This month, both the International Corporate Governance Network (ICGN) and the Financial Reporting Council (FRC) released ESG-focused publications aimed at companies and their boards of directors.
The ICGN published a viewpoint entitled "The Governance of Sustainability: An Investor View of Board Effectiveness". This viewpoint focuses on expectations for boards to not only consider, but actively address and manage sustainability within the company. The viewpoint suggests that evaluating and integrating ESG-related considerations falls within a director’s fiduciary duty to act in the best interests of the company. The report pulls no punches, stating that issues of sustainability have widened the governance umbrella to such a degree that boards will no longer be “effective” if they do not adapt and address these greater responsibilities towards the environment and society.
In addition, the FRC released a lab report (see left hand column) in relation to net zero disclosures to help companies prepare disclosures in their financial reports. It sets out key issues to consider when preparing company disclosures, such as clear definition of commitments, any limitations or exclusions from the commitments, and framing risks and opportunities. It also explores investor expectations and how effective processes and governance are vital in achieving goals (in this case net zero). The lab report contains a bank of detailed examples of current good practice, which companies may find helpful to draw on.
Why is this important?
Not only do the publications highlight the ever-growing importance of ESG to companies and their boards, but they describe a multifaceted approach. For example, having board members with specific expertise as well as training and diversity of the board.
In relation to disclosure and reporting, these are vital as investors are becoming increasingly environmentally conscious with specific “green funds” and sustainable investment rising in popularity. Not only that, but investors also have a fiduciary duty to their client. The UN Principles for Responsible Investment suggests an investor’s fiduciary duty requires them to include ESG within their decision making. This is of course easier to demonstrate where ESG is at the forefront of a board’s strategising.
Given the growing momentum around ESG and the FCA’s expected consulation in autumn 2022 on sustainability disclosure requirements, directors cannot afford to ignore the need for increased sensitivity to ESG matters and expertise. ESG issues are becoming a key part of the reporting agenda for businesses, and investors will scrutinise a company’s performance when assessing a business or its board of directors.
We are well equipped to advise you and your business in relation to ESG reporting issues, so do get in touch if you need assistance. You may also be interested in our previous article, where we discussed director’s duties in relation to greenwashing.
Jessica Gregson
Kathryn Saunders