The ongoing climate-crisis is forcing a change in corporate behavior

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Companies today operate at a higher economic footing than most governments – warranting greater moral and social obligations, towards a world in climate crisis. As the expectations of stakeholders evolve; there is a greater focus on companies’ contributions, their ability to manage increasing levels of risks, and their responsibilities towards stakeholders and society. There is a growing demand for proactive measures, and greater transparency in how businesses manage their impacts on nature and society.

Environmental, Social and Governance (ESG) performance is an area of growing interest for all stakeholders – investors, regulators, supply chain partners, consumers, employees, and the communities businesses are based in. Increasingly companies and governments are being called upon to address challenges presented by the climate crisis - as evidenced in COP27. Rising to this clarion call requires that businesses understand and acknowledge their impacts; and then evolve, innovate, design, and implement sustainable strategies that deliver environmental and social impacts, while simultaneously delivering value to investors.

Independent Directors must step up

Corporate boardrooms are witnessing rapid shifts as they begin to engage on climate and ESG-related risks and opportunities. For instance, an analysis of selection of S&P100 proxy statements found that 78% of companies had at least one board committee charged with overseeing environmental sustainability matters, and 42% of companies associated at least one director with expertise in environmental policy, sustainability, corporate responsibility, or ESG.

Despite being members of the company’s Board, Independent Directors have no material relationships or transactions with the company. Independent Directors function as an objective, outside pair of eyes: and are crucial for ensuring good governance practices by protecting minority interests, keeping an eye on the Board's actions, and acting as an effective deterrent to fraud, mismanagement, misinformation, and lapses in corporate governance. They are also pivotal in ensuring risk management, and for improving credibility. As companies gear up on ESG, the role of the Independent Director is poised to grow, both in size and significance.

Developing ESG expertise of Independent Directors

Independent Directors have an important role to play in ensuring regulatory compliance and integration of ESG within boardrooms. But to do this, they need to understand the Board’s role in overseeing ESG transition and integration, and be able to provide guidance across key areas of consideration including:

Defining the business purpose to consider key stakeholder needs and align it with business strategy

Defining the long-term ESG milestones and goals for the company

Ensuring integration of ESG risks and opportunities into the company’s long-term strategy

Understanding the comprehensiveness of the company’s existing risk processes to include identification of ESG risks, and prioritization of ESG risks & opportunities in capital allocation decisions

Ensuring the communication of ESG performance in relevant platforms based on best-practices and regulatory requirements

It is also incumbent on these Independent Directors to provide guidance on best practices, assist in hiring of suitable ESG experts in appropriate roles, and in ensuring that the company's ESG strategy goes beyond mere regulatory compliance and generates tangible benefits. They are also trusted with understanding the evolving ESG-landscape, and the risks and opportunities it brings.

Accelerating ESG-integration in corporate strategy

Independent Directors with ESG expertise can help in unlocking opportunities for ESG-driven value creation by upskilling the rest of the Board and ensuring that the company’s ESG-agenda is well-rounded and fit for purpose. Reporting ESG performance can be challenging, especially when a company has a sizable negative footprint across one or more tracked KPIs. It falls to the Independent Director to disclose ESG information in an accurate, comprehensive, consistent, and transparent manner, without indulging in greenwashing or tokenism.

It is also crucial that the commitments made, and targets set by companies are reported to the board periodically, and corrective actions taken. The Independent Director must create the necessary systems and metrics that enable the board to hold the right people accountable.

Regulators, in India, have historically played a steering role in the integration of ESG in corporate practices. The objective of the Business Responsibility and Sustainability Report (BRSR) is to make companies more cognizant of their material environmental, social and governance impacts; develop long-term sustainability strategy; and generate standardized and comparable information that enables stakeholders (especially investors) to understand a company’s ‘real’ performance.

This is a common objective for policymakers globally – and regulations are evolving quickly towards standardization. It is an important function of the Independent Director to keep the board abreast of all changes and ensure compliance with emerging regulatory and reporting requirements applicable to the company.

ESG will drive value creation for companies and their stakeholders

Sustainability and ESG are more than just catchphrases; and boardrooms are quickly realizing that integration of sustainability at the highest levels of strategic thinking is the key to unlocking future success. Paying attention to ESG can create value by creating top-line growth; managing rising operating costs; minimizing regulatory and legal interventions; access to impact capital and funds, improving talent retention and productivity; and enhancing returns on capital expenditures and investment.

Although there is no ‘one-size-fits-all’ solution – by exercising oversight of ESG – Independent Directors can ensure that the Board stays on track to deliver on their commitments for a sustainable and inclusive company, economy, and society.

Author: Madhu Sudan Kankani, Partner, Deloitte Touche Tohmatsu India LLP

Nachiketa Das, Director, Deloitte Touche Tohmatsu India LLP