ESG & climate oversight in the spotlight

July 18, 2023

Edna Twumwaa Frimpong


This post appeared as part of Diligent Institute’s contribution to the Institute of Directors (IOD) India July 2023 special issue for their Director Today Magazine. Read the full report here.

Environmental, Social, and Governance (ESG) represent three key factors used to assess the sustainability and ethical impact of investments in companies and organizations. ESG criteria are used to evaluate the performance and behavior of companies in these areas, and they have become increasingly important for investors and stakeholders who want to align their investments with their values and contribute to a more sustainable and responsible world. Climate governance on the other hand specifically focuses on the governance aspects related to climate change. It involves how companies and organizations manage and address climate-related risks and opportunities. Climate governance includes the development and implementation of strategies to mitigate greenhouse gas emissions, adapt to climate change impacts, and promote sustainable practices.

In the last couple of years, we have seen developmental issues such as the pandemic escalate and elevate ESG discussions in the boardroom. In two separate surveys with IOD Ireland and Spencer Stuart, respondents indicated that their board level of ESG has increased significantly post-Covid compared to pre-Covid.

In the context of ESG and climate governance, companies and organizations are expected to demonstrate a commitment to environmental sustainability, social responsibility, and effective governance practices related to climate change. To attain this, there is a greater responsibility to delegate the responsibility of oversight. In our recent ESG report with Spencer Stuart, we asked respondents about ESG oversight. It is becoming clear that ESG is now falling onto the shoulders of the full board.

Almost half of our respondents (49%) indicated that their board has ESG oversight. Comparatively, in a similar report that Diligent Institute conducted with IOD Ireland in 2022, 58% of our respondents indicated that their board has oversight of ESG. This shift is very important as it shows that organizations are increasingly moving away from ESG being just a tick-box exercise and now embedded in the overall strategy of companies.

One of the greatest things that boards can help with climate and ESG oversight is to set measurable targets, develop plans to integrate the goals and provide measurability to stakeholders as to how they are tracking them.

A closer look at the pillars: what is the oversight strategy by organizations?

What factors should companies consider under environmental factors? Companies should assess and minimize their environmental impact, such as reducing greenhouse gas emissions, conserving energy and water, managing waste, and promoting biodiversity conservation. Our research indicates that most boards globally retain full oversight of environmental-related issues. They are also likely to delegate to ESG/Sustainability committees and their Audit committees in that order.

What should companies consider under social factors? Under social factors, Companies should generally consider their impact on various social stakeholders, including employees, customers, communities, and suppliers. This includes promoting fair labor practices, diversity and inclusion, human rights, and community engagement. Our research indicates that most boards globally retain full oversight of social-related issues. However, by segregating the data by region, we made some quite interesting findings. While the boards in America are likely to delegate social-related issues to the nominating committee, compensation committee, and Audit committee; European Boards are likely to retain full oversight of social-related issues at the board level by far compared to relegating it committee level. Under governance factors, companies should have strong governance structures and practices in place to ensure effective management of climate-related risks & opportunities. This involves transparent reporting, accountability, board oversight, and risk management strategies related to climate change.

Investors and stakeholders increasingly consider ESG and climate governance factors when making investment decisions. They look for companies that have robust ESG strategies, transparent reporting, and strong governance practices related to climate change. Rating agencies, indices, and frameworks have emerged to evaluate and rank companies based on their ESG performance, providing investors with tools to assess sustainability and climate governance practices.

Regulators and policymakers around the world are also focusing on ESG and climate governance. They are implementing regulations and guidelines to encourage companies to disclose their ESG practices and address climate-related risks. For example, initiatives like the Task Force on Climate-related Financial Disclosures (TCFD) provide recommendations for companies to disclose climate-related risks and opportunities. Overall, ESG and climate governance are vital concepts for promoting sustainability, responsible investment, and addressing climate change. They drive companies to be more accountable, transparent, and proactive in managing their environmental and social impact while ensuring effective governance structures related to climate change. One of the ways that boards can support climate oversight is increasing the competency level of the topic on the board.

Our recent research on ESG has shown that there is quite a deficit of directors with sustainability and climate backgrounds on the Board. Aside from upskilling the board through certifications, there is also a greater need to access the current level of climate awareness. How is the board sensitive to the strategy, risk, and climate reputation of the company? After this has been determined, perhaps the next step is to determine the knowledge building of the board on climate. For some businesses, the key is perhaps to appoint directors with climate or sustainability backgrounds to the board. However, some also advocate for the need to upskill the entire board by going through programs tailored for directors on Climate and ESG.

There is not a one size fit and we asked this question to respondents in our recent report as to what they are doing to address ESG or climate competency on their board. A significant majority of respondents; 29% indicated that they are going through external programs. Another 24% indicated that they are looking to bring in external consultants. Companies should look deep within, see which strategy better fits their climate goal, and address that appropriately.

About the author

Head of International Research

Edna Frimpong is an experienced research analyst with a demonstrated history of working in the information technology and services industry. In her role with the Diligent Institute, Edna oversees and directs corporate governance research projects and partnerships internationally, outside the US.

She joined Diligent Institute in 2021 after six years with CGLytics — a corporate governance analytics firm based in Amsterdam, The Netherlands, acquired by Diligent — where she served as Head of Research for the EMEA region. Previously, Edna held research positions at firms including Sustainanalytics and Carnomise. She received her Master’s Degree in Finance and Law from the Duisenberg School of Finance in Amsterdam, and her Bachelor’s Degree in Administration, Insurance and Risk Management from the University of Ghana.

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