The role of corporate directors has changed dramatically. While boards still have responsibilities like hiring CEOs and setting executive compensation, now they’re also heavily involved in overseeing the development of corporate strategy and the oversight of identifying and mitigating material risks—including those related to environmental, social and governance (ESG).
ESG issues are complex and don’t lend themselves to a single reporting line or the traditional committee structure. With that in mind, there’s work to be done.
Who’s watching the controls?
Oversight of strategy and risk is a fundamental responsibility of the board. ESG has evolved from text-heavy corporate social responsibility reports to the investor-grade data and concrete strategies that are expected today. Yet poor controls over ESG information can create risk for companies: Less than two-thirds (65 percent) of directors say their board understands how management gathers information around ESG.
With pending SEC disclosures, it’s an imperative that board members learn more about procedures, processes and controls around data. Avoiding potential risk calls for accurate disclosures with robust controls. Boards and management should establish who owns oversight—and articulate how to structure accountability inside the company.
Making sure directors have the bases covered
Governance in the age of ESG requires an expanded view of business that can identify both risks and potential opportunities. That includes risks related to environmental and social issues, as well as operational governance. Yet according to our 2022 Annual Corporate Directors Survey, only 11 percent of directors believe environmental/ sustainability expertise is very important for their board, ranking it last on a list of importance.
In the past, specialized committee involvement evaluated only those risks within their purview. But now, how the board addresses ESG concerns reflects its maturity.
Your board can play an important role in driving these governance processes. Because ESG strategy should be integrated with business strategy, the full board needs to understand how ESG ties to both material risks and opportunities, as well as the evolving global regulatory landscape around ESG reporting.
Full board vs. committees: Where do directors fit in the committee structure?
ESG topics are wide-ranging, with a lot to oversee. Articulating how ownership and accountability is established across the board is important. Because many ESG issues around corporate responsibility intersect and can have material consequences in the real world (e.g., excessive industrialization, pollution and lack of green space in racially/ethnically diverse neighborhoods), certain committees will likely have a larger role in oversight. But many areas will overlap as well.
Ultimately, to help ESG strategies launch successfully and become more robust over time, embedded oversight structures can produce accountability across all committees. When the board and committees interact regularly, directors will know where to go to find answers from the management team.
Getting the cadence right is also key. That may mean increasing the length of meetings with management and reporting. Be open to more frequent updates, like when vetting third parties during supply chain snarls.
By spreading responsibilities across the full board and appropriate committees, board members can position ESG topics to receive the attention they need.
This stuff is hard—we get it
Some areas of ESG—like impact analysis of greenhouse gas (GHG) emissions and the layered intersectionality of diversity and equity issues—require both new learning and a perspective open to experiences outside of our own. That takes work and skill.
In this rapidly changing space, oversight can quickly become an impossible task. Taking the appropriate action to increase diversity, addressing equity through compensation and clarifying the company’s position on social concerns can increase stakeholder trust in your brand. Board members need to seek appropriate upskilling around complex issues such as climate, diversity and inclusion.
Power of the proxy: Keep lines of communication open
While regulation has provided plenty of motivation to move ESG strategies ahead, don’t discount shareholder pressure. Institutional investors are very interested in how your company is handling ESG, from top to bottom. If you don’t have a plan or if you’re not transparent enough about strategies in place, shareholders will let you know. And they will say it with votes.
Your shareholders expect detailed disclosure in your proxy statement that describes the board’s oversight efforts. Don’t run the risk of shareholders losing confidence in your board and voting out directors.
For more information and access to ESG Oversight: The Corporate Director’s Guide, visit PwC.com.