Audit committee should understand trends in ESG governance, report says
Even though oversight for ESG tends to fall primarily with the nominating and governance committee, or in some cases across multiple committees, the role of the audit committee will continue to grow in importance, especially as formal disclosure requirements increase, according to a new study by Deloitte.
The firm studied proxy statements filed by S&P 500 companies between October 1, 2021 and September 30, 2022.
Nearly all companies in the S&P 500 already disclose information about their board governance approach to ESG as a whole, according to the study. In 2022, only 3 percent did not disclose this information, compared with 14 percent in 2021 and 28 percent in 2020. Only 38 percent disclosed their oversight structure specifically for climate risk, however.
Boards – and the audit committee more specifically – will need to pay closer attention to disclosure of climate-related risks because the proposed SEC climate risk disclosure requirement will eventually go into effect. Companies operating in Europe are already required to disclose certain ESG-related information.
‘Don’t assume that because the SEC is slow to market on this that there aren’t other regulatory drivers,’ says Evan Harvey, audit and assurance managing director for sustainability & ESG services at Deloitte. ‘Legal officers and boards need to be aware of those reporting burdens that already fall on the company. The better prepared you are now, in advance of whatever regulatory driver might be coming, the better able you will be to comply with it.’
Leverage ESG framework for efficiency
As ESG reporting moves from voluntary to mandatory and the company’s ESG framework becomes more aligned with financial reporting, the audit committee will need to have a solid understanding of the company’s ESG program and data.
Harvey says companies should not view ESG disclosure as just a reporting exercise, either, because it also helps the company with internal controls. ‘It should be leveraged to increase efficiencies and find gaps in performance across the company,’ he says. ‘The end-goal is to make the business stronger and more resilient.’
As ESG reporting grows in importance, Harvey recommends that corporate secretaries make sure the board includes ESG when setting meeting agendas and is up to date about emerging ESG trends and issues. ‘They can also help keep their company’s board informed about what other boards are doing,’ he adds.
No one-size-fits-all solution for ESG board oversight
The way companies define ESG continues to get broader. Now it can also include diversity, equity, artificial intelligence and privacy concerns in addition to environmental and climate metrics, according to Harvey, so it makes sense for companies to allocate responsibilities for ESG oversight to several committees or even the full board.
Around 63 percent of companies report that the nominating and governance committee had primary oversight of ESG in 2022, up from 53 percent in 2021, based on the firm’s research of S&P 500 proxies. Primary responsibility for ESG resides in a dedicated ESG or sustainability committee at only 15 percent of reporting companies.
Deloitte also finds that more companies distributed ESG oversight across multiple committees and had more complex ESG frameworks overall in 2022 than in previous years, as evidenced by proxies that were much more detailed than in the past. Just over half (51 percent) of companies report that either the full board combined with one or more committees or multiple committees shared responsibility for overseeing the various components of ESG.