ESG Oversight and Governance

Environmental, social, and governance (ESG) matters have become a boardroom priority for public companies, including those represented in the Audit Committee Leadership Network (ACLN). Regulators, investors, customers, and society at large are making decisions on the basis of companies’ ESG goals and performance, making it imperative that ESG reporting be transparent, high quality, and accurate. Reporting on ESG performance can have a significant impact on a company’s reputation and long-term success, as well as on its ability to secure capital, talent, future customers, or license to operate.

Regulators around the globe are demanding that climate risk and sustainability be incorporated into public company disclosures. In the United States, the SEC has signaled that companies should expect new requirements for ESG disclosure. The SEC has also stressed the importance of internal controls on ESG data and disclosures.

Given the increasing importance of ESG reporting, many companies have already tasked audit committees with its governance. Some have created disclosure committees within management, focused specifically on ESG. Companies are leveraging audit committees’ experience with financial reporting and internal controls and applying these to ensure that ESG reporting is accurate, reliable, and consistent, as well as compliant with external standards and regulations.

Some ACLN members said that their audit committees are already overseeing assurance of ESG disclosures, including definitions of ESG metrics, measurement methodology, accountability tracking, and the cost of enhanced disclosure. One director said, “ESG gets to the same kinds of things—internal information and the same kind of controls. Who else is better equipped in the company to do that? The audit committee is best equipped.”

On November 16, 2021, ACLN members met virtually for a members-only discussion on ESG oversight and governance. ACLN members discussed the following topics:

Oversight of ESG reporting should be a responsibility of the audit committee. There was a strong consensus that audit committees should handle oversight of ESG reporting, primarily because they have the skills needed to meet external demands for integrity in the ESG Oversight and Governance reported data. Many members’ companies have already tasked their audit committees with oversight of ESG reporting.
ESG disclosure committees in management can ensure diversity of perspectives and focus on reporting quality. Several members described the formation of an ESG disclosure committee or a nonfinancial disclosure committee, separate from their financial disclosure committee. The new committees have broad representation across the company, including not only finance and audit, but also legal, human resources (HR), and investor relations. Many members saw an ESG disclosure committee as a strong practice that they can bring back to their own companies.
Cross-functional ESG committees can strengthen linkages around ESG. Some members took the concept of an ESG disclosure committee further and advocated for cross-functional teams that would manage ESG issues within the organization, similar to a cross-functional risk committee at the executive level. One member said that a cross-functional ESG committee would enable richer discussion, better understanding, and potentially earlier identification of possible issues.
Members debated whether Sarbanes-Oxley (SOX) or “SOX-lite” testing is appropriate for ESG disclosures. Most agreed that the methodology developed to comply with SOX has proven useful, but some members thought that ESG data is different and that it may not be practical to apply the same rigor or standards. One member worried that the SEC may expect a “very high threshold around the controls and the reporting of this” and that a “SOX-lite” controls environment could make companies vulnerable to future legal or regulatory actions.