The world is changing. ESG is no longer a buzzword and has become mainstream. However, the need now is to ensure that the board of directors of an organisation – the very echelon of power that steers the strategy of an organisation – is ready to face the oversight challenges of ESG.
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.
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.