(Expansion) – There is a growing consensus that the Boards of Directors of companies (or the Boards , for their name in English) also have, within the framework of their duty of care, the supervision of the risks and opportunities that are presented with respect to ESG topics, that is, environmental, social and corporate governance issues.
And it is also considered that these risks and opportunities should be supervised by the Board not only from an internal point of view with respect to how they affect the business and financial performance of the organization, but also from an external point of view, that is, the impact that the company’s operations have on its surroundings and the environment, potentially affecting different types of stakeholders such as local communities, customers, actors in the value chain, etc.
What may not be so clear is how boards should carry out oversight of ESG issues, what priorities to consider, what tools to choose, where to place the topic in the board structure, and what capacity to build to address it. proper supervision of these issues.
First of all, it will be important to determine which are the “material” ESG aspects or issues for the organization, those factors that have the most impact both internally and externally, taking into account the key stakeholders involved or affected by the former. In the design of the organization’s ESG strategy – at the level of the Boards and Management – it must be defined which are the priority issues (materiality map) to supervise (and manage).
Certainly issues such as water management, health and safety, or the impact on local communities will be material issues for a mining company, in the same way that, in turn, data protection and anti-money laundering issues. , they will be for a bank. Various frameworks and international standards provide guidelines on material issues by sector and industry that guide companies to build their own materiality maps.
For the treatment of ESG issues within the Board of Directors, best practices indicate that the most important thing is to have members who have a general understanding (and the respective regular training) about the priority ESG issues for the organization, and how these are addressed. linked to the latter’s strategy. Even better if some of the selected members – in particular, independent or external directors – are specialists in one or more of the organization’s material ESG topics.
A necessary condition for the Boards to be well adapted to address the supervision of ESG issues is the diversity of their composition: how do the Boards reflect the plurality of visions of the different interest groups with which the company interacts, especially customers, consumers and communities? How does its composition reflect the diversity in terms of gender, ethnicity, age, etc., of all these groups?
Numerous studies affirm that more diverse Boards better fulfill their supervisory role, and are innovative and resilient when it comes to taking into account the emerging ESG issues that most affect (or can potentially affect) the organization, eliminating or reducing biases that may arise in Councils formed in a more homogeneous way.
The Brazilian fintech Nubank recently chose the young pop artist Larissa de Macedo Machado, known as Anitta, as a member of the Board, justifying it in the need to have a voice on the Board that reflects the points of view of one of the demographic segments to those targeted by the business strategy of the digital bank.
In other cases, companies that have suffered serious cases of corruption in the past have decided to incorporate prominent anti-corruption lawyers into their Councils, or mining companies that have suffered incidents with indigenous communities, integrate experts and even activists on these issues into their Boards. .
It is true that many times these incorporations occur after a controversy or corporate scandal that forces the company to “refresh” its Boards. Ideally, boards should be able to proactively anticipate these potential ESG risks and act before, rather than after, they materialise.
There are several paths to choose from when choosing where to address ESG issues at Board level and there is no single predetermined solution. Among the range of existing alternatives, companies can create a new specific ESG committee at the Board of Directors level, assign ESG topics to a pre-existing Committee (Risk, Internal Audit, Corporate Governance, etc.), or assign specific ESG topics by Committee.
It will be of special importance in the Nomination and Compensation Committees to establish ESG selection criteria, as well as the design of compensation systems tied to ESG objectives and goals.
Regarding the sources of information from which the Boards draw to supervise the ESG strategy, these should go beyond the report and information provided by Management, and enable open channels of communication and exchange of external information in order to obtain perspectives and direct feedback from stakeholders, including investors, employees, local communities, etc.
For this exchange of information with interest groups, numerous companies at a global and regional level have established Stakeholder Advisory Councils with experts and representatives of different interest groups related to ESG issues in general or specific – for example, climate change – which are key for the company.
The Boards can then discuss and draw on the information or reports provided on a regular basis by these independent Advisory Councils made up of experts.
Also, of course, Boards can access numerous external ESG data sources and metrics that dynamically measure and quantify the ESG risk exposure of companies, sectors and projects. Other possible activities to collect information directly are field visits to places where the company has operations or activities (for example, sites of mining projects, oil exploration, etc.) and direct dialogue with interest groups. key and their respective members and leaders.
This diversity of information sources will allow Boards to be adequately prepared for the supervision of current and emerging ESG risks, with a corporate strategy aligned with these challenges, and also to ensure that the disclosure or reporting of information on the ESG performance of the organization is based on firm foundations, and there are no significant gaps between what the company says/reports it does and what it actually does (and their respective impacts), thus avoiding the phenomenon of ESG/greenwashing, that is, exaggeration, misrepresentation or directly reporting false information about actions and achievement of ESG goals.
This is an especially sensitive point for companies on which the main ESG regulations implemented in recent years and other new ones that will come into force in the short term, both globally and regionally, have focused their attention and focus.
In the face of the ESG tsunami, the Boards have a series of tools at their disposal that will allow them to proactively address these challenges, making their organizations resilient and “future-proof”, being prepared for the new challenges that the company will have to face at a strategic level. in the medium and long term, especially on key issues such as the fight against climate change, the transition to renewable energy, respect for human and social rights, and transparency and integrity.
Editor’s note: Gabriel Cecchini is a consultant in Corporate Governance, Integrity & ESG. Follow him on and on . The opinions expressed in this column belong exclusively to the author.