companies can undertake a review of their Board Charter to determine whether ESG considerations have been included.
ESG issues are relevant to all directors, regardless of the specific Board they serve. As governance surrounding ESG becomes a greater focus, directors will need to consider how (or whether) they should assign specific oversight for particular ESG issues to individual committees.
In the Investment Houses:
Investment houses can make capital and debt allocation decisions based on where ESG sits at a company. Board-level consideration demonstrates greater maturity for the topic than if it is considered at the middle-management level or not considered at all.
The Climate Action 100+ initiative is an investor-led advocacy group working to ensure the world’s largest corporate greenhouse gas emitters take necessary action against climate change. This means that investment houses joining this initiative are expected to collaboratively encourage their investee entities to increase their climate change-related awareness and, by association, their general consideration of ESG.
At the time of writing, this group is made up of 700 global investors who are responsible for more than $68 trillion in assets under management across 33 markets.
Other investor-led initiatives are also available, which combined will set forth an agenda for all companies to incorporate ESG and climate-related considerations within their operations and ensure Board-level oversight (or similar) of the associated risks and opportunities.
Our View:
Boards, just like their companies, are often unaware that they have been considering aspects of ESG in their practices to date. Most of the time, Board education sessions on ESG, conducted internally or externally, go a long way towards raising the overall awareness of ESG. Typically, once a year is usually a sufficient cadence to remain abreast of ESG trends and expectations. We do not expect each Board to have an ESG expert, but rather hope that ESG is more broadly spread across the group.
Waving our magic ESG wand, we would love to see more formalisation of ESG at the Board-level. This provides greater confidence that the topic is being considered at the highest level of governance, where decisions can be made more rapidly, and positive impacts can be felt sooner.
For additional information on this important topic or ESG assistance, contact us today at info@anabranchesg.com.au
