Defining the role of the audit committee in overseeing ESG

08 December 2020
 

In this publication, we look at the role of the audit committee in relation to ESG. In response to the increasing demand from investors and stakeholders for better quality ESG information, boards are responding by evolving their governance structure. Our analysis of the trend is based on the review of S&P 500 proxy statements in 2019-2020.

Which board committee oversees the ESG issues?
 

• Over 50% of boards have delegated to nominating and governance committee or ESG/sustainability committee oversight responsibility for ESG initiatives. 7% of boards however directly take the lead. 28% of companies, however, have not disclosed the relevant governance structure.
   

Industry practices differ

• 86% of boards in the energy, resources, and industrials sector have delegated to a specific committee to oversee ESG. This may reflect the nature of business, regulatory requirements and a long history of focus on employee safety. This is followed by the consumer industry, in which we have found specialised ESG/sustainability committee more frequently than others.
   

What this means for audit committees?

• The audit committee is the primary owner of risk oversight. When it comes to ESG issues and risks, it has a role in considering appropriate disclosures as well as relevant internal controls associated with the disclosed content. Considering materiality related to ESG disclosures is inseparable from the role. Assurance over the ESG information may also be on the agenda of the audit committee going forward.

On the audit committee’s agenda: Defining the role of the audit committee in overseeing ESG is the latest publication from the Center for Board Effectiveness, published on November 2020.