Module 4 Lesson 2 - Governance and Oversight PDF

Module 4: Lesson 2 - Governance and oversight ============================================= In this lesson we consider the implications for company boards when sustainability risks are built into risk and reporting systems. In particular we shall consider governance and oversight, looking at how b...

Module 4: Lesson 2 - Governance and oversight ============================================= In this lesson we consider the implications for company boards when sustainability risks are built into risk and reporting systems. In particular we shall consider governance and oversight, looking at how board-level structures could be enhanced for sustainability risks Introduction ============ Materiality assessment is the bedrock for companies to formulate efficient sustainability strategies. With the world increasingly striving for net-zero emissions, the relevance of this assessment has skyrocketed. It illuminates various ESG challenges that could potentially derail a company\'s journey towards environmental and economic prosperity. The mandatory requirements for companies is also evolving, with several new key regulations and directives including: - CSRD[^1^](#fn1){#fnref1.footnote-ref} from the EU which, starting 2024, impacts on UK companies with EU subsidiaries, mandating sustainability reporting - SDR[^2^](#fn2){#fnref2.footnote-ref} from the UK will (2024 or 2025) probably require corporate reporting to comply with regulations aligned to ISSB[^3^](#fn3){#fnref3.footnote-ref} standards - The companies Act (2006) was amended to mandate many large and/or listed UK companies to provide information in accordance with the recommendations of the TCFD[^4^](#fn4){#fnref4.footnote-ref} - Task Force on Climate-Related Financial Disclosures (TCFD). These regulations aim to enhance transparency and accountability in corporate sustainability practices, they can be seen as an approach to developing new ESG metrics which should help companies measure and report their sustainability and ethical impacts. Typical governance metrics would include: 1. **Board Diversity**: Composition of the board in terms of gender, race, and independence. 2. **Executive Compensation**: Alignment of executive pay with company performance and ESG goals. 3. **Ethical Conduct**: Policies on anti-corruption, bribery, and ethical business practices. 4. **Shareholder Rights**: Practices related to shareholder voting and engagement. 5. **Risk Management**: Processes for identifying and managing ESG-related risks. The implication is that companies will have to report to meet regulation and stakeholder needs, developing metrics and instruments for their measure as needs evolve. Board-level Structures ====================== It is the business mission and vison which drives sustainability strategy, considering sustainability and ESG risks and opportunities. It is the Board that is responsible for implementing robust governance structures, normally done via a formal committee structure or allocating responsibility for sustainability issues across a range of committees or sub-committees. A dedicated Sustainability Committee could take responsibility and focus on all sustainability issues, making decisions and recommendations for the approval of the full board, alternatively a Sustainability/ESG Board Champion could be appointed to ensure that sustainability and ESG issues are addressed at the highest level. Otherwise, ESG and sustainability issues may be carried by traditional committees with +-----------------------------------+-----------------------------------+ | Audit and/or Risk Committee | - overseeing ESG and | | | sustainability risks are | | | integrated into the overall | | | RFM[^5^](#fn5){#fnref5 | | |.footnote-ref} | +===================================+===================================+ | Remuneration Committee: | - incorporating ESG priorities | | | into compensation and | | | incentives | | | | | | - aligning executive | | | performance with ESG and | | | sustainability goals | +-----------------------------------+-----------------------------------+ Some Boards may decide on separating out aspects of ESG and sustainability allocating risk management, compliance and strategy to different committees. Such structures help ensure that sustainability and ESG risks are managed effectively, and that the organisation remains resilient and aligned with long-term goals. At the management level, it is typical to have a Management ESG/Sustainability Committee, or a full-time Chief Officer. Overall, due to the changing environment of ESG and sustainability, providing ongoing education and updates to board members on ESG issues ensures that they are well-informed and can make strategic decisions that align with sustainability goals, ensuring that a company can manage ESG and sustainability risks effectively, to remain resilient and aligned with long-term goals. However, these does not seem to be a tendency towards a new mandatory regime for Board structures in the UK. Governance Metrics for ESG and Sustainability Risk ================================================== ESG metrics are the key indicators used to measure company performance. These metrics help assess sustainability risks, guide strategic decisions, and ensure compliance with regulatory standards, ultimately fostering transparency, accountability, and long-term value creation for stakeholders. From the point of view of governance, there are a range of specific metrics. A close-up of a list of jobs Description automatically generated Figure 1 ESG Metrics from Nasdaq Inc. Figure 1 (Nasdaq, 2019) describes the range of metrics for ESG, pointing out 10 metrics for governance. Reporting such data is important, but how a company gathers the data, disseminates it internally, structures its management and incentives operators to improve their performance are equally important parts. According to Nasdaq, management discipline associated with ESG and sustainability has evolved, bringing in data-driven decision-making, sharing of responsibility and a willingness to change. Nasdaq quote Thomson Reuters support for a process (Figure 2) to manage ESG and sustainability risks. Figure 2 4 stage ESG Process This is a simple overview of a process which can have a company wide scope, interacting with all control systems, involving and interacting with budget lines. In those cases where an ESG team has been established there are the problems of integration, competition and responsibility. To succeed in managing ESG and Sustainability risks "the enterprise must be single-minded... about the importance of ESG" and sustainability. Double Materiality and the Board ================================ Members of a Board of management tasked with being part of Management of ESG and sustainability risks should address double materiality reports as follows: 1. Understand and Commission Double Materiality Assessments 2. Integrate Findings into Strategy 3. Enhance Reporting and Transparency 4. Attend Regular Board Training 5. Engage with Stakeholders By addressing double materiality reports in these ways, a board can effectively manage ESG and sustainability risks, ensuring long-term resilience and alignment with stakeholder expectations. Assessment exercise =================== ::: {.section.footnotes} ------------------------------------------------------------------------ 1. ::: {#fn1} CSDR - Corporate Sustainability Reporting Directive[↩](#fnref1){.footnote-back} ::: 2. ::: {#fn2} SDR - Sustainability Disclosure Requirements[↩](#fnref2){.footnote-back} ::: 3. ::: {#fn3} ISSB - International Sustainability Standards Board[↩](#fnref3){.footnote-back} ::: 4. ::: {#fn4} TCFD - Task Force on Climate-Related Financial Disclosures[↩](#fnref4){.footnote-back} ::: 5. ::: {#fn5} RFM - Risk Management Framework[↩](#fnref5){.footnote-back} ::: :::