Managing ESG: five tips for good ESG governance

Whereas corporate governance in general terms relates to the systems by which a company operates and is controlled, ESG governance, specifically, refers to decision-making, board and management oversight, rules, policies and procedures relating to ESG.

As companies of all shapes and sizes begin to devote significant time and resources to meeting much higher standards of ESG disclosure and practice – whether as direct result of new ESG regulations or indirectly, to meet the demands of their investors, lenders or corporate customers – it is important not to neglect good ESG governance as the foundation on which a company can reliably identify, assess and manage ESG-related risks and spot and take strategic steps to capitalise upon lucrative ESG-related opportunities.

In this briefing, we suggest five tips for good ESG governance, drawn from a range of ESG disclosure regulations and voluntary disclosure frameworks.

Context

In preparing these tips we have drawn from:

• The Recommendations of the Task Force on Climate-related Financial Disclosures, including its guidance (“TCFD Recommendations”);
• IFRS Sustainability Disclosure Standard IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) of the International Sustainability Standards Board (“IFRS S1”) (on which we previously released a briefing);
• The European Sustainability Reporting Standards ESRS 2 (General Disclosures) (“ESRS 2”);
• The Securities and Exchange Commission’s climate-related disclosure rules (“SEC Climate Rules”); and
• The UK Transition Plan Taskforce Disclosure Framework (“UK TPT Framework”).

These regulations and frameworks are largely about disclosure, rather than prescription – in other words, they are not designed to dictate how a company organises itself internally on ESG matters, but to require them to disclose more information about their internal structures, policies and processes.

Nonetheless, looking to what companies are required or encouraged to disclose about their ESG governance arrangements provides a helpful guide to what good looks like, particularly where there is a high degree of alignment between different regulations and frameworks.

Tips for good ESG governance

Accountability

Be clear and specific about who is accountable and has oversight at the top of the organisation for ESG risks, opportunities and impacts.

• Determine whether the full board or a board committee will be accountable and have oversight of ESG and what its specific roles and responsibilities will be.
• If establishing a dedicated ESG board committee, draft appropriate terms of reference, for example: “The role of this Committee is to carry out the responsibilities delegated by the board regarding the review and oversight of the Company's strategies, goals, policies, procedures, performance and disclosures related to ESG matters as described in these terms of reference”.
• Determine and document the role and responsibilities of executive management, including whether ESG-related roles or responsibilities are delegated to a specific management-level position or committee and how oversight is exercised over that position or committee.

ESG data and information

Put in place controls, processes and procedures to ensure that those accountable for ESG at the top of an organisation receive data and information on material ESG issues necessary to exercise effective oversight.

• Formalise and document the structure and process by which data and information on material ESG issues is collected by the organisation and communicated to bodies or individuals with an ESG oversight or management role (as appropriate), including how often this is done and how urgent issues are escalated.
• Consider including employees and other stakeholders (e.g., external experts) on relevant bodies to gain additional insights on relevant issues, or explore alternative ways to gather and consider their perspectives.

Knowledge and skills

Ensure bodies and individuals with ESG oversight or management responsibilities have adequate knowledge and expertise on ESG issues to discharge their roles effectively.

• Determine what ESG-related knowledge and skills are material to the organisation, its sector, its geographic locations and its products/services.
• Determine whether the bodies and individuals with ESG oversight or management responsibilities have the necessary knowledge and skills and, if gaps are identified, determine how knowledge and skills may be developed, acquired and/or sourced, such as through access to training or advice from third party experts.
• Consider bringing on new board members and/or managers who have necessary knowledge and skills.
• Consider retaining or establishing relationships with external ESG expert advisers, including sustainability consultants and lawyers.

ESG as core business

Integrate ESG into mainstream business processes, including strategy development, business planning, setting organisational targets and KPIs, risk management, annual budgeting and other key strategic/financial decision-making (e.g., major OpEx, CapEx, acquisitions and divestments).

• Assess the degree to which ESG risks and opportunities are already integrated into the organisation’s strategic business and financial planning processes; identify and take steps to address any potential siloes.
• Integrate delivery of the organisation’s ESG strategy, as appropriate, into the role and remit of heads of department or team.
• Task the finance team with incorporating and including ESG risks and opportunities in financial planning, annual budgeting and decisions on significant capital and operational spending.
• Review the organisation’s risk management policies and processes and consider re-drafting such policies, as appropriate, to integrate ESG risks and opportunities.

Align incentives

Consider aligning incentives and remuneration with the organisation’s ESG strategy, targets and metrics.

• Review current management incentive and remuneration structures and consider the extent to which they align with and support the organisation’s ESG strategy, targets and metrics.
• Where possible and appropriate, consider building performance on ESG issues into management incentive and remuneration structures, taking care to ensure that performance against any ESG-related KPIs is properly measurable and verifiable.
• Consider whether certain ESG-related KPIs or performance on key ESG issues might usefully be integrated into  incentive and remuneration structures for all employees to drive organisation-wide buy-in to ESG strategy.

For more information and tailored advice as needed on ESG governance or any of the regulations or frameworks discussed, please email your Charles Russell Speechlys contact.