Because ESG encompasses strategy, risk and opportunity, the board plays a vital role. But ESG is a broad topic, and the board should consider assigning various aspects of oversight to specific committees. Here we outline the role the audit committee can play in overseeing ESG disclosures.
Why the hype about ESG disclosures?
In recent discussions about environmental, social, and governance (ESG) issues, large institutional investors have been the loudest in the push for greater corporate transparency. Investors want to know how companies are addressing ESG risks and opportunities because of their potential impact on shareholder value. Environmental issues such as climate change and social issues such as racial injustice and inequality can affect a company’s cost of capital, long term growth prospects, and ultimately, its viability. That may be one reason why one in four S&P 500 companies cited “ESG” when discussing business strategy on their earnings calls for Q4 2020 the highest in 10 years.
Another group of stakeholders, global and national regulators, are also upping the ante on ESG reporting. In Europe, the European Commission has proposed expanding its Corporate Sustainability Reporting Directive rules to include large, unlisted companies. This change would more than quadruple the number of businesses that must disclose detailed ESG information. In the US, the SEC is expected to propose amendments to enhance disclosures on climate risk later this year, and has already adopted rules on human capital management disclosures. It also established a new Climate and ESG Task Force at the Division of Enforcement to investigate material gaps or misstatements in corporate disclosures under existing rules. In February, the commission also appointed its first senior policy advisor for climate and ESG and established a webpage dedicated to these matters.