Best practice in board oversight of ESG and how to achieve it
As environmental, social and governance (ESG) issues grow in the social consciousness, they simultaneously rise up the board agenda, and board oversight of ESG grows more crucial.
Issues that were once peripheral or “nice to have” are taking center stage in corporate strategy: diversity, equity and inclusion (DEI); sustainability; carbon footprints. Stakeholders and investors increasingly see practice here as shorthand for wider corporate integrity — and with business success and ESG performance increasingly intertwined, there are strong financial drivers for a focus on ESG too.
In his 2022 letter to CEOs, BlackRock CEO Larry Fink notes that “the relationship between a company, its employees, and society is being redefined” and as a result, “It's never been more essential for CEOs to have a consistent voice, a clear purpose, a coherent strategy, and a long-term view.”
Board oversight of ESG issues is central to this, empowering CEOs with the insight and data they need to drive stakeholder capitalism. But boards face unchartered territory when trying to measure and monitor new priority areas. As a result, identifying best practice can be a challenge.
Equally, forward-looking companies recognize that effective board oversight of ESG is a vital part of their modern governance strategy. They need to mitigate the risks and capitalize on the opportunities that ESG presents, to “shape society and act as a powerful catalyst for change” in the words of Larry Fink.
What is ESG Oversight?
Board-level oversight of environmental, social and governance practices is becoming the norm as the value of a proactive ESG strategy becomes better understood.
ESG effectiveness means that not only do you need to set clear and strictly-enforced ESG policies, you also need to implement commensurate oversight. If ESG strategy is important enough to devote board time to, then so is ESG monitoring and governance.
This might mean closer supervision of climate risk and strategy. It might require paying board-level attention to reverse mentoring programs and other DEI initiatives (something membership of the Diligent Director Network can help board members with). Once you’ve set clear ESG goals, monitoring and oversight are essential to ensure your objectives are achieved.
What Is Driving Increased Board Oversight of ESG?
As above, the increased focus on ESG overall is escalating it on board agendas. And if ESG strategy is a priority, then oversight is too; measurement is identified as one of the five critical steps for success in an ESG strategy.
ESG performance is increasingly a growth driver for businesses, with ESG ratings and scores forming the basis of purchasing and investment decisions. Your ESG strategy also impacts your ability to attract and retain talent. Whether it’s supporting growth or managing costs — both key concerns for boards — environmental, social and governance factors are increasingly pivotal.
And of course, as ESG becomes embedded in business-as-usual, board oversight naturally follows, and it’s clear that the drivers for board oversight of ESG are many, and growing.
Why Is Board Oversight of ESG Important?
As the ESG conversation has expanded, organizational approaches increasingly move away from “tick box”, compliance-led approaches towards proactive, strategic ESG. ESG is evolving from tactical initiatives to business-wide strategy.
Making this shift demands that boards have a big picture view of ESG performance; each element cannot be judged in isolation, but in relation to the wider environmental, social and governance corporate strategy and landscape. Only by having a joined-up view of ESG compliance can boards devise and optimize cohesive strategies.
Who on the Board Is Responsible For ESG?
When we ask which part of the board or which committee is responsible for ESG and ESG oversight, the answer can depend on whether we are talking about the “E”, the “S” or the “G”.
Research by Harvard Law School found that for 47% of boards, oversight of climate-related risks and opportunities sits with the full board (and only 14% said that the board does not oversee this at all). As regards workforce diversity, equity and inclusion oversight, the full board takes responsibility in 43% of organizations; only 6% of boards have no role in oversight.
Perhaps this is reflective of more pressing regulatory imperatives in some areas; equal employment and compensation practices are enshrined by law in a way that climate-focused activity and reporting is only starting to catch up with.
As climate-related reporting moves rapidly up the board agenda, it’s likely that full board attention will be brought to bear across all areas of ESG.
Optimizing Board Oversight of ESG
Board directors’ time is at a premium. The C-suite has no time to trawl through endless data points, reports or charts — yet ensuring your board can achieve oversight of ESG means getting your arms around a vast array of information.
Setting strategy and managing oversight may require the sifting and aggregating of this information to identify the big picture themes that matter. Digitizing ESG oversight and reporting can help boards immeasurably; collating data, presenting concerns and topics visually and clearly, and enabling directors to “cut through” to priority issues. Digitalization can give your board ESG oversight structure and the focus it needs.
Case study: How a Global Manufacturer Digitized Sustainability Reporting
Global packaging solutions manufacturer IPL Plastics had long prioritized sustainability, but with a rapidly growing operation — and an IPO on the horizon — wanted to elevate their approach. The multiple complex metrics and the range of data needing to be mined made moving from manual, spreadsheet-driven reporting to a technology-led solution digitizing a compelling idea.
By digitizing their reporting, ILP improved data accuracy and integrity; introduced a more robust sustainability reporting process; made auditing and verification simpler; improved transparency and gave all stakeholders, up to board level, clear dashboards and metrics showing performance and trends.
Applying a Modern Governance Approach to ESG Oversight
Succeeding in tackling today’s complex, numerous ESG challenges demands that boards and their organizations practice modern governance.
What is modern governance?
We define it as a forward-looking approach that facilitates visibility and empowers data-driven decisions. Research has shown that organizations practicing modern governance outperform their peers by 15%.
Being able to run seamless meetings to maintain governance momentum; having full oversight of your organization’s entities and subsidiaries; having confidence in the ESG metrics and performance that support financial integrity, investor confidence and stakeholder engagement. This is what modern governance looks like.
When it comes to the multi-faceted challenges of ESG, automation can make the difference between comprehensive, accurate, methodical — ultimately successful — strategies and fragmented, sub-optimal ones. Automation supports a modern governance approach by delivering consistency and accuracy, and nowhere more than in the complex and interconnected world of ESG. Read more about how ESG automation can increase efficiency, expand visibility and empower insight in our article.