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1、Boards can lead the way on sustainability.Heres how to get there.Governance Insights CenterESG SeriesMarch 2024Sustainability and ESG oversight:the corporate directors guide 2|Sustainability and ESG oversight:the corporate directors guideTable of contentsIntroduction 3Part 1:Understanding the sustai

2、nability landscape 5 The investor landscape 5 The broader stakeholder landscape 8 The sustainability regulatory landscape 8Part 2:Understanding the boards role in overseeing sustainability 9 Purpose and strategy 9 Risks 10 Disclosures 11 Materiality 12 Reliability of sustainability information 13 ES

3、G standards and frameworks 14 Where to disclose sustainability information 17 Measuring and monitoring progress 19 Using compensation to create incentives 20Part 3:Mapping sustainability to oversight 21 Allocating sustainability oversight responsibility 22 Making time for sustainability on the board

4、 agenda 25Conclusion 25Appendix A:A deeper dive into materiality 26Appendix B:Summary of board considerations 293|Sustainability and ESG oversight:the corporate directors guideIntroductionConversations around the environmental,social and governance(ESG)topics that impact the sustainability of a comp

5、anys business operations have become increasingly complicated.1 Amplified by the fact that much of the language used in dialogue is undefined.Put company leaders,regulators,investment analysts,portfolio managers,activists and retail investors in a room and they will quickly realize they might be tal

6、king past each other.According to our investor survey,78%of investors believe that companies should embed ESG directly into strategy,while just over half(54%)of directors think ESG issues are linked to strategy.When you add in regulated reporting and the political discourse that has emerged,the boar

7、ds role in ESG oversight has never been more difficult.Part of the complication also lies in the wide set of topics that can fall under the ESG umbrella,which will have varying impacts on companies over varying timeframes.ESG topics present real risks and potentially even bigger opportunities.Exampl

8、es of forces include physical elements like biodiversity,regulatory developments like mandated reporting and shifting business environments like changing consumer preferences.By understanding how and when the risks and opportunities will materialize,directors can start to sort through where to prior

9、itize their efforts.Identifying the issues that can be credibly linked to driving sustainable value creation involves expanding the lens when a company is developing long-term strategic plans,identifying and mitigating material risks,recognizing emerging growth opportunities to their businesses,and

10、the boards oversight of all of it.If that sounds a lot like an approach to strategy and risk oversight more generally,that is the point.ESG forces will impact nearly all companies in big or small ways.It is more important than ever that boards consider how that translates into a sustainability strat

11、egy that focuses on those factors that are most important for the company.Equally important is the development of governance structures that support effective oversight.Increasingly,this looks like spreading responsibilities across standing committees and in some cases,tasking a committee with speci

12、fic oversight for the most material sustainability topics for the company.At the same time,there has been a momentous shake up in the sustainability disclosure space,with mandatory reporting required in many jurisdictions and looming in others.Regulators and standard setters around the world have fi

13、nalized new disclosure requirements triggered by investor demand and,in some cases,designed to inspire efforts to combat climate change.The sustainability reporting landscape is dominated by the“big three”proposals released in 2023 and 2024:in the European Union(EU)as part of the Corporate Sustainab

14、ility Reporting Directive(CSRD),internationally by the International Sustainability Standards Board(ISSB),and in the United States(US)by the Securities and Exchange Commission(SEC).Also to note are two California bills signed into law in October 2023 are poised to change the landscape of climate rep

15、orting in the US.Market integrity and disclosure help protect investors and build trust in capital markets.Such trust helps lower the cost of capital for issuers and enhance returns for investors.It also helps increase participation in the capital markets.This is good for those investing for their f

16、uture and for issuers.Integrity and disclosure facilitate what can be the best of capital markets and guard against the worst.-SEC Chair Gary Gensler”“1 ESG and sustainability are frequently used interchangeably.In this guide we generally use“ESG”when referring to market trends and“sustainability”wh

17、en discussing internal activities related to those trends.4|Sustainability and ESG oversight:the corporate directors guideClimatePollutionWasteResource useEmployeeCustomerBusiness modelBusiness practicesTransparencyLeadershipBasic needs&wellnessProduct safety and qualityOperations resilienceProduct

