Boards urged to include ESG in strategy oversight

Environmental, societal and governance (ESG) issues should be a consideration for boards as part of their oversight of strategy and risk, according to a new white paper.

The National Association of Corporate Directors (NACD) report, produced in partnership with six professional services firms, also provides recommendations for boards about how to align compensation with ESG-based goals and how to disclose information about a company’s ESG strategy.

‘Shareholders and stakeholders alike have heightened expectations for the role corporations play in today’s society,’ NACD president and CEO Peter Gleason writes in the introductory letter to the white paper. ‘A company’s long-term strategy should create financial value in a socially and environmentally responsible way.’

Ten percent of S&P 500 boards last year disclosed that they have a separately designated public policy or social and corporate responsibility committee, according to the 2016 Spencer Stuart Board Index. A further 7 percent disclosed that they have a separate environmental, health and safety committee.

Boards can respond to ESG concerns and define their company’s ESG strategy by bringing in external advisers, Sidley Austin partner Holly Gregory tells Corporate Secretary, citing companies’ response to cyber-security as a guideline. ‘Boards can hear from academics with [corporate social responsibility (CSR)] experience without having them seated on the board,’ Gregory says. ‘If they do have a sub-committee, they need to have someone on that committee who understands CSR, but they don’t need to be an expert.’

DISCLOSURE
Both State Street and BlackRock (CorporateSecretary.com, 4/6) have turned up the heat on boards this year by highlighting the importance they attach to having a clearly articulated long-term ESG strategy. State Street has also called on its portfolio companies to ‘clearly [communicate] their approach to sustainability and its influence on strategy.’

In the white paper, Sidley Austin points to six SEC disclosure requirements that most commonly trigger disclosure of ESG issues –Regulation S-K Item 101, Regulation S-K Item 103, Regulation S-K Item 303, Regulation S-K Item 503(c), 2010 SEC guidance and Securities Exchange Act Rule 13p-1. According to the law firm, the SEC has faced pressure to demand additional disclosures, but Sidley’s authors say this is unlikely to materialize under the Trump administration.

Despite this, Gregory says there is ‘certainly a lot of interest in developing some best practice guidance.’ She points to the Sustainability Accounting Standards Board’s (SASB) implementation guide and the GRI sustainability reporting standards as examples of frameworks that encourage disclosure around ESG strategy and risk factors.

The new white paper also points to differences in international and state laws around ESG disclosure. For example, the Taiwan Stock Exchange requires its listed companies to publish a corporate social responsibility report, while the Tokyo Stock Exchange’s governance code strongly advocates for ESG disclosure. Closer to home, companies doing business in California are required to disclose their efforts to eradicate human trafficking in their supply chain.

SASB examined how 700 companies disclosed ESG related issues in December 2016. While 81 percent reported ESG-related risks, 52 percent used ambiguous or generic language and failed to outline plans to address the risks, according to the board.

NACD’s ‘Board oversight of ESG’ white paper was produced in partnership with Heidrick & Struggles, KPMG’s Board Leadership Center, Marsh McLennan, Pearl Meyer and Sidley Austin.