Who Should Be In Charge of Board ESG Responsibilities?
Should each board member assume all ESG responsibilities? Should ESG responsibilities be assigned to an existing committee? Or should the board create a new committee with specific ESG assignments and roles?
The answers to these questions will depend upon each company’s board structure and responsibilities. For some companies, that may mean creating a new and separate ESG committee. For others, the right approach may be to delegate oversight of some ESG issues within existing board committees. One size will not fit all boards.
How the Board’s Fiduciary Obligations Intersect With ESG
ESG is already a part of each board member’s fiduciary obligations to stockholders and those obligations may not be delegated to others. Boards have two principal fiduciary duties that implicate ESG: the duty of care and the duty of loyalty.
To fulfill their duties of care, board members must be engaged in the matters they oversee so they can make informed decisions on important corporate matters, such as strategic transactions and human capital challenges.
To fulfill their duties of loyalty, which requires putting the corporation and stockholders before directors’ own interests, boards must remain engaged in material decisions impacting ESG matters, which are becoming increasingly complex. The fulfillment of these duties require that each board member remain informed and objective as to ESG matters.
The Role of Board Committees in Governance
Remaining informed and objective requires board immersion in ESG matters. But does that permit or require ESG delegation to a board committee?
Board committee responsibilities are derived from the charters that outline each committee’s mission, authority, responsibilities, configuration, and meeting frequency. The assignment of board members to specific committees should—per good governance—leverage each board member’s expertise.
Corporations without board committee charters should consider drafting them with contribution from key stakeholders such as the board chair, key members of management (such as the CEO) and legal counsel. Good governance will accommodate flexibility to maximize resources and to allocate board work within these committees.
Allocating ESG Within the Board
Boards must identify synergies when distributing ESG oversight within the board and its committees. Some ESG concepts overlap with issues that corporate boards already prioritize such as diversity, equity and inclusion and board representation.
A natural place to house oversight of corporate diversity efforts in this regard is often the nomination and governance committee, which may already have been tasked (for Nasdaq-listed companies) with oversight of and compliance with Nasdaq’s new diversity disclosures and for compliance with the growing trend of state diversity mandates.
Because overseeing corporate diversity efforts aligns naturally with the nomination and governance committee’s mandate, housing responsibility for those issues there may best support proper ESG oversight without the cost and time associated with creating an entirely new committee, or requiring every board member to assume responsibility for this ESG aspect.
The recently proposed SEC rules governing certain environmental disclosures create a fairly urgent (and possibly new) need to assign responsibility for environmental disclosures (and indeed, expertise, if the rules are adopted as proposed).
Depending on its charter, the audit committee may be an appropriate choice to oversee climate-related disclosures, as audit committee members are typically responsible for ensuring compliance with public reporting and disclosures to government agencies. If the audit committee currently lacks a member with the environmental expertise that the proposed SEC rules encourage (and may soon require), an individual with the right background should be assigned to that committee. Alternately, other directors may need to be identified with the expertise required to ensure adequate environmental disclosure oversight.
Management’s Role in ESG Oversight
No matter how well equipped the board and subcommittees are in their ESG oversight, company management also bears responsibility for implementing ESG. Having a strong ESG program at the management level enables proper board oversight and evaluation, and also allows sufficient and appropriate responses to investor queries.
If, for example, an investor questions the origins of a company’s supply chain, the makeup of human capital, or a report concerning carbon emissions, the board must be able to rely upon management’s ability to report the relevant metrics to the appropriate board subcommittee (or the board itself).
While the board, and its subcommittees, provide business oversight, these entities do not have the independent capability to gather material facts (absent the hiring of independent counsel). Having a program in place that provides appropriate reporting to the board is a critical aspect of a functional ESG organizational reporting structure.
There is no “one size fits all” approach with respect to board responsibility for ESG oversight, and each board must evaluate its own circumstances, expertise, industry and composition to determine how best to discharge its ESG responsibilities. Investors are raising the stakes on ESG matters. Companies should examine ESG assignments within their boards to ensure compliance with the new mandates, and to ensure future ESG resiliency.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Reproduced with permission. April, 28, 2022. Copyright 2022. The Bureau of National Affairs, Inc. 800-372-1033. For further use, please visit Copyright and Usage Guidelines | Bloomberg Industry