18、design&lifecycle managementSupply chain managementAccessibilityCommunity investmentEthicsTaxBoard&management profileCarbon emissionsAirPackagingWater stressHiring&advancementPrivacy&data securityPurpose and valuesSoilOtherOtherHazardousWastewaterOtherBiodiversity&land useWorker experienceRisk and op

19、portunityDiversity&inclusionSelling practicesCompetitive behaviorAccountingExecutive pay structureWaterElectronicEnergy managementPhysical asset resilienceSocial Investing in people&relationshipsEnvironmental Conserving the natural worldGovernance Building trust in societyA view of the ESG landscape

20、Most companies are expected to be subject to one or more of these rules,and some may be impacted by all of them.Private companies are also likely to need to report in some form whether to investors with enhanced expectations,companies in their value chain or mandatorily in jurisdictions like the EU.

21、As a result,boards should be interested in compliance.But they should not lose focus on the bigger question of value.There is more to sustainability than just reporting.This guide captures the practices that have emerged,and questions that boards should consider when determining the governance struc

22、ture that is most appropriate for overseeing sustainability given the companys industry,size,growth trajectory and strategy.4|Sustainability and ESG oversight:the corporate directors guide5|Sustainability and ESG oversight:the corporate directors guidePart 1:Understanding the sustainability landscap

23、eDirectors have a responsibility to oversee company risk,ensuring material risks are identified,assessed and mitigated.This includes sustainability risks.The board also plays a role in challenging management to think creatively about strategic alternatives and opportunities including sustainability

24、topics.In our most recent Annual Corporate Directors Survey,54%of directors say that ESG is linked to their companys strategy,and 59%say ESG is part of their boards enterprise risk management(ERM)discussions.But what exactly does board oversight in these areas look like?Management teams need a strat

25、egic plan that takes advantage of market opportunities and addresses material risks.The board is responsible for considering if the companys strategy is appropriate,takes account material risks and is likely to deliver sustainable value.Because sustainability is grounded in risks and opportunities,t

26、he sustainability lens is often a more comprehensive way of packaging existing work and analysis.The investor landscape Investors tend to view sustainability through the lens of long-term risks and returns.The range of investors incorporating sustainability into their processes has quickly expanded

27、to include institutional investors;hedge fund,fixed income,private equity fund investors;and more.In addition,a growing population of investors limit their investments to companies they identify as sustainable or take positions in laggard companies to improve their sustainability practices.Long-term

28、 institutional shareholdersSome institutional investors are urging companies to build ESG considerations into their strategies,bringing it up during engagements and sometimes,using shareholder proposals to encourage companies to act.Some of the worlds largest asset managers have used their votes aga

29、inst directors at companies that,in their view,lag on one or more ESG topics.These investors are leading the call for more disclosures from companies,both qualitative and quantitative,so that they can better assess how each company is addressing risks and opportunities.In addition to stewardship-rel

30、ated activities,fundamental analysts at buyside institutions are continuing to expand their consideration of these factors when quantifying the embedded multiple in a companys valuation.Across many different roles,these investors want transparent,comparable reporting that demonstrates where companie

31、s are today and the goals they are striving to achieve in the future.Fixed income investors and creditorsThese investors are important sources of capital for many companies.In addition to using ESG factors to assess default risk,a market has developed for products that offer a lower interest rate so

32、 long as certain ESG key performance indicators are met(or a higher rate if they are missed).6|Sustainability and ESG oversight:the corporate directors guideHedge fundsIncreasingly,hedge funds and other activists are incorporating ESG factors into their investment strategies.Their focus can range fr

33、om areas where they believe a company has failed to set or meet goals,lags its peers practices or has failed to adequately account for sustainability in its strategy.While we do not expect many public campaigns and proxy fights entirely based on ESG factors,ESG is likely to feature in attempts to in

34、fluence management and other investors.Private equity fundsESG is making it into due diligence and valuation models used by private equity firms impacting the cost and access to capital.Almost all(95%)of the respondents to a recent PwC survey say they integrate highly-material ESG issues into commer

35、cial due diligence when making investment decisions.Impact investorsThese investors,who may use any of the strategies above,focus on nonfinancial factors related to ESG topics as part of their analyses to identify risks and growth opportunities.They might focus on sustainability risks along with fin

36、ancial performance,or specifically eliminate or select investments based on ethical guidelines.They may also track for positive impact that will benefit society or the environmentPushback on ESG investingRecently,some criticism of ESG investing has emerged.In many cases,the commentary focuses on whe

