Sustainability & ESG: The Next Frontier of Board Room Action
“The coronavirus pandemic has highlighted the importance of financial market risks that arise in the changing landscape including ESG expectations from various stakeholders. The COVID-19 crisis has brought sustainability and ESG focus to the center stage in board room discussions. There are stakeholders across the globe to pushing to move from measuring quarterly financial performance to long term value creation. As ESG moves from ‘good-to-have’ territory to becoming core of corporate thinking – the board of the company has got into the driver’s seat to guide the organization on the ESG mandate as well deliver results. Read on…”
1.0 Which Way is the Wind Blowing?
Looking at recent trends, ESG regulations and expectations are bound to rise, as is the interest of stakeholders like customers, investors, value chain partners, employees, civil organizations, regulators, and the media in ESG policies and practices that have a positive impact on society.
There are several countries and supervisory authorities in the financial ecosystem that have enhanced focus on climate risk disclosures, and this will only intensify transparency around climate in the buildup to the United Nations Climate Change Conference, or COP26, taking place in Glasgow in November 2021.
Similarly, several international and regional policy and regulatory initiatives have also taken the same path:
- IFRS Foundation Proposals: Proposals around sustainability reporting demonstrate an important international attempt to build further transparency and coherency around global baseline disclosures.
- Network for Greening the Financial System (NGFS): Coordinating global central banks and supervisory authorities to embed best practices in the financial supervision of climate-related systemic risks.
- European Union SFDR & Taxonomy: Introduction of the Sustainability Financial Disclosures Regulation (SFDR)1 and EU Sustainable Finance Taxonomy, creating powerful drivers for high-integrity ESG data.
- United Kingdom Mandatory TCFD: Formal announcement by the UK to make Task Force on Climate-Related Financial Disclosures (TCFD) reporting mandatory across the economy.
The story is no different when we examine the domestic landscape in India. The Indian journey on ESG began as early as 2007 and has progressed through major milestones: MCA CSR Guidelines, National Voluntary Guidelines (NVGs), SEBI Green Bonds Guidelines, the SEBI Stewardship Code6, and the recently mandated Business Responsibility and Sustainability Reporting (BRSR)7. Simultaneously, Indian enterprises are rapidly adopting international frameworks including GRI, IIRC, SASB, and CDP.
2.0 What is ESG? Definition & Core Pillars
ESG is firmly on the radar of investors worldwide. Focusing on ESG issues brings to light crucial risks and opportunities that dictate a company’s capacity for sustainable value creation:
| Environmental (E) | Social (S) | Governance (G) |
|---|---|---|
| Climate change & GHG emissions | Employee development & training | Board Independence |
| Water stewardship & conservation | Diversity & inclusion | Board diversity & expertise |
| Waste generation & circularity | Community development & CSR | Anti-Corruption & Bribery policies |
| Emissions & air quality management | Occupational Health & Safety | Tax transparency & disclosure |
| Biodiversity & ecosystem protection | Customer privacy & cybersecurity | Ethical conduct & executive pay |
2.1 Key Trends in ESG Capital Markets
Dedicated ESG funds mobilized in excess of USD 50 billion in 2020, pushing total global assets under management (AUM) with an explicit ESG focus past USD 35 trillion.2
The global green bond market surpassed a monumental milestone of USD 1 trillion in cumulative issuance in 2020.
Jurisdictions globally (led by the European Union) are standardizing legal definitions of environmentally sustainable activities.
IFRS Foundation initiative to establish a unified International Sustainability Standards Board (ISSB) to end disclosure fragmentation.
2.2 Global Frameworks on the Role of the Board in ESG Oversight
| Global Reporting Initiative (GRI)3 | Task Force on Climate-Related Financial Disclosures (TCFD)4 | Carbon Disclosure Project (CDP)5 |
|---|---|---|
|
GRI Standard 102-18 (General Disclosure 102): Explicitly mandates disclosure of the governance structure of the organization, including committees of the highest governance body responsible for decision-making on economic, environmental, and social topics. |
Governance Pillar Recommendation (a): Mandates entities to “Disclose the organization’s governance around climate-related risks and opportunities”, specifically requiring companies to “Describe the board’s oversight of climate-related risks and opportunities” in mainstream financial filings. |
Question C1.1b of CDP Questionnaire: Directly measures the involvement and oversight of the highest governance body on climate issues impacting the business: “Provide further details on the board’s oversight of climate-related issues.” |
3.0 The Board as Custodian & First Flight of the ESG Journey
The Board of Directors represents the best interests of stakeholders. As custodians of reputation and stewards of long-term value creation, board directors hold a vital oversight responsibility in evaluating environmental and social impacts. Boards are transitioning from passive observers to active drivers.
