ESG Board Committees, Part II: Five Steps to Achieve an Effective ESG Board Committee
By Sarah Fortt
ESG is taking the world by storm. However, while ESG may seem like a relatively new concept, the reality is that non-financial risks and opportunities, and board governance over those matters, have existed for a long time, even before the term “ESG” was first coined back in 2005. However, what is new is that ESG creates a series of lenses through which companies can assess whether, and to what degree, they need to exhibit greater risk-creativity and strategic creativity. As I discussed in ESG Board Committees, Part I, when it comes to how boards oversee ESG issues, there is no one-size-fits-all approach. Once a company decides that it is time expand the scope of its board oversight to include various ESG matters that have not been explicitly included previously, there are five matters that the company should consider to focus the board’s attention on what matters most.
1. Treat ESG Committee Like Other Board Committees
First, if a company decides to go the route of creating a new board committee to oversee ESG, it is important that it be treated as a grown-up committee. ESG committees, or other board bodies overseeing ESG matters, should not be treated as a lesser version of board governance. This means companies should adopt a committee charter, and that charter ideally should be made public. There also should be an internal annual schedule for the committee’s meetings with template agendas based on the committee’s charter. The committee also should have the same rights and function in the same manner as the company’s other board committees, unless there is a specific reason for deviation.
2. Be Deliberate With ESG Board Composition
Second, companies should take the composition of their ESG board oversight body seriously as well. While not every company needs to have a climate change expert or human rights lawyer on their ESG committee, companies do need to consider each member’s qualifications. Companies also need to consider whether there are any sensitivities around appointing a particular director. Consider whether a director’s biography and qualifications are consistent with the company’s ESG goals and message. Directors who are on the committee also should receive ESG education to increase their level of ESG sophistication and preparedness. Companies should always have an eye on the degree to which they are supporting the board’s and management’s fiduciary duties, including, in this case, their duty of care.
3. Focus on Material Risks and Opportunities
Third, the board’s attention should be focused on material risks and opportunities, and the choice about what to share with the board should be guided by management’s materiality assessment of ESG based on the five lenses of materiality (as I discussed in ESG Board Committees, Part I). One of the concerns I have expressed regarding companies creating ESG board committees is that they often do so prematurely, and thereby create the implication that ESG matters are material for the company before the company actually has identified whether, and to what extent, that is in fact that case. This could create litigation risk down the road. When considering how to report to the board on ESG matters, it is equally important to be clear on what are, and are not, material ESG matters for the company.
4. Consider ESG Committee’s Reporting Structure
Fourth, companies also should consider how the ESG committee, or other board body overseeing ESG matters, will report up to the full board, on what matters it will report to the full board, and how the committee will interact with the other board committees. For example, if there is separate ESG committee, will it engage with the compensation committee on issues around pay equity and human capital management? Will it engage with the nominating committee or the audit committee on risk oversight or ethical issues, and how will all the board bodies work together to not only create a culture of compliance and but also a culture of ESG excellence?
5. Be Thoughtful in Creating a Consistent Corporate Record
Lastly, as a governance guru, I have to discuss the importance of the corporate record. Consistent with the first recommendation that companies treat their ESG board committees as grown-up committees, companies also need to be thoughtful in creating a consistent corporate record. This means that minutes should reflect the committee’s oversight of the areas that it is charged with in its charter, and public disclosures that discuss board oversight of ESG should be backed up by the corporate record. Ultimately, the challenge of ESG does not lie in creating ESG disclosure, but in integrating ESG concepts into the operations and strategy of the corporation, and in creating consistency between what the company is doing, what the company is reporting, and what the company, and its members, care about.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.