As environmental, social, and governance (ESG) considerations continue to shape corporate strategies worldwide, a critical aspect of an ESG framework is the creation of specialized committees dedicated to overseeing key areas related to sustainability, ethics, and stakeholder engagement.
For some companies, it may be more effective to delegate oversight of ESG issues to new or existing committees particularly when the following is true.
This approach could help integrate ESG considerations into business functions, particularly when those issues aren’t directly linked to short-term reputational, financial, or risk considerations.
There are several variables that influence a board’s committee framework. These can include company size, size of the board, industry, regulatory requirements, stakeholder expectations, organizational strategy, and historical precedent. When establishing an ESG framework, here are some committees that are most often involved.
A new standalone committee to oversee sustainability or ESG-related matters is a good starting point for any board. In fact, 54% of FTSE 100 companies now have an ESG committee at the board level.
This committee provides a forum for regular, in-depth discussion of ESG issues. However, in this framework, the committee is at risk separating the discussion of ESG from the broader business, finance, and strategy discussions.
To mitigate that risk, a standalone sustainability or ESG committee can be structured to include chairs or other representatives of the audit, compensation, nominating and governance, risk, regulatory, or other board committees involved with specific ESG issues.
By having one committee rather than multiple committees report to the board, this approach can streamline reporting on ESG and facilitate coordination across committees to enable more effective synthesis of issues.
Key functions of this committee may include:
A governance and nominating committee is primarily responsible for ensuring effective corporate governance and shaping the board's composition. It plays a central role in selecting and recommending potential board members, considering their expertise and the company's needs.
When it comes to ESG, this committee becomes instrumental as it can encourage the inclusion of members with ESG expertise, thereby enhancing the board's ability to address ESG risks and opportunities. This committee’s involvement in ESG is key to fostering responsible governance, transparency, and sustainable business practices.
Key functions of this committee may include:
Involvement of the Investment Committee in ESG is linked with responsible investment management and long-term financial sustainability. This committee is often responsible for setting investment policies, strategies, and guidelines, and overseeing their execution to maintain alignment with an entity's financial goals. In the context of ESG, the Investment Committee can integrate ESG factors into investment decision-making, recognizing their potential impact on financial performance and risk.
Key functions of this committee may include:
This committee should also be sure to regularly evaluate investments and activities for alignment with the organization’s goals.
The Audit Committee should oversee the group’s comprehensive risk governance framework and compliance processes and procedures so all risks, including ESG and climate-related risks, are identified, managed, and monitored and that the group is compliant with all applicable legislation.
Key functions of this committee may include:
The role of the Compensation Committee in ESG matters is vital in promoting responsible leadership and fostering a culture of sustainability within the organization. This committee establishes, implements, and monitors executive compensation plans. It ensures compensation and benefits align with the company's strategic objectives, performance, and shareholder interests.
In terms of ESG, the Compensation Committee can link executive compensation to ESG performance, incentivizing leaders to prioritize social responsibility.
Key functions of this committee may include:
The right committee structure and allocation of ESG oversight will depend on a variety of factors. Overall, an effective structure is one that enables you to confidently answer:
Effective frameworks can also be characterized by:
Once the board decides on its oversight approach, updates should be made to the following to reflect the allocation of these responsibilities.
For guidance on developing and implementing an ESG strategy for your company, or if you want to increase the efficiency of your already established ESG oversight, contact your Moss Adams professional.