A wide array of developments have significantly increased the focus by public companies on board and board committee oversight of environmental, social, and governance (ESG) issues in recent years. These developments have included the heightened consideration of institutional investors and proxy advisory firms on ESG board oversight and ESG considerations more generally, as well as various recent proposed rules and initiatives of the Securities and Exchange Commission (SEC) with respect to ESG matters, including the proposed climate rules issued by the SEC earlier this year. This post addresses issues and trends concerning whether the full board or particular board committees should be primarily responsible for oversight of ESG considerations.
Should the Full Board or Board Committees Oversee ESG Considerations?
As a starting point, it must be recognized that matters under the umbrella of ESG cover a wide array of topics that differ by company and industry, and may encompass, among other things, the following matters: climate; the environment and sustainability more generally; governance; human capital; diversity, equity and inclusion; corporate social responsibility; employee health and safety; human rights; supply chain; cybersecurity; and public policy. As such, when considering how to approach board and board committee oversight of ESG considerations, public companies should first assess what subject areas should be considered within the scope of ESG, taking into account company-specific factors.
Currently, there is a wide variety of practice among public companies regarding the extent to which ESG matters are primarily overseen by the full board or are primarily overseen (at least in part) by a board committee. Most public companies have an oversight structure whereby the full board has sole or dual (along with a board committee) primary oversight responsibilities with respect to at least certain ESG matters. The approach of having the entire board be primarily responsible for the oversight of certain ESG matters may reflect that a particular matter is viewed as a core responsibility of the full board. For example, it is common for the full board (rather than a board committee) to have primary oversight responsibility with respect to a company’s overall ESG-related strategy. Additionally, for smaller public companies where there may be less focus on ESG matters, and for public companies that have fewer board members, there may be a view that certain or all ESG matters can be appropriately overseen at the board level without the need for specialized committee-level focus.
However, there is a trend toward the increasing delegation of ESG matters to board committees. For example, according to an EY study of Fortune 100 companies in 2021, 85% of the surveyed companies disclosed that a committee of the board oversaw environmental sustainability or corporate responsibility matters, compared to 78% in 2020. While these figures are likely higher among Fortune 100 companies than public companies as a whole, this increase between 2020 and 2021 reflects a trend toward greater board committee oversight of ESG matters occurring more generally among U.S. public companies. Various factors are contributing to this trend, including the following:
- The requirement under the proposed SEC climate rules to provide extensive disclosures regarding board oversight of climate risks may cause public companies to conclude that there are optical and other benefits to disclosing that a particular board committee oversees climate risk (potentially, with dual oversight responsibilities of the full board as well). Similarly, the SEC’s proposed cybersecurity rules issued earlier this year, which would require that various disclosures be provided regarding board oversight of cybersecurity risks, may result in a similar dynamic with respect to addressing board committee oversight of cyber risks. In addition, public companies may conclude that the common practice of providing proxy statement disclosure regarding board oversight of various ESG risks (including, but not limited to, climate and cyber risks) driven by a proxy advisory firm and institutional investor policies (along with existing SEC risk oversight disclosure requirements) similarly weigh in favor of allocating at least partial oversight of various ESG risks to one or more board committees.
- Given the significantly increased amount of time that boards are spending, and will continue to spend, on ESG oversight taking into account general ESG trends as well as the potential impact of proposed SEC rules (particularly the SEC’s proposed climate rules), companies may conclude that the full board does not have sufficient time on its board meeting agenda to be primarily responsible for ESG oversight such that it is necessary to allocate primary oversight responsibility for specified ESG matters (including climate risk) to one or more board committees who may have more bandwidth to devote to this task.
- Companies may conclude that certain board committees have more concentrated expertise in relation to a particular ESG topic than the board as a whole or that a specific ESG topic is ancillary to the preexisting responsibilities of a particular board committee. Moreover, the requirement under the proposed SEC climate rules to disclose whether board members have climate expertise, and the related requirement under the proposed SEC cyber rules to disclose whether any board member has cyber expertise, may not only incentivize the recruitment of potential director candidates with these types of expertise but also may cause public companies to appoint individuals with relevant climate or cyber expertise, as applicable, to a particular board committee where such matters will be primarily overseen.
- The smaller size of board committees compared to the full board may result in a board committee being a more targeted and efficient forum to oversee a particular ESG topic.
