Board oversight of ESG: Maximising sustainable performance
Learn all about the board's role in prioritising ESG and sustainability matters, the benefits and pitfalls, and how to do board oversight of ESG successfully.
Who is responsible for ESG in a company?
Spoiler: The board
No single person or team is wholly responsible for a company’s Environmental, Social, and Governance (ESG). Ultimately, the board is responsible for overseeing ESG and it should be an agenda item at board meetings. However, due to the large body of work ESG represents, activities must be delegated to members of staff. It is a group effort, with the board’s ESG role being one primarily of oversight and good governance.
The ESG committee charter is a document that outlines and formalises various matters relating to its duties and responsibilities, such as:
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Its purpose
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Its responsibilities
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Its composition
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Who it should report to
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How it is evaluated
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Its ability to delegate
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Its meetings and minutes process
You can download an ESG committee charter template here.
ESG Board Charter Committee
4 real-life examples of boards getting it right
Board engagement and leadership are vital for driving meaningful change and embedding ESG considerations into the core fabric of an organisation. Here are some examples of boards doing it well:
Danone
In 2020, Danone announced its "One Planet. One Health" vision, which placed sustainability and ESG at the core of its business strategy. The board of directors played a pivotal role in driving this transformation. They established a Sustainability Committee and appointed a Chief Sustainability Officer to oversee the company's ESG initiatives. The board's active involvement helped to align Danone's strategic objectives with ESG considerations, setting ambitious targets for social and environmental impact.
Starbucks
Starbucks has made significant efforts to integrate ESG considerations into its operations. In 2020, the company announced a multi-decade commitment to become a resource-positive company. This involved an emphasis on regenerative agriculture, water stewardship, and waste reduction. The board of directors actively participated in shaping and overseeing Starbucks' ESG transformation, emphasising sustainable sourcing practices, ethical labour standards, and community engagement.
Schneider Electric
Schneider Electric, a global leader in energy management and automation, embarked on a journey to become a carbon-neutral company. The board played a crucial role in driving this transformation. They established sustainability as a strategic pillar and oversaw the implementation of Schneider Electric's sustainability strategy, which included ambitious targets for carbon reduction and renewable energy usage. The board's active involvement helped align the company's overall direction with ESG objectives and ensured ongoing accountability.
Interface
Interface, a global modular flooring company, is recognised for its commitment to the circular economy. The company's founder, Ray Anderson, led the board's efforts in transforming Interface's ESG approach. The board championed the company's Mission Zero initiative, which aimed to eliminate any negative environmental impact by 2020. This mission was achieved in 2019, with every flooring product that Interface sells becoming carbon neutral across its full lifecycle.
4 real-life examples of boards getting it wrong
Ignoring ESG considerations, failing to comply with regulations, or not reacting quickly to sustainability issues can have severe consequences. Here are some examples:
Volkswagen
In 2015, Volkswagen faced a major scandal when it was revealed that the company had installed software in its diesel vehicles to cheat emissions tests. The scandal highlighted a failure of board oversight and inadequate ESG practices. The board of directors at VW was criticised for not proactively addressing environmental concerns. The company suffered significant financial losses, reputational damage, and legal consequences as a result.
BP (Deepwater Horizon)
In 2010, the Deepwater Horizon oil rig, operated by BP, experienced a catastrophic explosion and subsequent oil spill in the Gulf of Mexico. The incident revealed a lack of proper safety measures and environmental risk management within the company. The board of BP faced criticism for not adequately addressing ESG risks and ensuring compliance with safety regulations. The oil spill had devastating environmental impacts, cost the company billions of dollars, and severely damaged BP's reputation.
Wells Fargo
Financial institution, Wells Fargo, faced a scandal in 2016 when it was discovered that employees had opened millions of unauthorised accounts in customers' names. The board of directors was accused of insufficient oversight and governance, as they failed to detect or address the unethical sales practices. The scandal resulted in significant reputational damage, regulatory fines, and a decline in customer trust.
In 2018, Facebook faced a massive data privacy scandal involving the unauthorised access of user data by the political consulting firm Cambridge Analytica. The incident raised concerns about Facebook's handling of user privacy and data protection. The board of directors was criticised for not adequately addressing privacy risks and failing to respond swiftly to prevent the breach. The scandal led to increased scrutiny, regulatory investigations, and a massive decline in user trust.