37、ther investors are using nonpecuniary factors in their investment decisions,at the risk of not delivering on their duty to maximize returns for their clients.Of the investment approaches described here,only impact investing would use factors in investment decision-making that might not be linked to

38、maximizing value for clients,and this would be clearly disclosed.In general,companies with articulated sustainability strategies are well positioned to access lower cost of capital,for instance through preferential rates,as more investors look to invest in companies that think broadly about risks an

39、d opportunities.Companies must also consider how investors obtain sustainability information.Some investors obtain the information directly from the company,while others use sustainability data compiled by aggregators or determined by rating agencies(such as proxy advisory firms,ESG raters and credi

40、t rating agencies).Other investors may use the data from these third parties to support their own independent analyses.Investors and third parties rely on these ratings and data aggregation tools.As a result,a companys access to capital and debt as well as their brand perception may hinge on its sus

41、tainability disclosures.7|Sustainability and ESG oversight:the corporate directors guideAnalyzing data and third-party raters Rating agencies:Rating agencies gather data about a companys ESG efforts through direct surveys or the companys publicly available disclosures.They then provide ESG scores ba

42、sed on their views of companies risk exposures versus their industry peers.Qualitative and quantitative data inform these ratings:Rating agencies also guide investors through the publication of benchmarking data.And some use their ratings to create ESG indices that might be licensed to asset manager

43、s and others to serve as the underlying benchmarks for ESG funds and other financial products.MSCI,Institutional Shareholder Services(ISS),Sustainalytics and S&P Global are examples of established raters and rankers.The methodologies used by these agencies vary and the resulting ratings may not cons

44、istently align with a particular sustainability disclosure framework or set of standards;therefore,they may not meet the needs of all institutional investors.Data aggregators:Data aggregators compile and present public ESG data,making it easier for investors to access the data in one place.Aggregato

45、rs include Bloomberg and Refinitiv.There are also new entrants into this space that use enhanced technologies,such as artificial intelligence,to gather and analyze information and present it in data visualization tools.Examples of these companies are Clarity AI and ESG Book.Investor ratings:Some inv

46、estors have their own proprietary mechanisms for scoring ESG risks and opportunities.An investor may frequently draw on multiple data sources to generate an ESG score for a listed company that may or may not be shared with the company or public.ESG ratings help inform investment decisions of investo

47、rs use ESG ratings and scores in theirinvestment decisionsNearly halfSource:PwC,Global Investor Survey 2022,December 2022.8|Sustainability and ESG oversight:the corporate directors guideThe broader stakeholder landscape The push by shareholders for more and better sustainability information has been

48、 a catalyst for action by management and the board.But a companys customers,employees,communities and suppliers are also typically looking for management to drive value creation,while balancing broader obligations that impact the bottom line.For example,consumer decisions can shape practices.Half of

49、 consumer-packaged goods growth between 2015 and 2019 came from sustainability-marketed products.During that time,products marketed as sustainable grew seven times faster than those that were not.Employees can also impact company decisions.Companies looking to attract and retain top talent from the

50、next generations have felt this impact as Generation Z and Millennials(who will make up 72%of the global workforce by 2029)show greater concern about where their employers stand on environmental and social issues.The sustainability regulatory landscape Mandatory reporting is here or looming from bot

51、h an international and domestic perspective.The role of the board,among other things,is to understand how prepared the company is for these mandatory disclosures.Given the large proportion of the world with disclosure requirements or proposals and their potential to encompass a broad spectrum of val

52、ue chain contributors,most companies are expected to be impacted in some way.The sustainability reporting landscape is dominated by the recently released“big three”proposals or frameworks:in the EU as part of the CSRD,internationally by the ISSB and in the United States by the SEC.Nearly all public

53、companies are expected to be subject to one or more of these rules,and some may be impacted by all three.Companies are in the process of assessing the scope and applicability of the various proposals so that the appropriate planning can begin now.An SEC registrant that has a subsidiary listed in the

54、 EU and a subsidiary in a jurisdiction that requires ISSB reporting,for example,may be subject to the requirements in all three frameworks.With equivalency that is,whether disclosures for one reporting framework can satisfy some or all of the requirements of another not yet determined,companies capt

