Stock - ESG Investing
Escalate ESG to the board of directors level at corporates. Only then will clear progress be made. Image Credit: Shutterstock

With all the debates, the green-washing, and an imminent global regulatory mandate on Environmental, Social and Governance (ESG) issues, the GCC’s enterprises need help on these issues. Because it looks like ESG is stealing the limelight from the earlier trend of a heavy focus on DEI (diversity, equity, inclusion).

Though there is an increased focus, many corporate boards are struggling to find the right way. We see an industry of sorts emerging with experts, consultants and opinion-makers offering all types of advice.

Now that many board members are aware that ESG brings up numerous governance challenges they need to overcome, how do they plan for better compliance? We see a new possibility emerging – how about a dedicated board of directors-level ESG committee?

There are a few considerations boards should be cognizant of, such as the increasing need for aligning ESG with business goals, regulatory compliance, converging standards, and analyst requirement for ESG disclosures. An exclusive committee will be a good idea to address the many issues so that the board can be more effective.

Most companies groan at the idea of adding another board-level committee, but the rising interest in ESG - and the cross-disciplinary approach needed for its oversight - have driven a few to try the idea, especially in Europe. This is a tricky trend to follow, though. Specific ESG committees are usually an evolution of a previous corporate responsibility, sustainability, environmental, or similar committee.

Only by the big corporates?

It is often grown out of a public policy or social commitment, and seen at regulated entities in the pharma, healthcare or banking sectors. A 2022 Exequity study of S&P100 companies revealed that 31 per cent of them had some form of a distinct ESG board committee.

Yet, a larger study by Diligent and Spencer-Stuart, covering many more global enterprises, found just 15 per cent having a distinct ESG committee. Most still use the full board, or nomination or governance committee for this purpose.

Enterprises seem to realise that they are under an ESG disclosure spotlight – and are hustling to invent board oversight models. But this means that many ESG committees are formed with a magpie approach - gathering social, environmental, sustainability, risk, disclosure and governance tidbits from across the board.

A better approach will be to treat it like a real committee, with a charter and a clear outline of duties. Adopt best practices on board compensation and budgeting for research and outside consultants. Speaking of best practice, the ESG committee will face a far brighter investor, analyst and public spotlight than the rest of the board.

That means devoting extra care to good, comprehensive agendas and minutes taking of the committee’s work. Proper homework will have to be done to get a passing grade…

Vet the ESG credentials

Membership on the ESG committee will also be scrutinised for expertise and governance capabilities. Disclosure, audit, risk oversight and legal vitae make up the usual suspects. Corporate sustainability executives who have managed substantive company-wide efforts will be a better fit.

Boards want to look at sustainability experts, but they are not able to find the right candidates in many cases. Inducting ‘unconventional’ directors who bring the much-needed ESG skills to the committee will send a powerful message to all stakeholders.

Executives who have shown best practices on de-carbonization, DEI compliance, workplace safety, and related topics can bring more board depth to ESG, and display company commitment. They are also often younger and more diverse.

Vet potential ESG directors for skills not seen on the usual skills matrices. Instead, look for ability to acquire new skills, curiosity, and evidence that they ask questions outside the board comfort zone.

Board competitiveness can only come from a focused effort to guide the enterprise to understand the implications of ESG and how to integrate that into the strategic planning process. One other issue boards in the GCC will have to consider is the use of external evaluators for their ESG progress and disclosure, not very dissimilar to other audits.

An ESG strategy, rollout and progress need to be part of any disclosure, with clear targets and metrics. How best to implement the best practices? Steal the ideas from the leaders on the topic!

Tenet Healthcare, Tronox, Exor and Kaiser Aluminum are a few of the corporations that have published their board ESG committee charters.