How companies address climate change and other ESG issues is viewed by investors, research and ratings firms, activists, employees, customers, and regulators as fundamental to the business and critical to long-term value creation. At a time of low trust in government and institutions, corporations are being asked to do more to solve societal problems – or run the risk of losing the social license to operate.

While the media has reported that several US states have banned their pension fund managers from incorporating ESG factors into investment decisions, and others have blacklisted asset managers for allegedly boycotting the fossil fuel industry, greater focus on how directors have regard to a wider group of stakeholders is likely here to stay as many investors, research and ratings firms, activists, employees, customers, and regulators will continue to view ESG issues as fundamental to long-term value creation.

The ESG issues of importance will vary by company and industry. For some, it skews towards environmental, climate change, and emission of greenhouse gases. For others, it skews toward diversity and inclusion and social issues.

  • How is the board helping to ensure that these issues are priorities for the company, and that the company is following through on its commitments?
  • How is the company embedding these issues into core business activities (strategy, operations, risk management, incentives, and corporate culture) to drive long-term performance?
  • Is there a clear commitment and strong leadership from the top, and enterprise-wide buy-in? Are there clear goals and metrics?
  • Is management sensitive to the risks posed by greenwashing?

Demands for higher-quality climate and other ESG disclosures – and the upcoming requirements under the Corporate Sustainability Reporting Directive – should be prompting boards and management teams to reassess and adjust their governance, oversight structure and reporting relating to climate and other ESG risks – and to monitor ongoing regulatory developments in these areas.

Also read: A journey towards the CSRD

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