ESG competence and accountability at board level benefits companies and their investors. How? Principles for Responsible Investment (PRI) published Holding boards accountable for ESG: A business case (June 2024), which explains how investors can exercise effective stewardship and drive good corporate governance.
Human Level’s Take: Investors are vital pieces of the puzzle when it comes to strong corporate governance and stewardship on ESG issues. Why? Because investors are drivers of better company management of ESG risks and opportunities. How? By asking the right questions to their investee companies’ boards, and assessing their ESG competence and accountability. Through this, investors can use their leverage to facilitate changes in companies’ priorities and behaviours. Instead of seeking board accountability after controversies have happened, it benefits both investors and their investee companies if investors play a more active role at the outset. Responsible investing and active stewardship need investors to be ahead of the curve when it comes to ESG risks and opportunities. This means making board accountability for ESG issues central to their relationship with investee companies.
Key points from the report:
- Accountability is a multi-layered issue: There are five key concepts investors can draw on to assess the nature of board accountability for ESG issues. The first is transparency. How is the board structured? What are the responsibilities of committees and individual members? Do members have experience and qualifications in ESG issues? The second is independence. Do non-executive (independent) directors sit on the board? If so, what are their remit, backgrounds and affiliations? The third is remuneration, which looks at incentives such as ESG-related pay policies and ESG-linked KPIs. The fourth is ESG competency, which is “a precondition for accountability.” This looks at whether directors have the relevant skills, knowledge and resources to manage current and future ESG risks and opportunities. Last but not least is education as a tool to improve ESG competency. Examples include upskilling directors, hiring external consultants and experts, and adding members with relevant backgrounds through board nominations.
- The business case for board level ESG accountability: Board level ESG accountability benefits companies and investors. How? For companies, it improves their capability of spotting existing and emerging risks and opportunities, and reduces future legal, regulatory, and compliance costs. It also allows companies to keep up with investors’ expectations and maintain their trust, as well as increase their attractiveness to investors and creditors by demonstrating good governance mechanisms. For investors, it enables them to maintain critical governance structures, and obtain accurate disclosures to feed into investment analysis and capital allocation decisions. It also allows investors to protect and maximise value through stewardship and support the company to improve its sustainability performance.
- Recommendations for investors: Investors can refer to the following considerations to assess board level ESG accountability. These are taken directly from the report:
- The company has a poor level of disclosure or performance on material ESG factors.
- The company has experienced a recent ESG-related failure or controversy.
- The company invests in projects or engages in activities that run counter to global sustainability goals and risk becoming stranded assets.
- The company has failed to enact an ESG proposal that received majority support from shareholders or has not responded to high levels of support / dissent on shareholder / management proposals.
- The company has failed to respond to other investor stewardship efforts, including those resulting in a shareholder lawsuit.
PRI issues a call to action to investors. Make board accountability for ESG issues central to your relationship with investee companies.
