Board ESG Accountability

• 2023 AGM Intelligence Report
• Board ESG Accountability

So that boards can adapt and respond to the rapidly evolving ESG landscape, directors’ skills, capabilities and perspectives must continually evolve.

ESG is no longer an emerging risk for organisations but a fundamental, front-line issue. With 80% of company balance sheets worldwide comprising intangible assets, reputational risk is a major issue. ESG exposure is likely to grow as environmental and social issues increasingly draw public and investor attention. It is not clear that all directors are yet fully across the need to understand ESG and to regard it as a core and fundamental part of their duties. They can no longer afford to view governance solely as a compliance issue.

Directors’ ESG responsibilities

ESG plays a major role in the governance framework of an organisation and it is critical for directors to be able to address the ESG issues facing their companies. Investors and other users of ESG disclosures need to understand how effectively the board oversees climate-related and other key ESG issues and how management deals with them. Legislation such as the Corporations Act 2001 (Cth), as well as the ASX Corporate Governance Principles, define directors’ ESG responsibilities.

The Australian Prudential Regulation Authority (APRA) has set out the ESG disclosure requirements of financial services companies. In 2019, the ASX Corporate Governance Council amended the definition of ‘environmental risk’ to capture risks such as water scarcity, air quality and climate change — indicating that directors are obliged to consider these risks and not doing so could imply a breach of their duty. Many large investors also have their own disclosure requirements.

So that boards can adapt and respond to the rapidly evolving ESG landscape, directors’ skills, capabilities and perspectives must continually evolve. In a recent report, Deloitte wrote that future-fit boards need strong governance foundations, plus directors who can ‘add value through their heightened sensitivity to ESG issues, stakeholder capitalism, social licence to operate and elevated employee expectations.’¹ However ESG is not just a series of risks, but can also present companies with huge opportunities, so boards must be expert enough to ensure that these are realised too.

The 2021 Sustainability Board Report² found that 71 of the 100 world’s largest public companies have aboard committee overseeing sustainability, but only 17% of directors on the committees had relevant ESG training or experience. In Australia, research by impact investor Melior Investment Management found that less than 30% of ASX300 companies had a designated board committee overseeing ESG (June 2021) and suggested there was likely a similar skills gap among directors.

Board composition and training

The board’s composition must ensure that ESG responsibilities are managed — either via an existing board committee, a new committee or with some board members taking on ESG responsibilities. If the Risk & Audit Committee is responsible, which may be appropriate as its role includes ensuring compliance with public reporting and statutory disclosure requirements, then it needs to include directors with relevant ESG expertise. As ESG becomes broader in scope and more heavily regulated, this need will only increase. In some companies, directors with specific expertise may need to be added, for example, supply chain experts for logistics companies or cybersecurity experts for transaction platforms.

Bloomberg Law states, ‘there is no ‘one size fits all’ approach to board…ESG oversight, and each board must evaluate its own circumstances, expertise, industry and composition to determine how best to discharge its ESG responsibilities.’

If the company’s board skills matrix shows low ESG expertise on the board, there is ESG training offered by tertiary bodies and other organisations like the Australian Institute of Company Directors (AICD). We at Georgeson also offer ESG education for boards, providing an investor-focused overview of the ESG ecosystem, governance, reporting and ESG ratings agencies.

 

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¹ https://www2.deloitte.com/au/en/pages/risk/articles/bold-moves-boardroom-skills-capabilities-fit-future.html
² https://www.boardreport.org/the-sustainability-board-report-2021