55、ured in multiple reporting regimes have a vested interest in understanding which reporting applies.Further,understanding where the frameworks align and diverge will help companies develop the requisite reporting strategy,data gathering processes and related controls,providing for a streamlined proce

56、ss and effective deployment of resources.For a comparison of the international and domestic regulations,see Navigating the ESG landscape.In addition,see ESG Reporting:Preparing for tomorrows rules today,to understand the steps companies can take to prepare for mandatory disclosures.For a deeper dive

57、 on board considerations on the SECs final climate rules,see How boards can prepare for the SECs climate-related disclosures.Todays investors are looking for consistent,comparable and decision-useful disclosures around climate risk,human capital and cybersecurity.Companies and investors alike would

58、benefit from clear rules of the road.I believe the SEC should step in when theres this level of demand for information relevant to investors investment decisions.-SEC Chair Gary Gensler,September 2021”“9|Sustainability and ESG oversight:the corporate directors guidePart 2:Understanding the boards ro

59、le in overseeing sustainabilityCompanies that embed sustainability into their strategies are better positioned for success.They can spot growth potential in identifying and managing ESG issues.They can also shape the narrative of their brands and practices while expanding their investor bases.So,as

60、companies are telling their sustainability stories and integrating ESG into their strategies,its important to think through the“how”of implementation.If the company is already providing sustainability metrics in a variety of places(such as on its corporate website or in social responsibility reports

61、),directors may be well served to step back and consider the existing governance structures and if the messaging is clear and consistent across channels.Is it tied to the companys purpose and aligned with the business strategy?Does it focus on stakeholder needs and address material risks?This sectio

62、n outlines the important considerations as follows:Purpose and strategy Risks Disclosures Measuring and monitoring progress Using compensation to create incentives Purpose and strategy A companys purpose is often expressed as the reason its in business.But its more than that.A companys purpose needs

63、 to be aligned to the overall business strategy how the company will achieve returns year after year.As companies attempt to serve a diverse group of stakeholders including investors,employees,customers,suppliers and communities,it shouldnt come as a surprise that many struggle to balance all those

64、interests.To help,the board and management need to work together to define whats important and measure progress.The companys purpose should be reflected through its messaging and activities.And as part of its oversight role,its up to the board to make sure these things all tie together.Board conside

65、rations:Has the company clearly articulated a purpose that considers key stakeholder needs and aligns with business strategy?Has the company considered how its purpose compares to that articulated by its competitors?Are sustainability risks and opportunities integrated into the companys long-term st

66、rategy?How is the company measuring and monitoring its progress against milestones and goals set as part of the strategy?10|Sustainability and ESG oversight:the corporate directors guideRisksA key part of board oversight is taking a broad view of risk,and that may be harder in areas where management

67、 has less muscle memory because they may have less experience thinking of topics in the context of sustainability.Environmental and social factors heavily influence some of the thorniest business challenges companies must overcome.These include workforce dynamics,innovating and incorporating new tec

68、hnologies,and supply chain disruptions due to natural disasters.Sustainability disclosure standards are still evolving,and companies are likely to be in scope of more than one.There is not one single standard that boards can consider when building their risk register.Furthermore,growing mandatory re

69、porting requirements globally,with complex applicability,increases compliance risks.The universe of identified risks is expanding and as companies improve how they assess sustainability risks,the ERM process often needs to change as well.The probability and impact of sustainability risks should be c

70、aptured in the ERM effort.As a result,management will have a structured framework to use to manage and mitigate those risks.Fifty-nine percent(59%)of directors say their boards include ESG in their ERM discussions.Board considerations:Do the companys existing risk processes include identification of

71、 any sustainability risks?Would expanding the risk identification process lead to a broader scope of risks to be captured?Does the ERM process include assessment and mitigation plans for all sustainability-related risks identified?How does management prioritize sustainability risks and opportunities

72、?Are sustainability risks and opportunities included in capital allocation decisions?ESG and enterprise risk management 59%of directors say ESG issuesare a part of the boardsenterprise risk managementdiscussions Source:PwC,2023 Annual Corporate Directors Survey,October 2023.11|Sustainability and ESG

73、 oversight:the corporate directors guideBoard considerations:Is the company subject to any required disclosures?How is the company communicating its purpose and its goals in furtherance of long-term sustainable success?Is the company using both quantitative and qualitative information to measure its

74、 progress?How does the company monitor what competitors are doing,what the rating agencies are reporting and other benchmarking data?Is the company transparently tracking and reporting its performance against milestone goals,as well as long-term goals,so stakeholders and others can monitor progress?

