Boardroom discussion in 2021 is increasingly focused on the need to address environmental, social and governance issues (ESG), but directors can find it difficult to define just what those issues are and how they relate to their board and organisation. Boards and management alike should be considering how best to address ESG issues while delivering on their organisation’s purpose, as well as finding ways to create value through sustainable opportunities.
ESG on the board’s agenda
ESG is no longer an emerging risk for organisations – it is a fundamental, front-line issue for boards in the current climate. ESG plays a major role in the governance framework of an organisation, and it is integral that directors are aware of their duties in terms of addressing ESG issues facing their companies. This director responsibility is reflected in soft law introduced by Australian regulators over recent years, and legislation such as the Corporations Act 2001 (Cth) (Corporations Act) may apply in respect of director duties where ESG issues must be addressed by way of risk management by the board. A key aspect of the board’s responsibility for oversight is to ensure that ESG issues that may face the organisation, or are currently facing the organisation, have an appropriate risk management system in place to ensure adequate reporting to the board.
In 2019, the ASX Corporate Governance Council went so far as to amend the definition of “environmental risk” to capture risks such as water scarcity, air quality and climate change – a clear indication that the obligation to consider climate risks lies with directors, and the absence of consideration to these risks may suggest a breach of duty by directors of a board.1
Why is ESG important for boards to consider?
Community interest in ESG is high and maintaining a sustainable and ethical approach to business practice could be the key to shaping an organisation’s competitive edge in the marketplace. The board and management play a crucial role in translating ESG value into organisational strategies, and in terms of reporting, evidencing the organisation’s efforts around ESG lay with the board.
How does ESG link with corporate strategy?
Directors need to consider ESG at the forefront of organisational strategy – that is, ensure the board reviews the organisation’s commitment to achieving a positive outcome for the environment and community.
A challenge for boards is identifying the applicable ESG issues for their organisation, particularly where there are internal and external ESG factors to be considered in every organisation and industry.2 Directors are expected to understand the climate risks facing the organisation and how these risks will be mitigated by the corporation, and these risks may be incorporated into reporting to stakeholders and investors to mitigate concerns they may have.3
The key to implementing ESG initiatives
An organisation’s vision statement, tagline and mission statement reflect the direction an organisation takes with respect to its ESG agenda. However, an organisation’s commitment to ESG is realised through a key focus on resourcing for ESG initiatives and guiding the implementation of these ESG initiatives based on an aligned organisational strategy. Organisations may introduce ESG initiatives such as diversity, inclusion, and equity policies, promoting fair trade in the organisation’s supply chain or reducing the overall carbon footprint of the organisation. It is important to note that execution of ESG initiatives forms an integral part of the board’s oversight of organisational strategy, which is ultimately implemented in the day-to-day operations of the organisation by management.
If you would like to discuss ESG and the impact on your board, please contact us for further information.
1 Nosworthy, B. (2020). Corporations and Securities. Australian Law Journal, 411 – 417; ASX Corporate Governance Council (2019) ASX Corporate Governance Principles and Recommendations (4th edition), ASX, Sydney.
2 Caldwell, Z. (2020). Corporations and Climate Change: An Investigation of Mandatory Climate Risk Disclosure in Australia: Environmental and Planning Journal, 37(3), 3-1.