3.1 Actionable Roadmap: Board’s First Flight
3.3 Board Oversight & Investor Expectations
Institutional investors require transparent disclosure of board governance mechanisms through:
- Comprehensive disclosures in annual proxy statements describing board-level ESG oversight processes.
- Formal amendments to board committee charters articulating specific ESG responsibilities.
- Transparent reporting of individual directors’ skills, credentials, and diversity matrices relevant to ESG topics.
4.0 Mainstreaming ESG into Board Committees: Oversight Questionnaires
Whether boards exercise oversight holistically or delegate to specialized committees, oversight mechanisms must be rigorous, comprehensive, and publicly disclosed. Boards must pose pointed governance questions across committees:
Full Board / Sustainability Committee Oversight
- Business Strategy: Are ESG risks and opportunities an integral part of long-term business strategy? How does the organization measure and review targets?
- Business Context: Does ESG sit at the core of the company’s purpose and stakeholder interests?
- Risk Management: What is the formal process for identifying and integrating ESG risks into the Enterprise Risk Management (ERM) framework?
- Reporting Channels: What is the optimal communication approach and disclosure channel for ESG?
Audit Committee Oversight
- Disclosures: Do ESG disclosures meet investor-grade criteria? Which reporting framework (BRSR, GRI, SASB, TCFD) is optimal for the company’s sector?
- Processes & Controls: Are there robust internal controls ensuring ESG disclosures are accurate, consistent, and comparable?
- Independent Assurance: Is there an established need to obtain independent third-party assurance over non-financial ESG disclosures?
Compensation Committee Oversight
- Executive Accountability: How are quantitative ESG goals and climate targets reflected in executive compensation structures and performance bonuses?
- Talent & Culture: How well-equipped is management in terms of capabilities, resources, and culture to execute the corporate ESG strategy?
Nominating & Governance Committee Oversight
- Stakeholder Engagement: Is the ESG strategy being effectively communicated to investors, rating agencies, and wider stakeholders?
- Board Composition & Diversity: Does the board have the requisite skills, technical expertise, and diversity to oversee complex ESG risks?
- Capacity Building: What is the awareness level of the board regarding ESG, and is continuous director training being conducted?
5.0 Conclusion & Strategic Value Unlocking
Boards should be ready to engage on ESG with priority on sustainability, climate change, biodiversity, diversity, and social responsibility themes to gain momentum. Investors in particular insist that publicly listed companies provide more meaningful and comparable ESG reporting metrics, starting with climate change.
Stakeholders now assess how the company unlocks long-term business value creation by deploying ESG at its core strategy. Companies will have to find the right approach to manage ESG depending on their sector, organizational maturity, and stakeholder focus—there is no one-size-fits-all solution.
ESG will be an integral component of board governance, as opposed to a “good to have” topic to be covered annually, if at all. Ideally, ESG will be part of company strategy and integrated into the work of the board and its core committees. Progressive companies value being a frontrunner on ESG issues because they see the connection to the company’s long-term success.
References & Regulatory Notes
- EU Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy: https://gresb.com/eu-regulatory-environment-changes-sfdr-eu-taxonomy/
- Source: CRISIL ESG Compendium (2020).
- Global Reporting Initiative (GRI) Standards: https://www.globalreporting.org/standards/
- Task Force on Climate-Related Financial Disclosures (TCFD): https://www.fsb-tcfd.org/
- Carbon Disclosure Project (CDP): https://www.cdp.net/en
- SEBI Stewardship Code Circular: https://www.sebi.gov.in/legal/circulars/dec-2019/stewardship-code-for-all-mutual-funds-and-all-categories-of-aifs-in-relation-to-their-investment-in-listed-equities_45451.html
- SEBI Circular on Business Responsibility and Sustainability Reporting (BRSR): https://www.sebi.gov.in/media/press-releases/may-2021/sebi-issues-circular-on-business-responsibility-and-sustainability-reporting-by-listed-entities-_50097.html