75、What time periods should be presented in sustainability disclosures?For example,will the company only present current year data,or present a one or two-year comparative?Should the information be disclosed in the aggregate,or at a subsidiary level?DisclosuresIn addition to pending mandatory reporting

76、 regimes,stakeholders want a comprehensive,cohesive story when it comes to sustainability.Qualitative sustainability messaging should reinforce the companys purpose statement,while quantitative metrics bring that purpose to life and help companies measure their progress toward goals.These sustainabi

77、lity metrics also help investors compare companies across industries and companies set transparent milestones along the way to long-term goals.To effectively oversee these disclosure efforts,forward-looking boards are focusing on materiality,accuracy and reliability of data.Materiality is a threshol

78、d criterion in deciding which metrics to disclose.But determining materiality for sustainability purposes creates its own challenge,as discussed on the next page.Boards are also concerned with the accuracy of the information disclosed.This includes understanding the internal controls in place for bo

79、th qualitative information and quantitative metrics.And when choosing to adopt a framework or standard that incorporates specific metrics,consideration is given to the feasibility of meeting the provisions of the chosen framework/standard,including the requirement for assurance if applicable.When di

80、sclosures are mandatory,appropriate controls will be needed for the required data.Finally,boards are looking at how they stack up against their competitors.What types of disclosures are they making?Which metrics have they adopted?How do their ratings from third-party agencies compare?Understanding t

81、he companys ratings and how they compare to peer companies could also help highlight areas for enhancement.12|Sustainability and ESG oversight:the corporate directors guideMaterialityAs discussed in Part 1,investors are paying more attention to the sustainability risks and opportunities facing the c

82、ompanies in which they invest and are in many cases using the information available in the market to make buy,sell,hold and vote decisions.Leading companies are responding by bringing together multiple functions within the organization under close oversight by the board to identify and report on tho

83、se sustainability risks and opportunities that will impact resilience and value creation for the short,medium and long term.Recently,the vast majority of the S&P 500s market value has been tied up in intangible assets,such as human capital,customer loyalty and brand identification,on which a company

84、s sustainability position can have substantial effects.Determining whether those sustainability risks and opportunities will have a material impact on a companys strategy,messaging,risk assessment and reporting is critical as companies compete for capital,and boards have a key oversight role to play

85、.Additionally,many companies have expanded the population of who they consider the stakeholders beyond investors to include employees,customers and communities.For a detailed discussion on materiality and the boards considerations,see Appendix A:A deeper dive into materiality.How investors think abo

86、ut assuranceAccording to PwCs Global Investor Survey 2022,75%of respondents say their confidence in sustainability reporting would receive the biggest boost if it were assured at the same level as companies financial statements(i.e.,reasonable assurance).The board may want to consider what sustainab

87、ility data published by the company will be subject to assurance,such as the mandates in the SEC final rule and CSRD,and what level of controls are in place for data when assurance is not required.Regardless of where information is published,investors and regulators expect accuracy.Reliability of su

88、stainability information Once the company has settled on the qualitative and quantitative messaging,whether required or voluntary,the board will want to oversee the process for disclosure.After all,investors will be using this information to analyze the company and make investment decisions.This sta

89、rts with understanding the policies and procedures that are in place.The board needs to understand the internal controls over sustainability disclosures.Especially because disclosures are included in financial statement footnotes,as outlined in the final SEC rule,and are subject to internal control

90、over financial reporting(ICFR).Understanding the processes and controls in place around the scope and quality of disclosures is an important aspect of the boards oversight role.They may also want to consider stakeholder expectations for whether the company should consider obtaining some type of assu

91、rance over the sustainability information disclosed,as discussed on the previous page.Board considerations:Does the company have robust policies and procedures to support the development of its disclosures?Do the companys disclosures adhere to the requirements of particular frameworks or standards?A

92、re disclosures meeting investor expectations?What is the role of the finance/reporting function in sustainability disclosures?Has management found any gaps in the internal controls that support the completeness and accuracy of the disclosures?If so,how do they plan on mitigating those gaps?What is t

