ESG Insights Workpaper Series

ESG Insights Workpaper Series

Workpaper #2

Board Responsibility in ESG Governance-

Board Accountability From Oversight to Impact

Boards play a pivotal role in steering organizations toward responsible ESG

practices. This article sheds light on key oversight principles and their
impact on sustainable business leadership.
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Exploring Options for Distributing ESG Oversight

Responsibilities
Determining the oversight of Environmental, Social, and
Governance (ESG) issues involves strategic decisions, with
options ranging from full board involvement to dedicated
committees. A tailored approach is essential, considering
factors such as company size, board composition, and
specific circumstances. Existing board committees often
inadvertently oversee certain ESG matters, highlighting the
need for a deliberate allocation process. Company
examples in this publication illustrate diverse approaches,
showcasing the variability in designing effective oversight
structures.
As the global business landscape continues to evolve, the
integration of Environmental, Social, and Governance
(ESG) considerations into corporate strategies has become
not only a moral imperative but also a strategic necessity.

The Four Alternatives

To navigate the complex web of sustainability challenges,
organizations are increasingly recognizing the need for a
structured and accountable approach to ESG
responsibilities. One pivotal decision in this journey is
determining how to assign ESG responsibility within the
organizational hierarchy, specifically at the level of the
board. This critical decision encompasses a spectrum of
approaches, each with its own set of advantages and
challenges. In this exploration, we delve into four distinct
approaches:

• Full Board Involvement,

• Full Board and Committee Mix
• New Standalone Committee and
• Multiple Existing Committees.
By examining the pros and cons of each approach,
organizations can gain valuable insights into tailoring their
governance structures to meet the unique demands of their
ESG commitments, fostering a resilient and responsible
corporate culture.

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The Four Alternatives of Assigning ESG Responsibilities to the Board

Board ESG Description

Responsibility
1 Full Board • For smaller companies or boards with limited independent
Involvement directors, primary oversight may reside with the full board.
• However, this approach may face time constraints for in-
depth examination of specific ESG issues.
2 Full Board and • A common practice involves a combination of full board and
Committee Mix committee oversight. Standing committees may retain
responsibility for certain matters within their purview, with the
full board maintaining primary oversight for other crucial areas.

3 New • Companies may opt to create a dedicated sustainability or ESG

Standalone committee.
Committee
• While this provides a focused platform for ESG discussions,
there's a risk of isolating these discussions from broader
business, finance, and strategy considerations.

4 Multiple • Some companies distribute oversight responsibilities for

Existing discrete ESG matters among existing committees (audit,
Committees
compensation, nominating, and governance).
• This approach leverages relevant expertise and aligns with
existing committee responsibilities, streamlining reporting and
coordination.

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The pros and cons of each alternative

Certainly, assigning ESG (Environmental, Social, and Governance) responsibility to the board is a
critical decision for any organization. Here are the benefits and disadvantages of implementing
each of these four different approaches:

Full Board Involvement

Involving the entire board in ESG responsibilities ensures comprehensive oversight and alignment
with corporate strategy. The diverse expertise of board members contributes to holistic decision-
making. However, challenges may arise due to potential lack of ESG expertise, time constraints
for board members, and the risk of ESG efforts becoming a mere checkbox exercise.
Benefits Disadvantages
Comprehensive Oversight: Involving the Potential Lack of Expertise: Some board
entire board ensures that ESG members may not be well-versed in ESG
considerations are integrated into all matters, leading to potential gaps in
aspects of the organization's strategy and understanding and implementation.
decision-making. Time Constraints: Given the broad
Alignment with Corporate Strategy: ESG responsibilities of a board, dedicating
becomes a core part of the overall sufficient time to ESG matters might be
business strategy, reflecting a challenging.
commitment from the top leadership. Risk of Tokenism: ESG may become a
Holistic Decision-Making: Board members checkbox exercise, with the full board not
collectively bring diverse expertise, which fully engaging in meaningful discussions.
can lead to well-rounded ESG decisions.

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Full Board and Committee Mix

Combining full board involvement with specialized committees offers a balanced approach.
Committees allow for focused expertise and efficient resource allocation, but challenges include
potential communication issues, the risk of fragmented strategies, and increased administrative
burdens associated with managing multiple committees.
Benefits Disadvantages
Specialized Focus: Committees can be Communication Challenges: Coordinating
dedicated to specific ESG aspects (e.g., efforts between the full board and multiple
environmental, social, or governance), committees may lead to communication
ensuring in-depth expertise. issues and potential misalignment.
Effective Resource Allocation: Committees Risk of Fragmentation: Different committees
can allocate time and resources more may prioritize different aspects of ESG,
efficiently to address specific ESG potentially resulting in a fragmented
challenges. approach rather than a cohesive strategy.
Balanced Workload: Allows for the Increased Administrative Burden: Managing
distribution of ESG responsibilities without multiple committees requires additional
overwhelming the full board. administrative efforts and resources.

