November 18, 2020
November 18, 2020
Whether they are institutional investors viewing environmental, social, and governance (ESG) through a long-term value creation lens or socially responsible investors interested in specific areas of impact, the investor voice is getting louder.
PwC’s Governance Insights Center is often asked about the best way for a board of directors to exercise its oversight responsibilities related to ESG. We think it’s a mix between full-board involvement and that of various committees, especially the audit committee.
The full board naturally wants to understand the organization’s ESG strategy, including related opportunities and risk mitigation needs. Directors also want to ensure the ESG strategy is grounded in the company’s purpose and strongly links to the company’s overall business strategy.
In our roles at PwC, we’re privileged to regularly meet with boards of directors and management teams at some of the world’s largest public companies. From those discussions, we know that some boards already have committees, such as safety or environmental committees, that have been and will continue to focus on ESG oversight. We are also hearing about some boards who are opting to start new committees entirely focused on ESG oversight. That may make sense for boards that need to take a step back and invest time in aligning the company’s broader purpose, messaging, and activities with the overall business strategy, and from there in ensuring that ESG strategies are properly aligned. A special committee might be best suited to address these alignments, though it would likely only be needed for a limited period of time.
Meanwhile, most ESG risks and opportunities relate to broader company topics that are already being addressed in standing committees. And oversight of the execution of the ESG strategy is likely to fall to the committees in pieces. For example, the nominating and governance committee may want to dig into the shareholder engagement element of the ESG strategy, while the compensation committee might focus on related pay incentives.
But as the business maxim goes, if you can’t measure it, you can’t manage it. As ESG issues gain in prominence and investors ask more questions, finance teams are getting more involved. And many of the finance teams that we’re speaking to have shared with us that as they wade further into ESG reporting it becomes apparent that more rigor is needed for disclosures to be accurate and investor-grade.
In addition to the audit committee’s traditional responsibilities, most public companies already delegate significant risk oversight to the audit committee. Over the years, that risk oversight has continued to expand to include areas such as cyber risk, data privacy, and other reputational risks. Despite the audit committee’s full plate, PwC believes ESG is an area that warrants the committee’s attention, as well.
The following list details several important points of intersection between the audit committee’s built-in expertise and ESG, making the committee a natural candidate to take on ESG reporting quality.
Disclosures. Determining where the company will be disclosing its ESG messaging—such as in corporate responsibility reports, proxy statements, the company website, US Securities and Exchange Commission (SEC) annual and quarterly reports, or earnings calls—is an important decision to make. For most companies, corporate responsibility reports house the broadest array of disclosures. There’s now also regulatory attention and a policy-making focus around material human capital disclosures (see this fall’s new human capital disclosure rules from the SEC), which are especially relevant in providing insight into how management is responding to risks from COVID-19 and opportunities for shifting how and where work is done. As ESG disclosures evolve, we expect to see more make their way into SEC filings, such as Form 10-Ks or proxy statements. Companies also need to think about the use of standards and frameworks. Reporting a metric that is aligned to a standard or framework can provide additional integrity to the disclosure.
Policies, procedures, and internal controls. ESG data is generated by a wide group of departments within a company. Environmental or recycling data might come from operational teams and talent-related data might come from human capital teams. Companies will need to focus on the policies and procedures that feed the development of ESG metrics as well as the internal controls that ensure the metrics are accurate and consistently prepared. Metrics should focus on the current state of, and the milestones toward, achieving an organization’s long-term goals, both of which should be regularly shared with the full board.
Independent assurance. As companies expand ESG reporting, the information should be rigorous enough to support accountability. Undefined or misaligned information may lead to reputational and credibility challenges. The audit committee may want to consider whether some level of review of these disclosures is needed to provide confidence and trust in the quality and transparency of information reported, whether by internal audit or outside assurance.
As a board determines where ESG oversight will be assigned, it may want to consider the following questions:
Wesley “Wes” Bricker is a vice chair at PwC and the firm’s assurance leader. Paula Loop is a partner with PwC and leads its Governance Insights Center, which strives to strengthen the connection between directors, executive teams, and investors by helping them navigate the evolving governance landscape.
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