Finding ESG A Home: How To Choose A Board Committee To Oversee Environmental, Social, And Governance Matters
There’s no question that board oversight of ESG is a must. Most ESG ratings agencies, including MSCI or Sustainalytics, put significant emphasis on board engagement and reward companies in their scores accordingly. Proxy advisors, such as ISS and Glass Lewis, strongly recommend ESG board oversight for public companies and regularly advise investors to vote for resolutions requesting it. And more and more investors are flat out demanding it: 11% of all ESG shareholder proposals during the 2021 proxy season advocated for board-level ESG oversight. And, beyond shareholder proposals, we find the rate of investors asking for board oversight growing each day.
This isn’t bad news. ESG board oversight comes with a lot of advantages, including helping to ensure strategic alignment and ownership of environmental, social, and governance matters across the enterprise.
Despite the benefits and the mandates, we’re still a long way off from widespread board involvement in ESG. In 2020, just 45% of board members said that ESG issues are a regular part of the board’s agenda. That’s up from 34% in 2019, but it still leaves a majority of boards out of the discussion.
Don’t let ownership indecision hold you back.
Now, there are a million reasons why more boards aren’t involved in ESG – and we can’t solve for all of them. But one challenge that we hear time and again revolves around uncertainty as to which board committee or committees should have the honors. This uncertainty causes debate, disagreement, confusion, and gridlock as stakeholders talk in circles about the right or wrong way to approach this issue. As you would expect, this prevents companies from making important progress and involving the board in ESG as it should.
Pick a committee, any committee.
We’re not suggesting that the decision should be marginalized in any way. But the reality is, there are pros (and cons) to assigning ESG ownership to any of the board committees commonly selected for this role. The important thing is to make a decision and to put someone in charge, so you can start meeting investors’, rating agencies’, and proxy advisors’ expectations and, more importantly, so you can begin advancing critical ESG initiatives within your organization.
While we can’t mediate your boardroom discussions about ESG ownership, we can help by providing a list of key considerations for each potential committee that’s likely on your short list. Our hope is that this list of pros and cons will facilitate informed discussion and increase confidence in the decision you ultimately make.
Audit and Risk Committee members typically bring a great deal of experience and expertise in navigating regulatory compliance. This is becoming increasingly important given the significant growth in topics such as climate regulation. Audit and Risk Committee board members also tend to be well versed in overseeing risk assessments, which can be useful for companies that want to lead a climate risk assessment.
Because of their strengths and background, Audit and Risk Committee members are often more focused on mitigating risk than capitalizing on opportunities. Successful ESG management requires a good balance of both. If board members are overly reactive, they can end up driving an ESG strategy that responds to risks and regulations rather than one that is proactive and gets ahead of new trends and emerging topics.
By assigning ESG oversight to the Compensation Committee, companies are far more likely to successfully establish ESG-linked compensation targets for senior business leaders. These committee members are also generally more experienced in topics pertaining to labor, human capital management, diversity, equity, and inclusion – all of which are critical to a company’s ESG performance and narrative.
Because of the role of the Compensation Committee and the experience of the committee members, this group can be overly focused on the social dimension of ESG, and they can inadvertently deprioritize environment and governance initiatives. There also may be concerns that they lack the appropriate risk assessment skills to adequately anticipate and mitigate potential ESG risks.
Nominating & Governance Committee
The Nominating & Governance Committee is uniquely qualified to manage the governance pillar of ESG, and they wield the toolkit to hold other board members accountable with respect to any ESG-related duties. These committee members are also able to prioritize ESG skills and experience in selecting new board members.
What these board members bring to the table in governance strengths, they often lack in environmental and social experience. As a result, there is a common concern that this committee will naturally focus too much on governance compared to the other two pillars.
(While most companies do not have a Sustainability or ESG Committee, those that do are naturally inclined to assign ESG ownership to that committee. There are, however, pros and cons, nonetheless. Our position is that the creation of this type of committee is best practice, though it is not attainable in the short-term for many organizations.)
Perhaps the most significant upside of choosing the Substantiality/ESG Committee is that it ensures constant focus on ESG at the board level; it never has to take a backseat to other priorities. And, obviously, these committee members should have the requisite skills and experience to excel at ESG ownership.
While it may seem like a no-brainer to give ESG to the experts in sustainability, there is a downside. Assigning full ownership to a Sustainability Committee (or establishing a Sustainability Committee in the first place) introduces the potential for an overly specialized board of directors. If the board recruits directors with deep ESG experience, they may be excluding individuals with other relevant experience that is also important to the board’s fiduciary duties. Additionally, this model runs the risk of the board being overly involved in ESG management and not assigning enough autonomy to corporate leadership.
Full board oversight ensures that ESG management will receive a broad and diverse set of perspectives, experiences, and ideas. It also allows for the group to integrate ESG into all board committees in appropriate ways, rather than selecting just one committee to carry the load.
Especially for boards with upward of 10 members, there may simply be too many cooks in the kitchen. A variety of perspectives is helpful, until it begins to meaningfully slow down processes. Full board ownership also can lead to involvement and management that is too strategic and abstract and not rooted in measurable actions for the company.
There is no one silver bullet answer to the right or wrong place for ESG oversight to reside.
The decision is ultimately going to come down to the approach that feels best for your industry, your company, and your people. Using these pros and cons can help guide a constructive discussion with your stakeholders as your organization considers (or reconsiders) how to best approach ESG oversight, and they can hopefully help direct you to the right decision for your business. If you’re still feeling stuck or could use some objective insight into how to establish, change, or evolve your board’s ownership in ESG, we’re happy to weigh in. Reach out to get the conversation started. Stay tuned for more research in the coming weeks on how to approach board-level ESG oversight depending on where your company is in the process.