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New Standalone Committee

Establishing a dedicated ESG committee ensures a focused approach, rapid decision-making,
and enhanced accountability. However, risks include potential isolation from broader strategic
discussions, limited input from the full board's expertise, and resource constraints compared to
the collective resources of the entire board.
Benefits Disadvantages
Dedicated Focus: A standalone committee Risk of Isolation: A standalone committee
can exclusively concentrate on ESG may risk becoming isolated from the
matters, ensuring a dedicated focus on broader strategic discussions of the full
these critical issues. board.
Rapid Decision-Making: With a focused Limited Input: The expertise of the full board
mandate, the committee can respond may not be fully leveraged, potentially
more quickly to emerging ESG challenges. leading to a narrow perspective on ESG
Enhanced Accountability: Clear matters.
responsibility for ESG matters can improve Resource Constraints: The committee may
accountability and transparency. face resource limitations compared to the
entire board.

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Multiple Existing Committees

Distributing ESG responsibilities across existing committees integrates sustainability into core
functions, leverages existing expertise, and prevents overburdening a single committee.
Challenges may include coordination difficulties, the potential oversight of interconnected issues,
and the lack of centralized oversight, requiring careful consideration to avoid fragmentation and
ensure a cohesive ESG strategy.
Benefits Disadvantages
Integration into Core Functions: ESG Coordination Challenges: Ensuring
responsibilities are distributed among coordination and communication between
existing committees, ensuring integration multiple committees can be challenging.
into various aspects of the organization. Potential for Overlooked Interconnections:
Leveraging Existing Expertise: Committees ESG issues often overlap, and distributing
with relevant expertise can address ESG responsibilities might lead to overlooking
issues within their specific domains. interconnected issues.
Avoidance of Overloading a Single Lack of Centralized Oversight: Without a
Committee: Distributing responsibilities dedicated central body, there may be a
across multiple committees prevents lack of cohesive oversight and strategy for
overburdening any single group. ESG matters.

In choosing the most suitable approach,

organizations should consider their specific
context, culture, and the nature of their ESG
challenges. A combination of these approaches
might also be tailored to address the unique needs
of the organization.

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Current Practice
Approaches to board oversight of specific and
collective ESG issues differ among companies, with
no universal solution. For instance, findings from a
survey conducted by Corporate Board Member and
EY Center for Board Matters, involving nearly 400
public company directors and conducted in
February and March of 2021, reveal that the full
board frequently takes responsibility for supervising
climate-related risks and opportunities, as well as
workforce diversity, equity, and inclusion.
(ESG) considerations into corporate strategies has
become not only a moral imperative but also a
strategic necessity.

Source: Corporate Board Member/EY Research Report, Four Opportunities for Enhancing ESG
Oversight (2021),

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Supservising Company’s ESG Disclosures

ESG reporting plays a pivotal role in offering
stakeholders a comprehensive insight into how
companies generate and safeguard value. Based on
the survey conducted by EY “Four Opportunities of
Enhancing ESG Oversight (2021)”, these disclosures
are increasingly crucial for mainstream investors who
integrate related factors into their investment and
stewardship decisions. In this survey, 59 percent of
participating directors indicate that their companies
externally report ESG information, underscoring a
widespread recognition of the importance of
conveying their ESG story. However, there remains an
opportunity for many companies to present a more
comprehensive, long-term narrative to the market.

Without companies taking charge of their story, third-

party ESG data and ratings providers step in, often using
estimates for unreported data and penalizing companies
for the lack of disclosure. It is crucial for companies to
assert ownership over their ESG narrative. Of the
directors whose companies are already reporting on ESG
externally, 58 percent state that their companies provide
a stand-alone ESG/sustainability report, while others rely
on the annual report, company website, or proxy
statement. Additionally, 28 percent of directors note that
their companies are incorporating ESG communications
into earnings calls.

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Communication Channels
To ensure effective communication, all company messages,
despite their target audience or objectives, should convey a
clear, consistent, and long-term value creation strategy. ESG
disclosures should seamlessly integrate with other external
reports, aligning with risk factors in the 10-K and messages in
sustainability reports or earnings calls. The board plays a crucial
role in overseeing the coherence and clarity of the company's
ESG narrative. Investors emphasize the importance of
materiality, alignment with external frameworks, and
standardized data. Notably, the Sustainability Accounting
Standards Board (SASB) is widely considered decision-useful.
However, the research indicates that company-specific metrics
are the prevalent disclosure approach. Robust disclosure
processes and controls, including data quality measures, are
essential for credible ESG reporting. The involvement of internal
audit and external assurance contributes to building stakeholder
confidence.

Conclusion
In an era where ESG considerations are integral to
corporate success, effective communication becomes
paramount. Companies must articulate a cohesive,
long-term strategy for value creation, ensuring that ESG
disclosures seamlessly align with broader external
reporting. As stakeholders place increasing importance
on materiality and alignment with frameworks, the
board's role in overseeing the clarity and consistency of
the ESG narrative is crucial. While various disclosure
approaches exist, robust processes and controls, along
with internal and external assurance, are imperative for
credibility. With a majority of companies actively
developing governance policies around ESG
information, boards, and particularly audit committees,
emerge as key players in fostering transparency and
building stakeholder confidence. As ESG data
continues to guide informed decision-making, the
commitment to robust governance ensures companies
not only meet current expectations but also navigate
future challenges with resilience and responsibility.

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