April 21, 2022
ESG: Advice for Boards
Environmental, social and governance (ESG) issues are increasingly in the spotlight with stakeholders. A key challenge is that little guidance exists on how to disclose ESG practices. To better understand how boards are addressing these topics, we met with nominating and governance committee chairs to discuss ESG trends, including the evolution of ESG-related disclosures, the increased stakeholder and boardroom focus on climate (including pledges to reach net zero) and diversity, equity and inclusion (DE&I) issues, as well as the link between ESG and corporate purpose. Below, we outline some lessons learned from the past year and some advice for boards going forward.
Connect ESG to strategy.
Investors expect ESG policies to be tied to strategy and, increasingly, consider ESG risks and opportunities as integral to their capital allocation decisions so boards and companies should be prepared to discuss their corporate purpose, sustainability and ESG stories.
Anticipate continued uncertainty and evolution.
Directors expressed interest in seeing SEC leadership in the development of an ESG disclosure system that is consistent for all public companies. Until one is established, disclosures surrounding ESG will continue to evolve and vary based on company size and sector. Directors should stay on top of new regulations as they are rolled out and understand how management is addressing requirements and ever-evolving stakeholder expectations.
Decide who does what.
Boards should consider how to best oversee their companies’ ESG risks and opportunities and whether a standalone committee dedicated to ESG should be created or if existing committees should be assigned oversight responsibilities. For example, we reported in the 2021 U.S. Spencer Stuart Board Index that 11.4 percent of S&P 500 boards have an environment, health and safety committee, and it could be argued that at least some ESG-related oversight responsibilities fit under its purview. We find overall ESG oversight tends to fall under the nominating and governance committee’s purview for most boards. In all cases, responsibilities for oversight of ESG issues should be formalized in committee charters and governing documents.
Drive accountability.
It’s important to note that the management team is ultimately responsible for ESG and for communicating the company’s plans, metrics and actions; the board’s role is to validate and oversee the metrics. Once a company has determined key ESG metrics, which may be both quantitative and qualitative, the compensation committee should consider whether to link the metrics to executive compensation.
Expect continued scrutiny around political spending.
Investors and other stakeholders increasingly want to understand company policies for political contributions and lobbying activities and board oversight of these policies and activities.
There is more than one way to bring ESG knowledge to the boardroom.
ESG competence in the boardroom is an evolving area. Some boards are considering expanding to add a director with deep experience with ESG issues. Other boards are retaining consultants and advisers with ESG expertise. In all cases, boards should ensure they stay current on the ESG issues aligned with their businesses.
Don’t delay disclosures.
The Securities and Exchange Commission recently proposed new guidance to standardize climate-related disclosures. The proposal includes specific requirements for boards, such as descriptions of the processes and frequency by which the board or board committee discusses climate-related risks, whether and how the board sets climate-related targets or goals, and how it oversees progress against those targets or goals. While concerns exist around the legal ramifications, costs and enforcement of ESG disclosures, directors and management teams should understand and strive to meet stakeholder expectations for disclosures of relevant ESG risks and opportunities. Boards should also evaluate how company disclosures benchmark to peers.
Conclusion
Some degree of frustration and uncertainty surrounds ESG reporting for boards. With the pandemic, many companies have been focusing on surviving and the intense focus on ESG disclosure — with all its ambiguity — adds yet another layer of complexity for boards. Some worry about the legal ramifications of their disclosures and the lack of standardized reporting. However, companies cannot afford to wait. Start now by telling your ESG story, setting ESG goals that are measurable and achievable, and staying flexible for evolution as new guidance and expectations emerge.