The responsibility for the oversight of an organization’s sustainability and environmental, social, and governance (ESG) matters lies firmly with the board of directors. They are ultimately accountable for the long-term success of an organization, and it is important as part of modern corporate governance to embed sustainability and ESG into decision-making and long-term growth strategies. Therefore, companies on a sustainability transformation journey need strong board leadership and members with adequate sustainability literacy.
While it is clear that boards are responsible for sustainability and ESG oversight, how they discharge those responsibilities varies widely depending on the company, the industry, and the jurisdiction. With most boards around the world having at least one professional accountant board member, there is an enormous opportunity for the accountancy profession to influence sustainable governance practices in boardrooms. An important responsibility for PAOs is supporting their members serving on boards to stay up to date with relevant developments in sustainability and ESG.
To explore current practices for overseeing ESG, IFAC’s Professional Accountants in Business (PAIB) Advisory Group was recently joined by a panel of experienced board directors, who between them have a wealth of non-executive experience across a range of companies and jurisdictions. Nancy Tse, the Deputy Chair of the PAIB Advisory Group and an experienced board director herself, moderated the discussion between panelists, who included:
- Nicholas Allen, Audit & Risk Committee Chair, CLP Holdings Limited, & Chairman of Link REIT
- Susan Angele, Senior Advisor, KPMG Board Leadership Center
- Alan Johnson, Outgoing IFAC President, and non-executive director at Imperial Brands plc, William Grant & Sons Ltd, and DS Smith plc.
Some key learnings from the discussion were:
- Incorporating sustainability and ESG into purpose and strategy is not a separate exercise
For a purpose-driven organization, its purpose and strategy are fundamentally based on doing the right thing for society and various stakeholders. With this premise, embedding sustainability and ESG is not done in isolation; it is a core part of how an organization responds to challenges, risks, and opportunities affecting value creation in the context of the needs and expectations of stakeholders, and in line with planetary boundaries. Sustainability and ESG affect all organizations of all sizes and across all industries and sectors, including the public sector, and accountants serving as board directors are at the center of sustainability discussions.
- Aligning sustainability and ESG priorities throughout the organization can be a challenge
Boards are the stewards of long-term value and have an obligation to be bold in setting the strategy and embedding a culture that embraces sustainability and ESG and encourages innovation. But a key challenge for boards is ensuring a common understanding of, and alignment on, sustainability and ESG priorities throughout the organization. CFOs and finance functions have an important role to play in supporting the board by helping to break down organizational siloes and foster an integrated mindset to think, measure, manage and report in a more integrated manner.
- Boards are focusing on the key metrics and KPIs
Companies are using various standards, reporting frameworks and metrics to measure and report on sustainability, but this can often result in much complexity.
In the board’s strategic capacity, using sustainability/ESG as a lens to think about strategy, risk and opportunity can help them to identify the 5 or 6 metrics that will focus their attention on key strategic issues making a real impact and that will align performance to sustainability targets and goals.
Many targets are longer-term. Therefore, it is important when setting targets to work backwards in shorter periods to effectively monitor goals over time against set milestones.
- Ensuring an appropriate oversight structure
Individual companies decide (within any legal mandated requirements) the most appropriate board structure, the committees needed, and if and when the board delegates responsibilities to its sub-committees. Companies are increasingly evolving their committee structures and mandates to ensure effective oversight of ESG and sustainability.
The most appropriate committee structure will depend on factors, such as the:
- Jurisdictional legal requirements and corporate governance codes
- Size and structure of the company
- Complexity of sustainability and ESG risks in a particular industry. For example, companies in the oil and gas industry may need deeper expertise in a dedicated committee.
- 54% of FTSE 100 companies now have an ESG committee at board level (including 100% of mining and oil & gas companies)
Regardless of structure, boards must ensure minimal overlap or fragmentation of duties, while at the same time maintaining connectivity between committee agendas where relevant. They must ensure that the board is fully engaged in topics of importance. Having board members serve across more than one committee can be an effective way of achieving this. At the PAIB Advisory Group meeting, an example was shared of a company where board members serve on all committees to be able to see a complete picture and effectively link operational performance to strategic delivery.
- Audit committees have an expanding role
Audit committees have an existing mandate to oversee high quality financial reporting and internal and external audit, and as such are well placed to expand on this by:
- Providing oversight of mandatory sustainability/ESG disclosures and related systems and internal controls.
- Ensuring the financial impacts of material climate-related risks have been considered and, where appropriate, are reflected in the audited financial statements, including through:
- Oversight of management processes to ensure adequate consideration of ESG issues and monitoring of ESG compliance risks.
- Scrutiny of the work of the external auditors, especially their consideration of the impact of material climate risks in their audit of the financial statements.
- Ensuring the consistency of sustainability/ESG related disclosures across general purpose financial reporting and other public disclosures.
- Overseeing sustainability/ESG assurance, including internal audit activities, as well as the appointment of external auditors and ESG assurance providers.
With expanding roles, audit committee transparency is increasingly important for the board, investors and other stakeholders to understand the audit committee’s responsibilities and focus areas, including as they relate to ESG information and disclosure.
- All board members must be well-versed and competent in ESG matters
Many professional accountants serve on boards and must have adequate knowledge, awareness and literacy in the ESG issues relevant to the company and its industry. Although subject matter experts and advisors can be brought in where necessary, board members cannot be entirely reliant on outside expertise. Board members are responsible for ensuring they keep up to date with emerging issues and continually learn new areas relevant to their organization and industry. PAOs can support those who are professional accountants and subject to continuing professional development (CPD) requirements.
Appendix: Further reading
- Boardroom climate competence: Organizing for oversight (kpmg.us)
- ESG, strategy, and the long view (kpmg.us)
- An audit committee lens on ESG reporting (kpmg.us)
- Sustainability in the Spotlight: Board ESG Oversight and Strategy (spencerstuart.com)
- ESG: Advice for Boards (spencerstuart.com)
- Navigating The ESG Journey In 2022 And Beyond | Deloitte US
- ESG and the role of the board (pwc.com)