93、he role of the disclosure committee in the process?When not required,would stakeholders be confident with the accuracy of the disclosure without independent assurance?Could independent assurance serve as a differentiating factor among peers?13|Sustainability and ESG oversight:the corporate directors

94、 guide14|Sustainability and ESG oversight:the corporate directors guideESG standards and frameworksMany companies have used standards and frameworks to make voluntary disclosures and most are preparing for regulated disclosure.As mandatory disclosure requirements evolve,investors and other stakehold

95、ers may have disclosure expectations that extend beyond what is currently being contemplated by regulators.Using standards and frameworks to meet expanded disclosure expectations allows for consistent and comparable disclosures,aiding investors in their decisions.Companies find it helpful to have st

96、ructured guidance to follow,which can also provide a benchmark in support of third-party assurance over disclosed information.Over the past several years,the set of standards and frameworks being used in the market has expanded and contracted several times,but still leaves companies various options

97、to choose from.To make sense of the options,it is important to first understand the difference between standards and frameworks.Generally speaking,standards,which follow a typical process(including receiving public comments),offer specific guidance for measurement and disclosure.Frameworks,on the ot

98、her hand,provide general guidelines on disclosure.This distinction is important because it gives the company a sense of what level of specificity to expect when adopting a standard or framework.In addition,when deciding the standards and/or frameworks to adopt,it will be helpful to assess the follow

99、ing:The scope of the information(e.g.,a focus on environmental or all ESG topics)Whether it is industry specific or industry agnostic How materiality is considered(financial versus social)What the target audience is While there remains a variety of frameworks and standards in place,some have converg

100、ed.Many of the following standards and frameworks represented the market prior to the current wave of consolidation.However,they remain part of the ESG lexicon and are frequently still referred to in the present tense.14|Sustainability and ESG oversight:the corporate directors guide15|Sustainability

101、 and ESG oversight:the corporate directors guideNameStandard or frameworkDescriptionNotesGlobal Reporting Initiative(GRI)StandardProvides ESG standards that address disclosures of socially material topics affecting a companys stakeholders.It also requires that companies determine the issues that are

102、 material in consultation with stakeholders.Their website.Sustainability Accounting Standards Board(SASB)StandardRecommends topics and metrics for 77 different industries across all three pillars of ESG.These standards provide guidance on how organizations can align their reporting with investor nee

103、ds and how companies gather standardized data.Their website.In June 2021,the SASB and the International Integrated Reporting Council merged to form the Value Reporting Foundation,which subsequently was absorbed by the ISSB.The ISSB has committed to building on the industry-based SASB Standards and a

104、dopting SASBs industry-based approach to standards development.The Carbon Disclosure Project(CDP)FrameworkSupports various stakeholders by collecting data to measure company risks and opportunities on climate change,deforestation and water security.Their website.Climate Disclosure Standards Board(CD

105、SB)FrameworkProvides companies with a framework to disclose environmental and climate-related information at the same level of rigor as that of financial information.Their website.The CDSB was consolidated into the ISSB.The Taskforce on Climate-related Financial Disclosures(TCFD)FrameworkProvides 11

106、 recommendations across four pillars:governance,strategy,risk management,and metrics and targets.Their website.Beginning in 2024,the ISSB will take over monitoring compliance with the TCFD,effectively absorbing the organization.The Taskforce on Nature-related Financial Disclosures(TNFD)FrameworkProv

107、ides 13 recommendations across four pillars:governance,strategy,risk management,and metrics and targets.Additionally,it has published guidance on the identification and assessment of nature-related issues:The TNFD LEAP approach.Their website.The major standards and frameworks:Additional disclosure g

108、uidance:A number of business associations have also developed recommendations to help members standardize sustainability disclosures within their industries.The National Association of Real Estate Investment Trusts(NAREIT),for instance,produced a guide designed to help members better understand and

109、navigate the ESG reporting frameworks,and the Edison Electric Institute(EEI)launched an ESG template to help member electric companies provide uniform sustainability information.Separately,the World Economic Forums International Business Council issued a white paper that outlines a common set of met

110、rics to support consistent reporting.Board considerations:Has the company leveraged various ESG standards and frameworks to help determine whether it is addressing the most significant risks and issues facing the company?What considerations were taken into account when deciding on the standard and/o

