While the environmental and social impacts of organisations are increasingly on the board agenda, governance is what boards are there to do, so you might ask why it is included in ESG?
Governance, Social and Environmental impacts and considerations for organisations are not new concepts. However, ESG purports to be a new concept. Director and Principal Advisor of Effective Governance, Stephen Howell outlines that without the 'G', you won’t have the organisation focused on, or even considering, the 'E' and 'S'.
Good governance means ensuring that all the board’s responsibilities are being fulfilled.1 ESG-related issues have now been added to those responsibilities due to factors such as:
- stakeholder and community expectations;
- investor/shareholder activism;
- regulatory requirements; and
- for charities, demonstrating value and responsibility to funders.
The goal is to integrate ESG factors into decision making, and encourage companies to adopt responsible and sustainable practices.
Regulatory bodies such as the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and the Australian Competition and Consumer Commission (ACCC) as well as market supervisor the Australian Securities Exchange (ASX) have all increased their focus on ESG issues.
Thus, for individual directors, understanding their duties as they relate to ESG is becoming even more essential. This goes beyond their duties under the Corporations Act 2001 (Cth) to a plethora of Commonwealth, state and territory legislation, including work health and safety, competition and consumer, and anti-bribery and corruption legislation. For example, ACCC’s recent release of draft guidance on ‘greenwashing’ indicate that the regulator will take a sterner approach to enforcement of section 18 of the Australian Consumer Law (ACL) where an organisation misleads consumers when disclosing the environmental impacts of their products or services.2
Organisational factors impacting ESG
There is no ‘one-size-fits-all’ approach for ESG oversight. How the board monitors ESG depends on specific organisational circumstances, including:
- the organisation’s business and industry;
- board composition and culture;
- committee structure, scope of responsibility, and workloads;
- existing organisational risk management processes and practices;
- the significance of particular ESG issues to the organisation; and
- management-level expertise and staffing.
The specific issues and metrics the board monitors will also vary based on what is important to the organisation and its key stakeholders. Key questions for the board to consider include:
- What aspects of ESG impact the organisation?
- Where does ESG oversight sit within the board?
– The board as a whole?
– A committee or committees (e.g., audit and risk, nominations and remuneration, governance, sustainability)?
- Is the board satisfied that ESG is being handled in an appropriate manner?
– Has management developed a set of relevant ESG metrics?
– Is there any external reporting on ESG metrics?
- Is ESG integrated into the organisation’s strategic planning?
- Is ESG included in the risk framework and risk appetite?
– If so, are ESG matters considered in terms of risk or opportunity?
- Does the board evaluate its performance and that of its individual directors and committees annually?
- Does the board discuss succession planning for the board, CEO and key personnel?
- Does the CEO receive a comprehensive 360-degree review every year?
- Is there a healthy dynamic in the boardroom among board members and between the board and management?
- Do directors receive relevant professional development on ESG and their legal duties with respect to ESG?
If the board does not have a cohesive response to the above questions, now is the time to ensure it does.
What comes first? E, S or G?
An initial focus on the ‘G’ will lay the foundation for the ‘E’ and ‘S’. Having a board with the ‘right’ people with the ‘right’ skills, regular board and CEO assessments, a board-management strategy workshop to discuss the organisation’s ESG response, a review of the risk management and governance policy frameworks, and professional development for directors to build their ESG awareness, skills and knowledge are good places to start.
As part of HopgoodGanim Lawyers, Effective Governance provides advice and support through our tailored products to boards and those executives supporting boards – that advice includes, although not limited to, governance, risk, and compliance to ensure sustainable businesses.
To ensure a strong focus on ESG to support a sustainable business and inform ethical decisions, boards may wish to consider how best to assess their position. While not all organisations will need to develop comprehensive ESG strategies, all will be impacted in some way. For example, a small charity may simply require a documented risk management framework and key policies to address government funding requirements, a larger for-profit private company may need to develop an ESG strategic plan. In the latter case, it may be worthwhile to use an ESG materiality assessment.
The aim of this assessment is to determine which ESG risks and opportunities are most critical for the organisation to address first, and to prioritise which issues it should monitor and prepare to address in future. It is an important first step in establishing a framework for managing ESG impacts in the future.
We are fortune to have developed a strong relationship with the trusted software as a service provider Ansarada. As such, we are pleased to be able to offer our clients discounted access to Ansarada’s state-of-the-art digital ESG Materiality Assessment, so organisations can start their ESG journey at a fraction of the time and cost outlay normally associated with these assessments.
An ESG Pulse Check, provided by Ansarada may also be worthwhile. This online survey has been informed by ESG experts so that its processes and report outputs are aligned to leading practice methodology and globally recognised frameworks. The pulse check will show where your organisation is currently positioned in terms of ESG.
If you would like to discuss improving your governance, ESG or materiality assessments further or have any questions, please contact our team for more information.
1. On the role and responsibilities of the board, see Kiel, G., Nicholson, G., Tunny, J.A. & Beck, J., 2012, Directors at Work: A Practical Guide for Boards, Thomson Reuters, Sydney, pp. 185‒193.
2. ACCC, 2023, Environmental and sustainability claims: Draft guidance for business, accessed 22 August 2023.