As part of our engagement program, Glass Lewis meets with thousands of companies around the world each year to discuss the key environmental, social and governance issues of material importance to investors. Some of the most meaningful conversations we have had about board composition and performance have been around the issue of board-level oversight of a company’s ESG performance and risks.

ESG risks, and companies’ abilities to manage them, are increasingly at the forefront of investors’ stewardship priorities. Insufficient oversight of material ESG issues can present direct legal, financial, regulatory and reputational risks that could serve to harm shareholder interests. As a result, companies are figuring out how to better manage the specific ESG risks and opportunities connected with their business, the impact of their operations on society and the environment, as well as the potential for reputational damage.

Indeed, companies are being held to higher standards by all of their stakeholders, including governments, citizens, and investors, in terms of how they manage ESG issues. Emerging regulations such as the European Sustainable Finance Disclosure Regulation (SFDR) are supporting this trend by setting stricter requirements on institutional investors and mandating more disclosure on how they incorporate relevant ESG considerations into their investment strategies.

Harmonizing standards

Several transnational standards emphasize the need for prompt response and provide recommendations on corporate responsibility. The Paris Agreement and the Sustainable Development Goals (SDGs) of the United Nations, as well as international rules and conventions such as the UN Global Compact, the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines, are examples. These frameworks can be used by businesses to show their commitment to sustainability and ethical business practices.

While it is important that shareholders are afforded meaningful disclosure of the board’s oversight of these issues, we believe companies should determine the best structure for this oversight for themselves. In our view, this oversight can be effectively conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee.

Nonetheless, as a result of these changes, the number of corporations forming a board-level committee to handle ESG issues has increased dramatically. While ESG committees are not as common as audit, remuneration, or nominating committees, they have piqued the interest of investors who are looking to encourage both solid governance and strong ESG performance.

The effect on ESG performance

The findings of research attempting to link the presence of an ESG committee to ESG performance have been inconsistent.

According to recent academic research focused on committee structure and how it relates to ESG performance, found that committees with a bigger share of independent directors, a higher average age of directors, a female chair, smaller size, and which meet more frequently, have better ESG performance.

In their report investigating the link between the presence of board level supervision of ESG matters and ESF performance, Glass Lewis and NN Investment Partners, considered ESG performance holistically (through the latter’s ESG Lens score) and found that the correlation between supervision and performance was present and strongest where supervision was exercised by a standalone committee.

Many studies that do not discover a link between the inclusion of a committee and ESG performance focus on environmental performance. However, it is the case that specialized ESG committees at different organizations may focus on different topics, based on the issues that are most important to the company and its industry. Therefore, studies that focus primarily on environmental performance may overlook increased performance under non-environmental performance-related measures that can have a tangible impact on stakeholders such as employees, suppliers, and local communities.

Engagement Case Study: Adidas

Participants:  VP – Corporate Legal, VP – Investor Relations

Background: Two engagements since 2021

Issues: No Board Oversight of ESG – Adidas has faced high profile controversies related to the lack of diversity in its workforce and allegations that it has been involved in the use of forced labour in the Xinjiang province of China. Exacerbating the issue, at the time of the 2021 AGM no directors had specific responsibility for ESG oversight.

Progress: The company understood the issue and stated that it would take action. This year, the appointed Kathrin Menges as ESG representative on the supervisory board. Director Menges was a member of the German Council for Sustainable Development, which advises the Federal Government on issues of sustainability policy, between 2013 and 2019.

Outcome:  The company was responsive to improving board oversight of ESG by putting a director with relevant expertise in charge of ESG supervision.

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Institutional investors are increasingly expected to engage with companies to promote ESG practices that may contribute to the enhancement of shareholder value. Initiatives like the PRI and new regulatory frameworks, like the EU’s Action Plan, require investors to demonstrate responsible stewardship related to ESG issues.

At Glass Lewis, we take care of contacting and meeting with public companies to promote best practices and transparency on material ESG issues so you can focus on other key priorities. All our engagements are powered by Glass Lewis’ company research, creating a holistic approach to ESG for your investment.

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