The August, 2022 edition of The Hub brings you an article from Harvard Law School Forum on Corporate Governance authored by Ms. Katie LaVoy who is a Counsel at Sidley Austin LLP. This article looks into various important aspects of ESG from the point of view of a Board of Director.
Leading an organization towards sustainability path while ensuring growth & safety of stakeholders’ interest is a once in a generation challenge for most of corporate boards today. Mounting pressure from investor community and ever enhancing regulatory scrutiny & disclosure requirements are forcing boards to take more concrete actions rather exploring options for green-washing.  The past few years have brought significant attention to environmental, social and governance (ESG) principles, whether related to climate change, sustainability, human capital management or diversity, equity and inclusion. As boards of directors consider their risk management and oversight responsibilities, what weight should they give ESG issues?

Are ESG Issues and Opportunities “Mission-Critical”?
A recitation of board duties and responsibilities typically includes topics such as corporate strategy, financial integrity, risk oversight and oversight of key executives. With the individual topics of E[nvironmental], S[ocial] and G[overnance] covering such a broad range of topics, it is difficult to disagree with the conclusion that every company will need to consider some elements of ESG to be mission-critical. For example, within these broad topic areas lie many board-level responsibilities that fit unequivocally under the ESG umbrella, such as CEO succession and compensation, talent development and compliance with environmental and safety laws and regulations.
Based on the flurry of ESG-related pronouncements and proposed rule-making the Securities and Exchange Commission (SEC) has engaged in over the last several years, it would appear that the SEC agrees and considers elements of ESG to rise to the level of mission-critical risk. For example, the SEC’s proposed rule on climate related-disclosures would require that public companies describe the board’s oversight and governance of climate-related risks, including (1) identification of the committee or directors responsible for climate-related risk oversight and whether any director has climate-related risk expertise, (2) the processes by which the board or committees discuss climate-related risks, including how the board is informed of climate-related risks and the frequency of such discussions, (3) whether and how the board or committee considers climate-related risks as part of business strategy, risk management and financial oversight and (4) whether and how the board or committee sets and oversees progress against climate-related targets or goals. [4] If the rules are enacted as proposed, boards will have to evaluate whether their current governance processes over climate-related risk are sufficiently robust or should be enhanced in anticipation of the required disclosures. 
The important point here is that boards must actually consider and decide which elements of ESG are mission-critical and tailor board processes to ensure that oversight of those particular elements is integrated into board operations.

Are ESG Issues and Opportunities of Strategic Importance?
Boards should consider good ESG governance an element of strategic importance—to attract customers, investors and employees or as an opportunity for growth.
A powerful and growing group of investors believes ESG risk is strategically important. Investors incorporate ESG elements into investment decisions and stewardship, viewing ESG as a means of generating long-term value and focusing on disclosure and compliance with reporting standards. 
Larry Fink, Chairman and CEO of BlackRock, explains his attention to ESG disclosure, practices and policies as a critical element of strategy: “Stakeholder capitalism is all about delivering long-term, durable returns for shareholders. And transparency around your company’s planning for a net-zero world is an important element of that … As stewards of our clients’ capital, we ask businesses to demonstrate how they’re going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies.”
Institutional investors perceive ESG matters as not only potentially value-destructive (such as with risks) but value-enhancing as well (such as with opportunities for growth and differentiation). As a result of increased investor focus, boards of directors should consider good ESG governance, at a minimum, an element of investor relations best practices.
Key constituents other than investors, such as employees, also focus on elements of ESG and expect boards to have ESG competence. In this era of talent competition, potential employees may seek employers with superior talent management programs and social impact—both elements of a solid “S” strategy—as well as commitment to sustainability practices and other climate-related goals. A company’s efforts to increase both workforce and supplier diversity may be a key decision-making point for both potential employees and customers.

Integrating Oversight of ESG Risk Into Board Processes
Effective board oversight necessitates understanding how ESG factors into business decisions, including strategic decisions, risk assessments and enterprise risk management. The boards of directors should tackle oversight of ESG risks as they would any other risk. First, boards and management should identify which elements of ESG are relevant and could rise to a level of “mission-critical” risk to the company, whether now or in the foreseeable future. Second, given the breadth of topics covered by ESG, boards should divide the various elements of ESG risk among its various committees or create a standalone ESG committee. Even when delegated, however, at the board level, directors should regularly discuss ESG as a component of the company’s long-term strategy and risk management.

A board might further consider whether to amend its corporate governance guidelines to require best practices benchmarking of ESG-focused practices, risk oversight and disclosure as compared against peer practices, institutional investor guidelines and rating agency criteria.
Finally, the board should ensure that division of responsibility for ESG matters and execution of those duties is documented appropriately through regular board agenda items and explicitly address ESG responsibilities in governance guidelines or committee charters.

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IICA duly acknowledge the authorship/ownership of Harvard Law School Forum on Corporate Governance and Ms. Katie LaVoy.