Best Practices for Managing ESG in the Boardroom

Investors and stakeholders increasingly understand that long-term success is directly affected by how a company and its Board of Directors (the “Board”) manage environmental, social, and governance (“ESG”) factors. Best practices require that a Board establish and implement a framework for managing ESG concerns to avoid potential issues that may negatively impact the company or its stakeholders. For example, the failure of a Board to adequately address an ESG issue may result in poor market performance, a decline in company share price, and regulatory or legal action. A Board needs to ensure that its company stays up-to-date on mandatory ESG-related disclosure requirements. Regulatory authorities such as the U.S. Securities and Exchange Commission, European Commission, and Canadian Securities Administrators, including the Ontario Securities Commission, are frequently publishing updates and notices of changes to the disclosure regime. 1  When tackling ESG concerns such as climate change impacts and Board diversity, how can a corporate director avoid facing peril?

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ESG Risk Oversight

This article will outline the director’s obligations concerning ESG oversight and provide a framework that Boards can utilize to identify and evaluate ESG risks.

ESG Risk Management Framework

To effectively address ESG, a Board must have mechanisms in place to ensure that it understands how ESG issues may impact the company. This does not mean that directors and Boards must be involved in day-to-day risk management, but rather that directors must fulfill their role in risk oversight. Proper risk oversight of a company requires directors to be accustomed to the company’s ESG risk management policies and procedures. If directors do not disclose material ESG risk and maintain proper oversight, they may face discontent among shareholders, potential litigation, damage to their reputation, or regulatory investigation.

In developing ESG risk management policies and procedures, the company and the Board should establish an appropriate governance structure and allocate the roles and responsibilities of directors and different Board committees. The designation of specific roles ensures that each party knows who is responsible for certain tasks. To determine if ESG risk oversight should be allocated to the full Board or a committee, the Board should consider the nature of the ESG issues, the level of expertise required, the time commitments to achieve meaningful oversight, and the mandates of existing Board committees, if any.

A robust ESG risk management framework within a company is integral to the overall culture and success of business operations. ESG procedures and policies will look different for each company depending on its industry and the type of business, but generally, an ESG risk management system should:

1. identify material ESG risks promptly;
2. implement appropriate ESG risk management strategies that align with the company’s business strategies and ESG risk profile;
3. integrate ESG risk and risk management into corporate strategy and business decision-making; and
4. properly document and communicate necessary information on ESG risks to applicable parties such as employees, shareholders, and senior executives.