What exactly constitutes an ESG competent Board of Directors? While there are many schools of thought, they all agree that a competent board should be able to give strategic oversight to ESG risks and opportunities that help optimise shareholder value while building investor confidence in an organisation’s long-term performance.

Key characteristics of an ESG competent board is expertise. It is clear that the ESG sphere is constantly evolving and subject matter experts are needed. Expertise in all aspects of ESG issues including reporting and latest trends is required to fully leverage a boards’ contribution. As such, qualified board members in the ESG sphere are an added advantage to any board and will have significant positive impact on the overall ESG journey of an organisation.

Another characteristic is ESG fluency which allows a fluent board to connect ESG issues to the strategic roadmap of an organisation for better decision making. Although it is important to have individual board members with ESG expertise as detailed above, it does not indicate ESG fluency. ESG fluency requires a board to collectively understand issues and ask the right questions of management. These nuanced conversations are only possible if the board can act as a cohesive and deliberate body that is fluent in ESG issues. A popular gap analysis tool used is a board Skills Matrix that can identify individual ESG expertise and overall ESG fluency in a board of directors.

Although ESG expertise and fluency are key, the cornerstone to an ESG competent Board of Directors is continual learning. The dynamic nature of ESG requires a board that is agile and adept in evolving to oversee, enable, and support delivery of ESG strategy. To this end a continuous learning agenda that is aligned with the organisation’s mission and goals is required. However, studies show that few organisations have a true learning culture. Challenges for boards include lack of time and knowledge because opportunities for training and development are often ignored due to impending deadlines and short-term goals.  To develop a continuous learning agenda, boards must first prioritise establishing a learning agenda.

It cannot be denied that a competent board is required to successfully steer an organisation through the complexities of ESG. Any organisation that has yet to ensure they have the right skillsets on their board is strongly urged to understand their key ESG concerns and enlist a board of directors that is up to the task. 

The post Striving for an ESG Competent Board of Directors first appeared on ESG Foundation.

The post Striving for an ESG Competent Board of Directors appeared first on ESG Foundation.

This article delves into 3 critical areas. The first addresses ESG oversight areas. Next, we look at how a board can be organised to fulfil their oversight role. Finally, we look at the questions that a board needs to ask in their next board meeting.

ESG oversight areas

An organisation’s board of directors play an integral oversight role in enterprise-wide approach to risk management while ensuring that the organisation’s strategy is aligned with its risk appetite. This also includes how ESG-related risks and opportunities impact the organisations operating model and overall strategic objectives. This will help optimise shareholder value and build investor confidence in an organisation’s long-term performance outlook.

Additionally, the board should assess the effectiveness of risk management processes and monitor the key risks faced by the organisation. It is important for the board to provide perspective on the financial materiality of sustainability information, important KPIs, and how material risks and opportunities should be managed.

There is need for oversight on integrated reporting which involves assessing adequacy of financial and sustainability disclosures. The Board of Directors should provide insight and perspective on how ESG disclosure practices compare with direct competitors and industry peers. Internal audit functions and external audit processes should also form part of a board’s roles and responsibilities.

Board structure

The roadmap of ESG is evolving rapidly and any organisation will go through changes in ESG priority and strategy over time. A common mistake when deciding on a board structure to fulfil ESG oversight is a “one-size-fits-all” approach. Instead, it would be best to adopt an agile approach and pivot with the structure as needed. 

Some of the options of a board structure for ESG oversight include a full board, an existing board committee, a newly formed or dedicated ESG committee and a sharing of responsibility by one or more committees. Organisations should select the option that is most effective for them based on their current circumstances and needs.

Questions for the next board meeting

For directors on boards who are not familiar with ESG or are only beginning their journey, it is imperative that they start with asking the right questions at the next board meeting. Some questions include identifying who oversees sustainability and ESG matters at the operational level and board level, determining the current ESG priorities and ensuring that the organisation is being credited for, communicating and branding ESG efforts underway (if any). Most importantly, the board should ask how they can help the organisation in spearheading the blueprint for ESG. The world is changing. ESG is not static but a dynamic, ever-evolving issue that requires an organisation to ensure that the board of directors are well-equipped to handle. Boards should explore how to integrate ESG into their governance practices and determine their strategic roadmap to steer the organisation for long-term performance. If your organisation has not begun its journey, then this needs to be addressed immediately.

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The key to understanding it all is to break them down into their respective functions. There are four main categories in this alphabet soup: standards, frameworks, ratings and indices.

First are standards that govern the metrics based on processes that provide specific rules for ESG measurement and disclosure. ESG Standards dictate what organisations must report. Examples of standards are the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB). Introduced in 1997, GRI is the most widely used standard with a holistic and outward looking approach that works with stakeholders to determine how an organisation impacts the world.

Frameworks are high-level guidelines that provide principles and guidance for how information should be disclosed. Carbon Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC), Carbon Disclosure Project (CDP) and Task Force on Climate-related Financial Disclosures (TCFD) comprise some of the most popular frameworks currently being used.

The next category is ratings which include agencies that collate information through surveys and other methodologies to gather ESG data from different organisations. Sustainalytics, a popular one, has a mission to “provide the insights required for investors and companies to make more informed decisions that lead to a more just and sustainable global economy”.

Finally, we have indices that compile data into a single metric to represent a particular market or strategy. Indices allow investors to track the performance of a company through their ESG reports. Dow Jones Sustainability Indices (DJSJ), FTSE4GOOD and Bloomberg all provide opportunities to be listed for organisations that demonstrate continuous improvements in a variety of economic, environmental and social criteria.

There are steps currently being taken to bring clarity to the sustainability reporting ecosystem and in July of 2020, the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) announced a collaborative workplan. Following this, in September 2020, five of these global organisations, CDP, CDSB, GRI, IIRC and SASB – whose frameworks and standards guide most sustainability integrated reporting – announced a shared vision and intent to collaborate on comprehensive corporate reporting. In June 2021, IIRC and SASB have officially announced their merger to form the Value Reporting Foundation (VRF).

While there is a vision to simplify the reporting process, it will take time. The newly established International Sustainability Standards Board (ISSB) is expected to develop a global standard of sustainability disclosures for financial markets. It will consolidate VRF and CDSB by June 2022 but it is still uncertain how the most popular standard, GRI, will fit into the narrative. The various standard setters will have to work with each other for a vision of a global standard to materialise. While we watch the various collaborations unfold, it is imperative we understand the alphabet soup of acronyms as they stand and report based on available standards.

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