Not long ago, the role of an organization’s Board members in ESG governance was largely passive. However, the Board's role has significantly evolved. Today, they actively govern, taking on critical oversight of ESG policies, strategies, and reporting.-By Robin Byrd

ESG (environmental, social, governance) was once perceived as a set of 'feel good' principles corporations used to attract socially conscious customers. However, it has evolved into a crucial set of principles that encapsulate business opportunities and risks, essential for long-term business success. ESG may now form the core of a company's vision, purpose, and values, and companies are increasingly formalizing their ESG strategies and integrating them into their operations. This is where the Board of Directors steps in, responsible for defining the company's purpose and its strategic strategies. The Board’s role now extends to overseeing the ESG policies and strategies and holding management accountable, as ESG has become a cornerstone of business sustainability and growth.

Strengthening Oversite of ESG in the Global Corporate World

The duties of the Board of Directors have evolved over the years. Still, they have always had fiduciary duties to protect corporate interests while acting in the best interests of stockholders. Boards also have statutory duties, which are legal obligations. Increasingly, countries are establishing ESG laws and regulations to promote the reliability and comparability of ESG ratings and to encourage the pursuit of ESG principles because ESG issues pose risks for investors. The European Union (EU) is taking a lead in strengthening the regulation of ESG reporting, having passed new regulations for ESG raters in 2024, which will take effect in 2025. One of the challenges in ESG reporting has been a lack of consistency between ratings, making comparisons extremely difficult for stakeholders. There is also concern some companies greenwash their ESG reports, harming investor confidence.

The EU’s new Regulation on the Transparency and Integrity of Environmental, Social and Governance (ESG) Rating Activities (ESGR) requires the use of ESG rating providers authorized by the European Securities and Markets Authority and requires raters to disclose to the public their models, methodologies, and critical assumptions used in reporting, among other requirements. The new regulations supplement the 2023 EU’s Corporate Sustainability Reporting Directive, which requires reporting on sustainability. Hong Kong has also embedded ESG in its regulatory landscape. Directors must comply with the ESG rules and requirements of the Stock Exchange of Hong Kong, the Securities and Futures Commission, and the Hong Kong Monetary Authority. The Stock Exchange of Hong Kong requires listed companies to embed ESG in their governance structures, and Directors have overall responsibility for ESG strategy and reporting. Directors are required to consider ESG issues that affect company interests. They must keep adequately informed through access to internal and external sources to identify ESG considerations affecting the company, the likely consequences, and how it monitors and manages them. Directors are expected to stay informed and critically evaluate ESG reports and business implications. They must also ensure financial statements reflect relevant ESG considerations to provide a “true and fair” view of the organization’s financial position, performance, and prospects. Also, Directors should develop a strong ESG governance and reporting structure to ensure they can fully and honestly exercise their ESG responsibilities.

Good Governance: Aligning ESG Strategy with All Stakeholders

As global requirements for Board of Director oversight of ESG grow, the Board members become more responsible for ensuring their organizations achieve sustainability and social goals. However, their role is even broader in that good governance ensures that a company's ESG strategy is aligned with the long-term interests of all stakeholders, not just shareholders. Boards play a role in ensuring the company engages with all stakeholders - investors, employees, customers, and communities - on ESG issues. This may involve understanding stakeholder concerns and how they influence the company’s ESG priorities. This can result in better societal outcomes, such as improved environmental practices, fair labor conditions, and ethical supply chains. The importance of Board ESG governance transcends the organization to promote a more just world.

Companies with strong governance tend to have a long-term approach to decision-making. This supports sustainability goals, as environmental and social impacts often have long-term consequences. A focus on governance helps mitigate short-termism. Strong governance practices foster trust among stakeholders. Companies that demonstrate responsible behavior through effective ESG oversight build stronger relationships with investors, customers, and employees.

There are steps the Board can take to align ESG risks with strategy. Boards can assess whether management has considered all relevant sources of information about ESG risks that could impact the company. This can include consulting employee surveys, customer feedback, and shareholder engagement. Boards can also challenge management to show that ESG has been integrated into strategy development. ESG strategies should align with a company's vision and mission and include clear, measurable goals. Boards can choose a framework that works for their business after considering ESG best practices and gathering stakeholder feedback. They can define ESG oversight responsibilities across their committees and identify steps to operationalize them. Usually, a Board committee is created to do the work required and report to the general Board. Boards can then analyze business risks and opportunities, identify emerging sustainability trends, and increase the chances of meeting stakeholder requests.

The Conference Board summarizes the Board ESG agenda from a European perspective with three key strategies: ask the right questions, align and oversee policies, and raise red flags. Boards should proactively ask management for data, explanations of ESG approaches and actions, and stakeholders’ expectations. Boards should verify management goals, like carbon-reduction targets. Boards should stay current on legal and policy developments across countries and industries. They also should be quick to identify risks and raise red flags. They also can review policies and identify those needing improvement.

Steering Aligned Strategies

The hands-off or minimal approach to ESG strategy that Boards have taken in the past is no longer possible if an organization wants to ensure legal compliance to minimize risks, maximize stakeholder engagement, and operationalize ESG practices for good corporate citizenship. Boards play a critical role in steering ESG strategies by providing oversight, setting the tone for ethical leadership, and ensuring accountability. Good governance practices are vital for achieving sustainability goals, as they provide the framework for making responsible and forward-thinking decisions that benefit both the company and society, and good governance starts at the top.