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ESG: Board Governance Considerations

Introduction

Environmental, Social, and Governance (ESG) considerations and reporting will be the next major challenge for companies amid a dynamic regulatory landscape and evolving stakeholder demands as they await the SEC’s final ruling on climate risk disclosures. For companies to be prepared, an appropriate level of Board governance over ESG programs is critical. Failure to fulfill this duty can alienate stakeholders, draw regulatory scrutiny, and jeopardize customer and employee loyalty.

Role of the Board of Directors

ESG and sustainability are increasingly hot topics on the boardroom agenda, pushing directors to navigate new ESG-related responsibilities, from establishing an appropriate governance structure and overseeing the implementation of the ESG strategy and program to oversight of the ongoing ESG program and reporting. The Board directors must stay on top of industry trends, regulatory updates, proposals, and emerging risks via continuing education. The role of the Board continues to evolve as they take on additional responsibilities to ensure all stakeholder expectations are satisfied. Some of the key stakeholders include investors, regulators, employees, customers, and vendors.

Here are some of the roles and responsibilities of the Board:

• Establish appropriate tone at the top with respect to ESG objectives
• Define oversight responsibilities and Board Committee structure, including charter updates
• Establish management accountability criteria, including alignment with the overall strategy
• Reviewing ESG specific policies and programs established
• Proactively identify, monitor, and oversee management of ESG risks
• Oversee ESG program, including progress against published goals, targets, and reporting

There has not been a consistent ESG governance structure. However, a growing number of organizations have created dedicated ESG committees, and oversight responsibility has generally been to the entire Board and spread to the various committees.

Top 7 Considerations for the Board

1. Purpose and Strategy: Has the company clearly defined and articulated a purpose that considers key stakeholder needs and aligns with business strategy? Beyond investors, which groups of stakeholders is the company accountable to? Is the company considering the interests of employees, customers, suppliers, and communities? How is the company communicating its purpose and its goals in furtherance of long-term sustainable success?
2. Risk Management: Does the company’s existing risk processes, such as an Enterprise Risk Management (ERM) process, include identifying ESG risks? Are ESG risks and opportunities integrated into the company’s long-term strategy? How is the company measuring and monitoring its progress against milestones and goals as part of the strategy? Is your achievement of goals at risk? Has the company considered its legal liability when including ESG information in SEC filings? Evaluating if and how management has determined which ESG risks and opportunities could have a material impact on strategy, operations, or financial performance.
3. Competitor and Industry Assessment: How does the company monitor what competitors are doing, what the rating agencies are reporting, and other benchmarking data? Does the company’s purpose, goals, reporting, and rating/score align with your competitors and industry?
4. Establishing Accountability: Is management’s performance and compensation tied to ESG Performance and achievement of ESG KPI’s? Have ESG specific metrics and criteria been defined and aligned with peers? Do the company’s disclosures address various stakeholder preferences?
5. Standards / Frameworks: Do the company’s disclosures adhere to the requirements of particular frameworks or standards? How were decisions made on which standard and/or framework to adopt? Is management monitoring changes as certain standards and frameworks converge?
6. Data Reliability: Does the company have robust policies and procedures to support the development of its disclosures? Are the disclosures investor-grade? Has management found any gaps in the internal controls that support the completeness and accuracy of the disclosures? If so, how does management plan on mitigating those gaps?
7. Reporting Oversight: What ESG commitments has the company made public, what is the strategy to achieve the commitments, and how is management monitoring performance? How is the Board overseeing the ESG reporting process and progress toward published goals?

How Centri Can Help

Centri’s ESG Advisory team is uniquely qualified to assist you on your ESG journey. And, while each company’s ESG journey will be different, ensuring you have a trusted advisor to support you is essential. Whether your business has an ESG program in place or is in the process of developing an ESG strategy, Centri’s experts offer a range of ESG services that are tailored to your needs at the moment and in the future.

Mihir Jhaveri

Partner | Risk & Sustainability Practice Leader | CPA, CIA, CISA, CFE, CITP, CGMA

Mihir is a Partner at Centri Business Consulting and the leader of the firm’s Risk & Sustainability Practice. He has over 15 years of experience helping large Fortune 500 publicly-traded and private companies drive process improvement, minimize company risks, and enhance corporate governance. View Mihir Jhaveri's Full Bio