While these considerations do not mean that a board should fully delegate its oversight responsibilities with respect to ESG to board committees, it may be advisable for boards of certain public companies to consider whether certain ESG matters should be overseen at the board committee level (either with dual board oversight responsibility or not).
Allocating ESG Responsibilities Among Board Committees
Assuming that a public company has determined that certain ESG responsibilities should be overseen at the board committee level, a related question is whether all ESG matters should be overseen by one board committee or whether multiple board committees should oversee ESG matters. Practice differs in this regard, but given the breadth and diversity of topics within the scope of ESG, many public companies have determined that it is advisable to allocate ESG oversight responsibilities to multiple board committees, taking into account the breadth and diversity of topics within the scope of ESG. For example, a 2022 Exequity survey of S&P 100 companies indicated that, among the companies which disclosed overseeing ESG matters at a board committee level, 49% of surveyed companies oversaw ESG matters through two board committees and 17% of surveyed companies oversaw ESG matters through three or more board committees (with the remaining companies overseeing ESG matters through one board committee).
While there is variety in practice among public companies regarding ESG board committee oversight, various general trends emerge:
- Most public companies have not created a stand-alone board committee to oversee specified ESG considerations. For example, according to a survey of S&P 500 companies in 2021 by Spencer Stuart, 13% of surveyed companies had a science & technology committee; 11% of surveyed companies had an environment, health & safety committee; and 7% of surveyed companies had a public policy/social & corporate responsibility committee.
- A key area of recent focus among many public companies has been considering which board committee should oversee climate and sustainability matters, particularly given the expansive disclosure requirements and the amount of board-level and management-level work that would result from the adoption of final climate rules similar in scope to the SEC’s proposed climate rules issued earlier this year. In this regard, the corporate governance committee is the most common board committee to oversee climate and sustainability risks, which may be driven in part by the fact that the corporate governance committee often has a lesser overall workload than the compensation and (particularly) audit committees. For example, a 2022 Exequity survey of S&P 100 companies indicated that 75% of surveyed companies oversaw certain ESG matters through their nominating and corporate governance committee (most commonly, environmental and sustainability matters). In addition, some public companies allocate climate risk oversight to their audit committee (sometimes with dual oversight responsibilities of the corporate governance committee). In this regard, if the SEC’s final climate rules are adopted in similar form to the proposed climate rules, it is also relevant to this analysis that (even if the audit committee is not given primary responsibility for climate risk oversight) audit committees will need to have familiarity with the aspects of these climate rules that impact the financial statement disclosures of a public company.
- The audit committee is the most common board committee to oversee cybersecurity risks, which ties in with other risks (e.g., legal and regulatory) that audit committees often oversee.
- The compensation committee is the most common board committee to oversee human capital as well as diversity, equity and inclusion considerations. Moreover, to the extent that a public company has incorporated (or intends to incorporate) ESG factors into their management incentive compensation structure (as is becoming more common), this area of focus would be within the scope of the compensation committee’s responsibilities as well.
In sum, many factors influence the determination of which ESG topics should be overseen by particular board committees (and, possibly, whether a new board committee should be created to oversee certain ESG matters). However, two critical factors in most cases will be: (1) the amount of additional time that a board committee has to take on a new oversight responsibility; and (2) the existing subject matter responsibilities of a board committee and the expertise and experience of the board members currently serving on such board committee.
Consider Interplay with Other Public Company Documents
In addition to assessing board oversight of ESG considerations from a governance perspective and proxy statement disclosure considerations in connection therewith, public companies should ensure that the disclosures in their corporate governance documents (board committee charters, corporate governance guidelines, etc.) are consistent with board and board committee oversight of ESG risk as a matter of practice, and that such corporate governance document disclosures are up-to-date (and neither overinclusive nor underinclusive). In particular, given the rapid evolution of board oversight processes with respect to ESG matters, it is not unusual for board committee charters of public companies to not have been fully updated to reflect ESG matters that a particular board committee is now overseeing.
Moreover, in some cases where public companies have allocated a significant amount of ESG responsibility to a particular standing board committee, public companies have renamed such board committee to reflect such oversight responsibility (e.g., the “Corporate Governance, ESG and Sustainability Committee”). Relatedly, public companies should review any discussion of board and board committee ESG oversight included in their corporate responsibility/sustainability report to ensure that such discussion is both up-to-date and consistent with the disclosure of such oversight outlined in their proxy statements and corporate governance documents.