ESG Governance

In a recent EY survey, 66% of top executives and board members of large European companies agreed that “the COVID-19 pandemic has increased expectations from stakeholders that our company will drive societal impact, environmental sustainability, and inclusive growth.” Strong performance in handling environmental, social, and governance (ESG) issues and accurate, transparent reporting of that performance have become increasingly important to outside constituents; good ESG leadership can significantly influence a company’s ability to raise capital, to attract talent, and even to enhance customer demand. Regulators around the globe are insisting that climate risk and ESG be incorporated into public company disclosures. Governance of ESG is now a priority for every board.

Members of the European Audit Committee Leadership Network (EACLN) said that ESG governance at their organizations is evolving. One said, “We are currently looking at all the reporting requirements, and we need to put a structure together, but it is not easy.” Another noted that her company has been a leader on ESG reporting, but added, “That doesn’t mean that we’re perfect. I am always looking to learn anything we can do to improve.”

Members discussed how is ESG is governed at their companies, what ESG oversight requires of boards and audit committees, and the importance of collaboration.

Oversight of ESG reporting should be within the remit of audit committees. Members said that audit committees are experienced in overseeing disclosures and regulatory compliance. They expect the regularity and frequency of reporting on ESG metrics to increase to match that of financial data. In an integrated reporting system, nonfinancial and financial data could not be separated and would thus need to be overseen by the audit committee. One member observed that his audit committee took over ESG reporting oversight because at a prior EACLN meeting investors had made it clear that they would hold boards to the same standards for nonfinancial reporting as for financial reporting.
Audit committees will need new policies and capabilities. A member noted that audit committees will have to look at their policies and be explicit about the scope of committee oversight of nonfinancial reporting. The policies should state what will be assured and to what degree, and they should be made available to outside stakeholders. Many members agreed that audit committees will need to upskill; some said that they are already conducting ESG training with internal and external experts. One member suggested that financial experts will have to become nonfinancial experts, too, as reporting becomes more integrated and as ESG reporting becomes an increasingly significant risk for organizations. Members also agreed that audit committees will likely have to prioritize issues to ensure a manageable workload and will have to think strategically about committee composition.
Coordination and collaboration among committees are vital. Members agreed that ESG oversight will vary across companies and sectors. They emphasized the need for coordination and communication between the different committees and groups involved. One member described a model of cross-committee membership, where the audit committee chair also sits on the sustainability committee and vice versa. She noted that the two committees regularly coordinate their agendas to ensure that there is no duplication and no items are dropped. Another member described a joint executive committee that brings together people from other committees responsible for ESG for regular discussions. Still another said that she and the secretary of her board take the list of ESG topics, ensure that they are updated, and then work on distributing the topics across board committees, taking into consideration the committees’ time constraints and available resources.