February 6, 2024
Best practices for creating an ESG committee

There is no one-size-fits-all approach. An ESG committee is organised to have an oversight of the environment, social and governance related matters across the company and ensure that the company has mechanisms in place to mitigate risks and be prepared for anticipated urgency matters in the context of global economic crisis, climate change, diverse demands of shareholders, complex regulations and investors wanting to invest in the right places. Although it is upto the company’s discretion on the organisational structure of the ESG committee, most companies have one independent non - executive director of the company, other members of the committee may be appointed of the Group CEO with the approval of the Board. The Group HSE (Health, Safety and Environment) and Sustainability Head shall be permanent invitees to the committee meetings. Some best practices have been collated to create an effective ESG committee. 

A ESG committee charter 

An ESG committee charter with company secretary as its head has to be established to assist the Board in meeting its responsibilities in relation to Environment, Social and Governance matters.  The scope of the charter should have the committee’s responsibilities outlined, membership, meeting agenda, applicability, reporting responsibilities, delegation of authority, approval & review. 

A good example of a company that has a charter explaining the scope in detail is Exor. Exor N.V. is the largest shareholder: Ferrari (construction and sale of luxury sports vehicles), Stellantis N.V. (construction of automobiles, utility vehicles, and construction and agricultural vehicles and equipment), CNH Industrial (design and manufacture of commercial vehicles and agricultural and construction equipment), Juventus Football Club (operation of a soccer club), Iveco Group N.V. (design, manufacture and marketing of commercial and specialized vehicles and transmission systems), The Economist (newspaper and magazine publishing), GEDI Gruppo Editoriale (newspaper and magazine publishing), and SHANG XIA (design of luxury furniture, homeware, apparel, leather goods, jewelry and accessories).

Treat ESG Committee Like Other Board Committees

If a company decides to go the route of creating a new board committee to oversee ESG, it is important that it be treated as a senior committee. ESG committees, or other board bodies overseeing ESG matters, should not be treated as a lesser version of board governance. This means companies should adopt a committee charter, and that charter ideally should be made public. There also should be an internal annual schedule for the committee’s meetings with template agendas based on the committee’s charter. The committee also should have the same rights and function in the same manner as the company’s other board committees, unless there is a specific reason for deviation.

Be Deliberate With ESG Board Composition

Companies should take the composition of their ESG board oversight body with seriousness. While not every company needs to have a climate change expert or human rights lawyer on their ESG committee, companies do need to consider each member’s qualifications. 

They also need to consider all favourable and unfavourable factors while appointing a particular director. It is helpful to assess a director’s credentials and qualifications, see if they are consistent with the company’s ESG goals and message. Directors who are in the committee also should receive ESG education to increase their level of ESG preparedness. 

Focus on Material Risks and Opportunities

The committee’s attention should be focused on material risks and opportunities, and the choice about what to share with the board should be guided by management’s understanding of materiality assessment. So, how should the board structure ESG governance? It depends. A small, but growing percentage of boards have created dedicated ESG committees, while others have designated oversight to either the full board or to one or more existing board committees. The organization’s material risks, existing governance structures and available resources – including the experience, knowledge and skill sets of directors – should dictate the approach.

Listing down some structural considerations to set up an ESG committee: 

  • How to ensure all ESG risks are identified and addressed in corporate strategy?
  • How to ensure that ESG roles and responsibilities are formally established and being executed appropriately by directors?
  • Does the committee have the appropriate director composition to oversee sustainability matters?
  • How to enable effective communication among the board, committees and management
  • How to achieve accountability for director oversight and management execution
  • How to assure continuing education at the board level (as well as throughout the organization)?

Lastly but not the least, corporate’s purpose and ESG must exist in unison. A corporate purpose harmonises value-creation efforts with the organization’s impact on its stakeholders. Applying a customized ESG framework to manage organization-specific sustainability risk and opportunities helps translate corporate purpose into measurable goals that generate stakeholder value. The committee exists to ensure this is implemented and purpose in action happens through the process.

A good example of a company incorporating corporate sustainability in the organisation and leadership that thinks and acts in pursuing sustainability in all fronts is BMW, the pioneer in automotive manufacturing. The ESG committee and the BMW Board of management emphasizes on sustainable actions as importantly as financial actions. 

A good indicator of an ESG committee is to ensure that the organization has a strong and identifiable corporate purpose that incorporates diverse stakeholder perspectives and aligns with overall business strategy. Setting related ESG objectives should also be a complimentary exercise; the committee must help the management team focus on business performance while balancing competing stakeholder interests. There needs to be a strong reminder that ESG objectives which do not support long-term business growth and sustainability, may be the wrong objectives.

If you’re creating your ESG Committee, talk to our sustainability experts for a free consultation for guidance on how to do it right. 

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