Nearly a third of business leaders agree that ESG competence will be the most desired board skill, and Environmental Social and Governance issues are now a critical strategic issue on the board’s agenda. Directors are therefore stewards of long-term organizational performance, and boards have a central role to play in ensuring that their organizations can navigate an ever-evolving ESG risk and opportunity landscape.
The role of the Board is to ensure the long-term sustainability success of the organisation. The Board’s role in embedding ESG in an organisation is therefore one of partnership and alignment with management through the provision of oversight and direction with regard to interests that are critical to the long-term success of the company, employees, customers, communities, investors, the economy, and the society as a whole.
The Companies and Allied Matters Act 2020 imposes a responsibility on directors to act in the best interest of the company and to preserve its assets, further its business, and promote the purposes for which it was formed. This duty is statutorily required to be discharged as a diligent and ordinarily skillful director which could act in the relevant circumstances and in doing so, the director is mandated to have due regard to the impact of the company’s operations on the environment in the community where it carries on business operations. In addition to this responsibility, directors are also obliged to protect the interest of the employees and members of the organization.
The Nigerian Code of Corporate Governance places the board of public and private regulated entities at the center of corporate governance, and it requires the board to pay attention to sustainability issues by monitoring and establishing policies and practices which would address the social and environmental responsibilities of the company. The board is also expected to monitor the implementation of ESG policies and report on the extent of compliance with the policies and on the company’s ESG initiatives.
The 2021 Guidelines on Sustainable Financial Principles for the Nigerian Capital Market encourages regulated entities to entrench key ESG considerations into the operations and decision-making processes of their organisation, to prevent or minimize negative impacts. It also mandates regulated entities to report on their progress in implementing ESG principles and to make appropriate disclosures on their ESG issues. Other notable regulations that impact the Nigerian ESG space are Nigerian Stock Exchange Sustainability Disclosure Guidelines, the Federal Competition and Consumer Protection Act, and the Climate Change Act.
The Board should therefore work with management to determine which ESG factors are critical to the overall business structure and oversee the implementation of appropriate policies and processes for assessing, monitoring, and managing material ESG risks and opportunities. The Board also should oversee the process for integrating material ESG factors and opportunities into the strategy, mission, operational plan, goals, crisis tools, corporate governance, investor and stakeholder management, budget allocation and planning and risk management processes in the organization.
The Board has a critical leadership role in every organisation and must lead by example by setting the tone at the top and ensuring that the culture of ESG governance is embedded throughout the fabric of the organisation. The Board should therefore be comprised of persons with sufficient knowledge and experience on ESG standards and the materiality factors that impact the sector in which the organisation operates.
The Board is also responsible for overseeing the implementation of ESG initiatives by receiving regular reports and briefings from management on the material ESG factors and the organization’s approach to managing same. Some organizations have committees in place, that are responsible for reviewing the material ESG matters, particularly those that have significant impact on the sector in which the organization operates. These reports are usually presented to the Board at its quarterly meetings, for further deliberation and resolution.
Risk oversight is a vital element of the board’s fiduciary duties, and investors and regulators are now highly focused on whether boards are effectively overseeing ESG and sustainability risks. Companies that are frontrunners in embedding ESG initiatives have also identified the connection between ESG issues and the organization’s long-term success. Directors therefore have significant responsibility in ensuring that management allocates appropriate resources to identifying and managing ESG risks.
The board’s role in ESG risk oversight includes identification and assessment of material ESG-related risks, such as carbon emissions, employee disputes, supply chain disruptions, stakeholder concerns amongst others. However, as the critical investors, stakeholders, and members of the public scrutinize how organisations address ESG issues, the board, working with management, should make an intentional effort to ensure that its risk oversight role is effectively carried out. Some of the practical steps that the Board can take to embed ESG in the organisation include: prioritizing building trust in sustainability reporting by keeping abreast with regulatory initiatives relating to ESG, monitor international development in sustainability reporting and keep track of how ESG data providers view their companies, ensure the depth and reliability of disclosures, risk exposures & resilience, as well as concerns over greenwashing, develop an assurance framework that will provide comfort in the sustainability framework, the board charter should be revised to include a substantial part on sustainability, set up a committee responsible for overseeing ESG reporting and formalize board committee ESG level review, oversee the development of an annual sustainability report which identifies the organisations sustainability initiatives and stakeholders, carry out ESG maturity assessment and sustainability assessment to determine the critical gaps and issues that require training and continuous development, train the Board on emerging trends in ESG governance and sustainability governance.
Whilst noting that not every director can be “ESG fluent,” directors should ensure that they are properly equipped, with sufficient knowledge and information on the material ESG issues and factors affecting the business or with potential to affect the business in the future.
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