The Value of ESG Experts on Future Corporate Boards
By Christina Alfonso-Ercan, Entrepreneur and ESG Advisor
The ripple effect from the awareness and demand for environmental, social and governance (ESG) has led to a maturation of boardroom topics including compensation, regulatory compliance, leadership diversity, ESG reporting and social and environmental risk mitigation. While many of these topics are not new to corporate directors, what it takes to maintain fluency, command and compliance of ESG today is well beyond most traditional boards’ expertise.
Professionally managed assets with ESG mandates totaled $46 trillion in 2021, representing 40% of assets under management (AUM) globally, as noted in Barrons. That number is projected to rise to $80 trillion by 2024. As capital is further allocated to ESG investments, companies across all industries are grappling with how best to incorporate ESG, with pressure mounting from all stakeholders. This requires strategic planning and management across all three pillars of environmental, social and governance, which reverberates to the central command of all business oversight—the boardroom.
In the same way that compensation, governance and audit committees have facilitated better corporate oversight through an experienced group of directors, future corporate boards would be prudent to add a dedicated ESG committee to oversee matters of increasing importance. Such committees should be led by an ESG expert who is knowledgeable of ESG strategy and qualified to hold the company and its corporate directors accountable to progress and commit to long-term value creation.
Traditionally, boards have been comprised of standing or retired CEOs and financial experts, required by the Securities and Exchange Commission (SEC) to oversee a company’s financial reporting and audit function. However, boards have increasingly added technology experts to boardroom rosters in recent years as technology plays a more integral part in innovation, competition and risk factors like cybersecurity. Likewise, mounting calls for more diversity, equity and inclusion (DE&I) has led to a notable increase in board representation by women and minorities. The same argument can be made for the ongoing need to oversee ESG policy, strategy and reporting, as it pertains to employees, investors, customers, regulators, suppliers, competitors and other direct and indirect community stakeholders.
If there is any further doubt of the rise of ESG’s importance, the argument for it is further solidified through the SEC’s establishment of the Asset Management Advisory Committee’s (AMAC) dedicated ESG subcommittee in July 2021. Highlighting ESG issues impacting investment oversight, in March 2022 this = committee proposed new rules for standardizing climate-related reporting requirements aimed at identifying risk associated with companies’ carbon emissions, and their impact on company operations and balance sheets. The understanding that non-financial, or ESG, issues can and do have meaningful impact on a company’s profitability and long-term growth prospects has translated to a vital shift in adequately accounting for, actively managing and strategically overseeing ESG practices with increased proficiency.
The addition of an ESG expert to govern a board’s ESG committee is becoming a critical necessity of future board composition as ESG becomes a greater component of overall corporate strategy and regulatory compliance. An ESG expert would be a key leader in satisfying the board’s oversight of an ESG-compliant growth strategy and would support the board in mitigating risks of industry-relevant ESG factors, such as carbon emissions, worker safety and fair compensation practices. This complementary addition to traditional board construction would not only improve a company’s ability to appropriately govern ESG matters, but also progress what Professor George Serafeim of Harvard Business School elegantly refers to as the staged corporate track of ESG from (1) compliance to (2) efficiency to (3) innovation and growth.
Given that the rise in attention and interest in ESG has led to a wide range of subject matter expertise and operational experience, it is advised that companies seeking to identify a qualified ESG director candidate work with a clear set of parameters for their search. Valuable ESG experience may include prior work in ESG advisory, data and reporting, regulation and compliance, or strategy and implementation.
Traditional board director searches and personal networks can also be mined for ESG specialists. For private companies, ESG experts should have a minimum of five years of prior ESG work. Meanwhile, public companies would especially benefit from candidates with 10 or more years of ESG experience with particular emphasis on ESG strategy and/or compliance—depending on the target industry—given their regulatory oversight requirements.
ESG is increasingly in conversation at all corporate levels, and what is prioritized in meeting rooms is often mirrored in the boardroom. The need to channel this rising interest into corporate strategy and growth is likely to be a central subject for years to come. To that end, the search for ESG expertise is on across many—if not all—industries as boardrooms are predicted to have no shortage of future ESG topics to address.
By structuring a dedicated ESG board committee, companies will be taking proactive measures to successfully position themselves for effective ESG oversight, compliance and long-term growth—further satisfying their fiduciary duty as corporate directors. By adding expert ESG competence, boards can better support management in ESG strategy and enhance corporate governance for all stakeholders.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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