Ceres, a sustainability non-profit, issued a White Paper on how boards should be thinking about ESG risks and opportunities. We asked their Governance Managers Hannah Saltman and Melissa Paschall to walk us through the approach.
This is an interview with Ceres. NYSE presents the information for informational purposes, but does not endorse, represent nor warrant the accuracy of the narrative, which relies solely on material provided by Ceres.
The global COVID-19 pandemic has demonstrated the importance of company preparedness for systemic risks that have the potential to cause major disruptions to enterprises and the economy writ large. Environmental, social and governance (ESG) issues have long posed significant risks to business performance and need to be evaluated as such within a company’s risk management process. Companies that have robust systems in place to surface the impacts of such risks on the company are those that will be best positioned for resilient growth.
The Ceres report Running the Risk: How Corporate Boards Oversee Environmental and Social (ESG) Risks provides guidance to corporate directors on how to proactively oversee ESG issues that could pose risks to business strategy and performance. The report explains how a number of ESG issues such as climate change, water scarcity, and human rights abuses can result in major financial impacts to the company across all areas of traditional business risks. Boards have a critical role to play in ensuring that companies are aware of and able to navigate an ever-evolving risk landscape. The report offers a framework to corporate directors on how to integrate ESG risk into their risk oversight process - which in turn can be used by management to support and prepare their boards to effectively oversee ESG risk:
Risks and opportunities are two sides of the same coin. Running the Risk points to a number of ways in which companies could address ESG factors by integrating them within their organizational efforts towards competitive differentiation or new market capture. Opportunities include:
Investors are very focused on the systems that companies have in place to oversee ESG factors, including at the board level. The existence of these systems signal how seriously companies are taking ESG risks as business risks. Additionally, companies that have these systems in place for ESG factors are considered well-managed companies overall.
Specifically, investors are interested in the following systems:
In a 2018 analysis of the world’s largest global companies, Ceres found that board oversight of ESG typically resides within board committees with a specific ESG or sustainability focus (38%) or nominating and governance committees (18%) with environmental, health and safety (14%) and public policy (13%) committees next in line. While less common, some audit (2%), risk (6%) and compensation (1%) committees oversee ESG risks as part of the overall organizational risk management process. Running the Risk provides examples for how each of these committees oversees various ESG issues, including specific company examples.
While specific committees have an important role to play in overseeing ESG, related risks and opportunities should be surfaced at every relevant committee of the board - and many need to be discussed at the full board level.
As a first step, a company should determine which ESG issues are most relevant to its strategy both from a risk and an opportunity perspective. Examining what peer companies disclose on ESG issues as well as engaging stakeholders and shareholders can illuminate expectations from a company’s key constituents. Running the Risk includes recommendations for companies on how to disclose material ESG risks within financial filings and how to effectively disclose the board’s role in overseeing these risks.
Next, a company should identify its primary audience for its disclosures. This will help the enterprise both understand how to hone and focus its disclosures, as well as pinpoint the most relevant disclosure framework to use. While there are a number of ESG disclosure frameworks in the marketplace, many of them are honed to the needs of various stakeholder groups. You can find more information on a few of these in the NYSE Disclosure Guidance Library.
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