ESG is the topic on everyone’s lips at the moment. Terms like “net-zero”, “scope 1, 2 and 3 emissions”, “diversity, equality and inclusion” are well understood and getting plenty of airtime. But what about governance? Governance is often overlooked compared to its E&S siblings; but it is an important aspect in its own right and more than just the means by which the environmental and social agenda are delivered. Key questions include the following. Are organisations giving sufficient focus to how good governance can help an organisation to operate in a socially and environmentally responsible manner? Is the tone set from the top, with the board owning ESG and protecting the long-term interests of its shareholders, the wider industry and its community? Do the board committees have the right remit? Are the organisation’s policies and procedures up-to-date and fit for purpose? Is the organisation producing an annual ESG report? This article looks some of the issues an organisation should consider when looking at its governance arrangements in an ESG context. It also looks at how Cambitas can help. It is aimed primarily at financial services organisations but will have applicability more widely.
The tone from the top
Given the importance of ESG to the long-term health and reputation of an organisation, it is essential that the board have overall responsibility for ESG, even if regular oversight of all or parts of it are delegated to one or more committees. The board terms of reference should clearly set out the board’s responsibility for ESG, and which aspects have been delegated. The organisation should give careful consideration to the balance of skills on the board, including those with ESG experience. Fresh perspectives are vital, so an organisation should keep a close eye on the tenure of its board directors. There should be an appropriate mix of executive and independent directors. The independent directors should be able to challenge the executive robustly. The board should consider ESG issues on a regular basis and ideally sign-off the issuance of an annual ESG report.
Committees
If the board has delegated ESG responsibility to one or more of its sub-committees, this should be captured in the committee’s terms of reference. Some organisations are now creating a specific “governance committee” which has overall responsibility for governance within the organisation. As an alternative, the board nomination committee could be repurposed as the “nomination and governance committee” or similar. Some organisations have recently created an “ESG committee” as a sub-committee of the board. Other questions might include the following. Does the risk committee consider environmental climate risks? Which committee is responsible for oversight of the organisation’s net-zero targets? Is the remuneration committee properly overseeing the policies and strategies relating to leadership, culture, talent and succession planning, and responsible for diversity and inclusion?
ESG Policies
Every organisation will approach its policies and procedures in a slightly different way. However, set out below are some areas which ESG policies could address:
- Procurement & Environmental Policy. This could set out matters like: how the organisation advances sustainability through its procurement process; how it engages with stakeholders to ensure environmental awareness; how it takes environmental decisions into account when purchasing; and its policy on recycling and minimising paper use.
- Human Rights & Modern Slavery Policy. This could address issues like: the organisation’s commitment to the protection of human rights, its compliance with employment laws and how it complies with the UK Modern Slavery Act 2015.
- Ethics & Business Conduct Policy. This could cover areas such as: ethical principles, compliance with laws, fair dealing, conflicts of interest, political involvement, reporting etc
- Bribery & Anti-Corruption Policy: how the firm complies with anti-corruption laws, manages gifts and entertainment, and ensures a culture of compliance.
- Code of Conduct. behavioural standards expected of staff and other persons, and how breaches will be reported and investigated.
- Whistleblowing Policy. how the firm ensures the fair and appropriate treatment of whistleblowers.
- Equal Employment Opportunity Policy. This might cover employment practices that impact the terms and conditions of employment such as hiring, termination, appraisals, promotion, discipline, training etc.
- Anti-Discrimination Policy: how to prevent any conduct that creates a hostile or intimidating work environment.
- Well-being Policy: how the firm ensures the health and well-being of its staff.
- Flexible Working Policy: the firm’s approach to flexible and hybrid working and its expectations of staff.
- Charitable Giving Policy: how the firm gives to charity, how it ensures fairness and avoids conflicts of interest, any matching gift programmes etc.
- Other. Some organisations may chose to bring other policies within the ambit of ESG, such as information security, data privacy, tax strategy, vendor management etc.
ESG Report
Many firms are now producing an ESG report on an annual basis. This includes firms such as Lloyds of London, PwC, Asda, CBOE and others. The report will generally set out the firm’s commitment to sustainability and social responsibility. These reports often have a section on each of Environment, Social and Governance. The Governance section will cover many or all of the key topics referred to above.
How can Cambitas help?
Tom Hine has extensive experience of corporate governance, having acted as Company Secretary and General Counsel in a highly regulated environment. Tom has put in place many of the governance arrangements described in this article. Cambitas can undertake governance reviews, whether with an ESG focus or more generally. It can also help to put together ESG reports for businesses, which can be published on the firm's website and used to demonstrate commitment to ESG. If this is something which would interest you, or you would like to discuss any aspect of this article, please contact Tom at tom.hine@cambitas.com.
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