Modernizing Governance: The Board’s Role in ESG!

CS Divya Momaya

24 Mar 2021

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Sustainability has become one of the mainstream discussions in todays’ corporate world. The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” The ESG components are taken into account as factors that help ascertain investment decisions and risk management with sustainability lens within the organization. The primary objective is to build the culture that encourages to achieve business standards that are more conscientious and more likely to succeed in the long-run.

It is interesting to know that stakeholders are taking great interest in recognizing and understanding Environment, Social and Governance (ESG) issues to formulate robust business strategies and come up with ideas to help businesses grow. However, at the same time, Boards are still concentrating on the short-term gains rather than focusing on the long-term sustainability of business. The concept of ‘corporate purpose’ provides the impetus that the Boards need to focus more on ESG concerns and learn to effectively manage the long-term success of their businesses. It is important for the Boards to understand that adaption to socio-economic and environmental changes will help in better identification of strategic opportunities and meet competitive challenges. Proactive and integrated ESG policies can widen a company's competitive moat relative to other industry players.

In the Indian context, very few management leaderships understand the need to identify and manage ESG impacts and risks. Boards have the responsibility to influence management to enhance the organization’s approach towards ESG. This is not just about building public relations and creating branding, but also a question of business performance and long-term value of the Company. In order to attain the same and introduce a robust approach towards ESG, Boards must consider following practices:

a.      Request for a formal ESG Assessment

An effective sustainability reporting allows companies to identify potential risks that may affect businesses in both short as well as long run. This appropriate identification would help companies to prepare themselves and help Boards to strategize according to their risk appetites. An ESG inventory and formal risk assessment should extend beyond the routine organizational operations and take inputs from both internal as well as external stakeholders of the Company. The assessment should cover the complete supply chain, the extended enterprise and strategic considerations such as resource accessibility, usage, and sustainability, talent recruitment, engagement and retention, financial performance, risk and reputational impacts. The assessment should not only identify and rate all risks, but also consider how those risks interrelate at the enterprise level. This activity will give organizations a great perspective towards building best practices suitable for their businesses.

b.     Encourage more proactive Corporate Transparency and Disclosures

An effective ESG reporting broadens the scope of organizational disclosures beyond mere financial reporting. It helps Boards to evaluate environmental as well as social metric to formulate appropriate strategies taking into account all the relevant factors affecting businesses. Further, it also helps in setting an important parameter for investors and other stakeholders to judge the working style of the Company as well as mindset of the top management towards culture, innovation, transparency and integrity.

c.      Encourage management for active Stakeholder Engagement

Sustainability reporting always helps in creation of a brand and gain stakeholders’ trust. Therefore, it is extremely important for the Board and the Senior Management to constantly engage with the stakeholders to make them feel an integral part of the Company and its activities. This act of Board and robust ESG reporting will further help in building great communication channels amongst the Company and stakeholders thereafter leaving no scope for miscommunication or misrepresentation of any information.

d.     Establish ESG specific roles and responsibilities

Once organizations have identified and assessed specific ESG impacts, risks and opportunities, the senior management and the Board are better positioned to set and pursue long-term objectives specific to ESG. As a matter of trend for the companies which understand ESG as an important element, have appointed a Chief Sustainability Officer for undertaking the ESG related responsibilities, while others have given the CEO or other C-suite executives explicit ESG responsibilities. From a Board perspective, ESG is most often overseen either completely at the Board level or by the Risk Management Committee constituted by the Board. It is highly recommended that in order to gain better outputs on ESG implementation and reporting, a mix of appropriate people from the Board, Risk Management Committee and Audit Committee should initiate and strongly support efforts to provide high-quality ESG assurance to the stakeholders of the company.

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