As regulators clamp down on greenwashing and investors call for concrete evidence to prove sustainability claims, more and more UK organisations are establishing ESG and sustainability committees at the board level, according to research from the Chartered Governance Institute (CGI).
Based on an analysis of the FTSE 100, a survey of 130 other organisations and 26 interviews with governance professionals, the paper written by CGI – Governing sustainability: Are sustainability committees the answer? – reported UK boards are struggling to oversee ESG and sustainability matters across their organisations, and therefore are choosing to establish a committee at board level for ESG and sustainability matters.
Some 51 of the FTSE 100 have an ESG board in place, while 41% of smaller organisations have similar committees and 5% intend to establish one.
Emily Ford, policy adviser at CGI and one of the report’s authors, said: “Sustainability is increasingly a business driver – and so companies are looking for new governance structures to help them oversee it effectively. 57% of those we surveyed said that their board views ESG as ‘central’ to doing business. This compares to 19% who feel that it is a ‘compliance cost’ of doing business and another 18% who see it as a result of ‘wider stakeholder pressure’. This can explain the rise of sustainability committees.”
Key takeaways
Speaking to PA Future, Ford highlighted some further key takeaways from the research including investor pressure on sustainability and how companies are tackling the operational side of implementing ESG policies.
“Several of the listed companies we spoke to indicated that investor pressure was a key motivator in establishing a sustainability committee. Having a dedicated committee at board level sends a strong signal to investors – and other stakeholders – that a company is taking ESG issues seriously,” explained Ford.
However, the majority of sustainability committees end up functioning in a more operational – rather than strictly oversight – capacity. This is particularly the case where the management-level sustainability function is less mature.
“Our interviews indicated this can be a barrier to the sustainability committee securing a strong internal reputation – and can also represent a drain on the committee’s time and resources. On the plus side, some suggested that a board-level committee can provide the impetus needed to strengthen – or establish – a management-level sustainability function,” Ford noted.
The research also found, because these committees are not yet standardised or codified in the same way as an audit or nomination committee is, there is much more variation between organisations in terms of how they are run and what they oversee.
The variety is reflected in the huge number of different names that these committees are given, including references to areas as diverse as ‘safety’, ‘ethics’, ‘energy transition’, ‘social’, ‘compliance’, ‘reporting’, ‘culture’, ‘technology’ and even ‘reputation’.
“For some organisations, these committees become a ‘catch-all’, whilst for others, their remit is strictly focused on particular areas of ESG, such as reporting. On average, these committees spend 60-80% of their time looking at environmental issues (rather than social or governance),”
Also, 75% of those surveyed agreed that a board-level committee can help to ensure that sustainability gets the attention it needs. It can also help to develop sustainability leadership and expertise.
Nevertheless, this ‘sustainability skillset’ cannot be left solely to a committee, according to Ford, as it is important for the full board to engage with and understand sustainability too. 33% of those surveyed, for example, admitted to a lack of understanding of ESG issues amongst their boards.
“The most important skill is an understanding of appropriate ESG data, metrics and goals – 72% of survey respondents selected it as important. Also highly valued is a knowledge of ESG-related regulatory and reporting requirements, as well as a knowledge of industry-specific good practice,” indicated Ford.
“These two skills were ranked similarly (50% and 49% of respondents, respectively), suggesting that companies are not only concerned about regulatory compliance but also about meeting market expectations, which often go far beyond what regulators are mandating.”
Finally, Ford highlighted a positive finding in the report: the average sustainability committee among the UK’s largest 150 companies is “more gender and ethnically diverse than the average full board”.
“In our interviews, another important aspect of diversity was repeatedly emphasised: age. The younger generation of directors are generally seen as more ESG-literate than more seasoned directors.”
