The role of the board in overseeing ESG

By Kristen Sullivan, Maureen Bujno, and Jon Raphael

In corporate boardrooms, few topics seem to be generating more conversation than environmental, social, and governance (ESG) matters. The Center for Audit Quality (CAQ) observed that 95 percent of companies published some type of ESG disclosure in 2020.¹ According to Board Practices Quarterly, diversity, equity, and inclusion; human capital management; and environmental and sustainability matters ranked among the top four board priorities this year.²

Despite this increasing focus, many companies are at the beginning of their ESG journey. As a company’s ESG focus sharpens and as the landscape progresses, boards should be aware that the G raises several governance questions directors should consider.

Key projections
There are several key projections that boards should be aware of as they enhance their ESG governance activities over the coming year:

• Growing need for ESG and business alignment
• ESG’s rising stature on board agendas
• Compliance with SEC requirements
• Convergence of standards
• Heightened demand for alignment of ESG disclosures and financial statements
• Increased focus on the essential role of assurance

Board implications
To help boards prepare to address what is on the horizon for ESG and stay ahead of the rapidly changing environment, we’ve put forth leading practices for boards to consider. Each of these areas will likely become increasingly important as they embark on or expand their governance and oversight responsibilities in response to today’s demands.

• Define the board’s governance infrastructure
• Understanding the ESG management structure
• ESG integrated into the company’s strategic fabric
• Align risk and ESG oversight
• Understand the company’s ESG maturity
• Overseeing the adoption of an ESG framework
• Assure, disclose, and communicate

The merits of an ESG disclosure strategy
Stakeholder needs are continuing to evolve and, as a result, companies need a disclosure strategy that integrates ESG performance into multiple avenues. A carefully conceived disclosure strategy can not only improve the quality of ESG performance information, but also enhance trust and drive business performance. Board members should understand the framework management is using to communicate the company’s sustainability story to specific stakeholders. This includes knowing how ESG metrics are communicated on the company’s website, disclosed in a separate sustainability report, or integrated in an SEC filing.

The value of third-party assurance
As ESG gains prominence, there is also an increased focus by stakeholders on the integrity of a company’s ESG disclosures. To instill confidence, companies should consider the value of getting third-party assurance on ESG disclosures. Overseeing the quality of both the ESG program and disclosures must be an objective process performed by an independent third party following quality control and professional standards. At the board level, this oversight resides with the audit committee. The CAQ observes that third-party assurance from a public company audit firm can improve the reliability of ESG information and the overall credibility of the disclosure.³

Conclusion
Given the growing consensus around ESG performance tied to company value, boards have a great deal to consider. With so much riding on the company’s successful implementation and governance of ESG, boards will benefit greatly from continuing education as they carry out their oversight responsibilities.

End notes

¹The Center for Audit Quality, “S&P 500 and ESG Reporting” (August 9, 2021).
²Board Practices Quarterly, “2021 Boardroom Agenda” (February 2021).
³The Center for Audit Quality, “S&P 500 and ESG Reporting” (August 9, 2021).