Key elements of successful board oversight of ESG
The board of directors plays a crucial role in overseeing and guiding a company's ESG practices. The ESG board committee could be comprised of the full board or part of it. The key thing is that the material ESG issues fall within their charter mandates and the board members' areas of expertise. Here's an overview of the board's role in relation to a company's ESG:
Setting ESG strategy and goals
The board is responsible for setting the company's ESG strategy, goals, and objectives. They establish the vision and direction for integrating sustainability into the company's operations and long-term business plans. This includes defining key focus areas, identifying material ESG issues, and aligning ESG goals with the company's overall strategy.
Oversight and risk management
The board has a fiduciary duty to oversee ESG risks and opportunities. They must ensure that appropriate systems and processes are in place to identify, assess, and mitigate ESG risks that may impact the company's reputation, financial performance, or stakeholder relationships. This involves monitoring compliance with ESG regulations, assessing emerging ESG trends, and establishing risk management frameworks.
Board composition and expertise
ESG reporting and disclosure
The board ensures that the company provides accurate, transparent, and reliable ESG information to stakeholders. This includes overseeing the development and publication of ESG reports, sustainability disclosures, and other communications. The board should ensure that ESG information is aligned with relevant reporting frameworks, such as the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB) standards. Learn more: ESG Reporting
Stakeholder engagement
The board plays a role in overseeing stakeholder engagement efforts related to ESG matters. They should ensure that the company engages with relevant stakeholders, such as investors, customers, employees, communities, and NGOs, to understand their ESG expectations and concerns. This engagement helps inform the company's ESG strategy and decision-making processes.
Executive compensation and incentives
Boards are responsible for aligning executive compensation and incentives with the company's ESG objectives. They should consider integrating ESG metrics into executive compensation plans to incentivise and reward sustainable performance. This can reinforce the company's commitment to ESG and drive accountability at the leadership level.
Boards are responsible for considering ESG expertise when determining board composition. They may seek directors with relevant sustainability experience, industry knowledge, or expertise in areas such as climate change, or diversity, equity and inclusion. Having a diverse board with ESG perspectives helps drive effective decision-making and oversight.
Board education and training
The board should ensure that directors have access to appropriate ESG education and training opportunities. This helps enhance their understanding of evolving ESG trends, best practices, and regulatory developments. Board education enables directors to effectively oversee and provide guidance on ESG matters within the company.
Long-term sustainability and strategy
Boards have a duty to consider the long-term sustainability and resilience of the company. They should assess how ESG factors, such as climate change, resource scarcity, or changing societal expectations, may impact the company's business model and value creation over time. This long-term perspective helps the board guide strategic decision-making that takes into account ESG considerations.
Common challenges and how to overcome them
When boards attempt to prioritise ESG, they invariably encounter hurdles. Here are some common challenges and tips to overcome them:
Lack of expertise
Boards may lack expertise in ESG matters, making it challenging to effectively oversee these issues.
How to overcome this issue: Add directors to the board with relevant ESG experience. Consider engaging external ESG consultants or advisors to provide guidance and support.
Limited ESG data and metrics
Boards may struggle with obtaining reliable ESG data and metrics to inform decision-making.
How to overcome this issue: Collaborate with management to establish robust ESG reporting processes. Work with leverage frameworks such as the GRI or the SASB to enhance ESG reporting.
Limited stakeholder engagement
Boards may struggle to effectively engage with stakeholders on ESG matters.
How to overcome this issue: Establish channels for regular dialogue with investors, employees, customers, and communities. Seek their input, listen to concerns, and incorporate stakeholder perspectives into decision-making.
Changing regulatory landscape
Boards may face challenges in keeping up with rapidly evolving ESG regulations and expectations.
How to overcome this issue: To stay ahead, assign responsibility for monitoring and interpreting relevant regulations to a committee or a dedicated director. Establish processes to regularly assess regulatory changes, and collaborate with legal teams to ensure compliance.
Resistance to change
Boards may encounter resistance from management or other stakeholders when attempting to prioritise ESG.
How to overcome this issue: Articulate the business case for ESG, emphasising the long-term value creation, risk mitigation and stakeholder benefits.
Integration into governance framework
Boards may struggle with integrating ESG considerations into the existing governance framework.
How to overcome this issue: Establish board subcommittees focused on ESG oversight and regularly evaluate their effectiveness. Provide board members with ESG training and resources to upskill them and aid their understanding.