Increased pressures from employees, investors, regulatory agencies and society at-large have caused boards of directors to raise their level of oversight and involvement in broad stewardship and environmental, social and governance (ESG) activities. As business leaders, political change makers, local decision takers and social representatives participate in this year’s Climate Week NYC, we are looking at what we’ve learned in the past year about the role of boards in the climate agenda, sustainability as a commercial driver and human capital governance.
Board directors tasked with stewardship recognize that climate is another business risk to be managed and navigated; it's an integral part of their board duties. Climate governance and oversight should be owned by the entire board to uphold their role in ensuring regulatory compliance, driving organizational performance and future-proofing the organization. WTW’s 2024 Global Directors and Officers Survey found that 55% of global board members consider climate change an “extremely important” or “very important” risk to them as a company director, an increase from 42% in the prior year.
Aspects of climate governance also should be incorporated into existing committee remits as another lens to their regular activities and approvals. For example:
Additionally, some companies have introduced a dedicated committee for sustainability or ESG (for example, 17% of the S&P 500) to ensure sufficient time and focus at the board level is allocated. Where this is the case, this committee’s responsibilities should support the activities of the existing committee remits with regular touchpoints.
Boards should take steps to formalize their climate accountability by reviewing committee Charters and Terms of References, as well as board reporting processes and board effectiveness assessment and education methods.
An important part of a board’s stewardship role is to oversee credible transition planning for how the company will achieve its commitments and ensure resilience in the business model to a changing climate and natural environment. At its core, transition planning is a matter of business strategy (and sometimes transformation) that the board should preside over to ensure long-term business resilience and value.
Acknowledging that the board’s responsibility to preserve and deliver shareholder value has expanded to include the strategic implications and physical and transition risks presented by climate change, the challenge for directors becomes how to effectively govern this evolving and complex area.
Last year, 48% of respondents to a WTW-NASDAQ global survey said their boards didn’t have the skills and expertise to provide oversight of climate risks and opportunities. However, respondents also indicated that climate was the fastest growing area of skill development for boards, reflecting the increased awareness that climate risks and opportunities can have significant long-term financial and business implications.
Boards should take steps to upskill themselves, through internal and external expert training, and ensure that the board culture facilitates a safe environment for constructive challenge and meaningful climate action on boards and dialogue with management.
This summer, WTW partnered with the Climate Governance Initiative’s Global Financial Sector Hub to host a webinar discussing the results of WTW research into trends and best practices around ESG metrics in incentive plans.
Based on WTW’s Global Report on ESG Metrics in Incentive Plans, we were able to dive deeply into the financial services sector. The result of this exploration? Challenges are consistent but nuanced across all industries. On a sector-agnostic basis, the quality of ESG metrics — particularly for the ‘E’ — are coming under increased scrutiny. Investors are skeptical that metrics are aligned to strategy and long-term climate/sustainability commitments, nor are they sufficiently measurable and transparent. For the financial services sector, there’s a need for boards to be careful when approving these metrics to ensure that they do not drive behaviors that may have unintended consequences (e.g., “paper decarbonization”).
Where companies include these metrics in their incentive plans, it is important to ensure their inclusion is strategically aligned with company strategy, that they are material, transparent and measurable and that it is made clear in disclosures how they link to long-term value.
Human capital is another key area of focus in the board’s stewardship role. An increase in ESG-related metrics in incentive plans forced an evolution in the way that boards approach human capital metrics.
Many articles have explored the key elements of human capital that boards should focus on as well as why boards should care about wellbeing, employee experience and culture in particular. More than 90% of S&P 100 companies have broadened their compensation committee's charter and remit to include broader human capital governance, and we are seeing a similar trend across Europe.
Strong human capital governance requires metrics and reporting that are simple and contextualized, show a clear connection to key business priorities and align with the risk profile and growth ambitions of the organization. There are several ways board members can pressure-test their organizations to gauge the effectiveness of their human capital governance.
ESG is a complex, multi-faceted and fast-moving area that can be challenging for directors and officers, particularly with evolving and polarizing sentiments among stakeholders. However, boards are at the heart of shaping corporate culture and the business case for ESG issues that are material for their businesses. Getting it wrong or failing to prioritize these issues adequately can lead to significant consequences such as erosion of shareholder value, increased reputational harm, supply chain disruption and and operating costs.
Understanding and prioritizing the underlying aspects of E, S and G that present material risks, opportunities and impacts for your business is a critical first step, and the Corporate Sustainability Reporting Directive’s requirement for double materiality assessments is a welcomed intervention to reinforce this. However, a compliance mindset and tick-box approach will not lead to successful development and execution of a sustainability strategy. Only by taking a long-term strategic mindset will boards be able to clearly articulate the business case as well as how ESG and climate action are an integral part of the business’ strategy, resilience and the board’s stewardship role.
In response to an increasingly complex risk landscape driven by acute climatic, geopolitical, labor market and technological disruptions, boards are evolving their role of governance and stewardship. Boards that understand the need for strengthened oversight and governance over these issues, in order to future-proof the business and preserve long-term value, are taking certain actions.
For example, boards are conducting climate/broader sustainability governance reviews across the board and its committees, as well as looking at how climate and sustainability are embedded across the organization through incentives, culture and skills. Additionally, boards are conducting human capital governance reviews, including reporting and risk assessments, governance processes and effectiveness.
These types of actions will continue to increase as pressure from key stakeholders persists. Ensuring boards and their members are prepared to manage this increase in responsibility will be key to addressing the concerns among these — and ensuring the long-term success of the organization.
