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ESG Board Advisory Checklist

by Jonathan Ocker, Mona E. Dajani, and Sheila McCafferty Harvey

Investors care about the environmental, social and governance standards that their portfolio companies are demonstrating, and the SEC is making ESG disclosures a priority for public companies.

Takeaways:

  • Boards need diverse members with appropriate ESG skills to make sure their companies’ strategies are sustainable and relevant.
  • Boards should consider issuing green bonds to fund sustainable projects and access ESG capital.
  • Boards should know their ESG proxy and other rankings (e.g., ISS and State Street) so that they can measure management’s progress on ESG initiatives and improve remedial actions and disclosures. Moreover, the S.E.C. is demanding greater transparency on ESG issues.

As institutional shareholders invest record amounts in environmental, social and governance (ESG)-conscious funds and companies, boards of directors are looking for ways their companies can design and implement a business strategy that produces a sustainable future and remain relevant in a world where climate change, social injustice, pandemics, disease prevention and wellness are the new normal.

Set forth below is an ESG checklist that boards can use to help formulate their ESG strategy:

Board Responsibility

Appropriate Committees

Determine which board members have this expertise and which committees have responsibility, e.g., the Compensation Committee for Human Capital Management (HCM) or the Nominating and Governance Committee for ESG/Sustainability. In addition, some companies are appointing ESG committees.

Charters

If necessary, amend corporation charters to add this responsibility and appoint appropriate members to such committees.

Diversity, a Business Imperative

Understand that diversity is a business imperative. Create programs to ensure that you have a workforce that is representative, at every level, of the diversity of your customers, your investors, communities and your partners. Add new diverse board members where expertise is needed or desired. 

Tracking Costs & Success

Review specific things that are measurable and that relate to your business. Track costs of ESG activities and evaluate success of these activities across all business units.

Retain ESG Measuring Firm

Retain a third-party ESG measuring firm like Sustainalytics or MSCI so you have an outside barometer to measure your progress and to give your program credibility.

Assign Management Responsibility

Assign responsibility for your ESG program to one person: general counsel, head of investor relations, CFO or chief ESG officer.

Incentive Compensation Plans

Add ESG progress—e.g., diversity and inclusion, employee and customer satisfaction and community responsibility, as one of the individual performance factors, together with company performance, in the company’s annual short-term incentive plan for executive officers.

Green Bonds

Consider whether or not issuing a green bond is right for your company. These issuances have tripled in the last year as companies use these as a financing to finance important sustainability investments. Green bonds are another way to access ESG capital.

Access ESG Capital

Define an outreach program to access the major pools of capital ($25 billion) that are investing in ESG-friendly companies and are expected to grow to $40B in the coming few years.

Policies and Reports

ESG Topic Chart

Set up a chart to track and measure ESG topics over time with clear reporting so your constituents can see your progress. These ESG topics include efforts to measure a range of social, environmental and climate, employee well-being and engagement programs. These may include training, diversity inclusion, anti-harassment, sustainability, organizational development and employee wellness.

Post Policies and Reports

Responsible Committees should make sure their company has adopted and posted on their website all appropriate reports, e.g. human rights, corporate social responsibility (CSR) or sustainability, environmental, supplier code of conduct, diversity and inclusion, etc. In the 10-K, include an HCM report and make sure it is accurate and comprehensive.

Sustainable Development Goals (SDGs)

Ensure that the ESG program specifically addresses the United Nations’ 17 SDGs, as these are the parameters that many money managers and institutional investors are using to determine if you meet their ESG investment qualifications.

Proxy Disclosure

Director Bios and Skills Matrix 

The director bios should show ESG expertise where appropriate and diversity statistics to satisfy applicable law, e.g. California and NASDAQ. A skills matrix should also be included. More and more companies are using graphics to drive the expertise and skills message home—“one picture is worth a thousand words.”

Board Nomination Graphics

Companies are also starting to include director nomination and succession graphics to show how they look for and appoint individuals with expertise and diversity.

CSR/Sustainability Report

A CSR/Sustainability Report should be included as well as HCM (which can be extracts from the website and the 10-K). These disclosures will help improve ISS and other institutional shareholder ESG rankings.

ESG Rankings

ESG rankings and remedial actions: boards should know their ISS and other ESG rankings (e.g. State Street’s R-Factor or Blackrock) to determine if improvement is necessary and what remedial actions need to be taken. This effort might include, among other things, adding or supplementing training and safety programs, benefits and wellness programs, diversity hiring and promotion programs, community outreach, evaluate energy efficiency, water usage, waste minimization, greenhouse gas emissions and climate risk and impact on natural resources.

Disclosure Requirements

The S.E.C. is demanding greater transparency on ESG issues, and its acting chair, Allison Herren Lee, noted that “no single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that ESG [issues] pose to investors, financial system and our economy.” In fact, the S.E.C. is working on revisions to the 2010 climate disclosure standards and global consistency on ESG disclosure standards. The biggest complex question for public companies is going to be how to balance the tension between profits, principles and ESG metrics. Ms. Lee insinuated that it will be a iterative process.

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Republished with permission from Pillsbury Winthrop Shaw Pittman LLP. The original article appears here.

Jon Ocker, co-leader of Pillsbury’s Board Advisory & Corporate Governance team, advises public companies, boards of directors and high profile executives on compensation and corporate governance issues.

Mona Dajani is the global co-leader of Pillsbury’s Energy and Infrastructure Projects Team and also leads the Renewable Energy practice which covers clean energy, clean energy technology, hydrogen and sustainable finance.

Sheila Harvey is the leader of Pillsbury’s Energy Industry Group, the co-leader of the firm’s Hydrogen and Sustainable Finance practices, and the leader of the firm’s Climate Change & Sustainability practice.

 

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