111、r framework to adopt?For example,were the target audience,materiality considerations and scope considered?How is management monitoring and responding to changes in voluntary and mandatory reporting standards and frameworks in markets where the company operates?16|Sustainability and ESG oversight:the

112、 corporate directors guideWhere to disclose sustainability informationOnce a company has decided on its purpose,messaging,metrics,and which standards and frameworks to use(both mandatory and voluntary),it will have to consider where to disclose the information.Among the most common platforms are pro

113、xy statements,CSR/sustainability reports,company websites and annual reports.These choices are informed by stakeholder preferences and peer practices,as well as the liability risk associated with information being filed,furnished or otherwise voluntarily disclosed.Disclosure platformsProxy statement

114、s:More companies are including sustainability information in their proxy statements as a way to communicate directly with investors.This disclosure often includes discussion of:the sustainability risks and opportunities identified by the company,and their areas of focus,the governance and management

115、 operations structures(for example,whether a committee or a specific person is responsible for developing and executing the companys sustainability strategy and frequency of reporting to the board),how and how often the topic is discussed with various stakeholders,such as whether the topic was speci

116、fically targeted for shareholder engagement,progress against implementation goals,including the companys current state,periodic milestone goals and other long-term goals,and links to the companys other sustainability information,including reports or materials on the companys website.CSR/sustainabili

117、ty reports:A sustainability report has been the historic channel for many companies to communicate sustainability performance and impact whether positive or negative.If a company is planning to use its CSR report to deliver sustainability disclosures,the company should consider whether it includes t

118、he sustainability risks and opportunities that would be considered relevant to investors and other stakeholders.Also,think about whether the sustainability activities described link to the companys purpose and overall business strategy.Websites:Companies often house sustainability information on the

119、ir websites,with pages dedicated to their sustainability goals and efforts.The websites often include links to additional sustainability information,such as ESG score cards.SEC annual and quarterly reportings:When material,companies may be required to disclose sustainability matters in the risk fact

120、ors,MD&A or other sections of their SEC reporting.17|Sustainability and ESG oversight:the corporate directors guideof companies in the S&P 500 publish a sustainability or ESG reportSource:Governance&Accountability Institute,Inc.,2022 Sustainability Reporting in Focus,November 2022.96%18|Sustainabili

121、ty and ESG oversight:the corporate directors guideEarnings calls:Some companies are using their earnings calls to showcase their sustainability efforts.This approach allows them to improve corporate communication with investors on material sustainability issues and demonstrate how their sustainabili

122、ty efforts are embedded in their overall value creation plan.Investor/analyst day:Some companies are incorporating their sustainability efforts into their investor/analyst day presentations to demonstrate how the issues addressed are connected to the companys strategy.Alternatively,a few companies a

123、re holding a separate day to focus on sustainability efforts and performance exclusively.Board considerations:Do the companys disclosures address various stakeholder preferences?For example,a customer or an employee will most likely refer to the companys website for sustainability information,while

124、an investor would more likely refer to either corporate responsibility reporting or annual reports.Are disclosures consistent across various platforms and appropriate for the different audiences of each?For example,are material risks disclosed in a corporate responsibility report aligned with those

125、identified in the companys Form 10-K filing?Is the messaging being incorporated in operational discussions,such as quarterly analyst calls?Has the company considered its legal liability when including sustainability information in SEC filings?19|Sustainability and ESG oversight:the corporate directo

126、rs guideMeasuring and monitoring progressInitially,investors and other stakeholders were simply looking for data from companies on relevant sustainability factors.Then the emphasis shifted to higher quality data and increased types of information.Aligning disclosures with one or more frameworks or s

127、tandards was sufficient.Today,shareholders are looking for companies to set specific goals and milestones when developing their sustainability strategy and to track and report their progress against these goals and milestones.Further,they want to understand the governance structures,especially board

128、 oversight,that underpin the metrics,goals and milestones.Board considerations:How does the company determine which metrics,frameworks and standards will be used for disclosure in mandatory and voluntary reporting?What sustainability commitments has the company made publicly,what is the strategy to

129、achieve the commitments and how is management monitoring performance?Board considerations:How do the companys compensation practices benchmark against peers as it relates to tying sustainability to executive compensation?Do peer companies use sustainability metrics,and if so,what metrics do they use

130、?Which goals are important for the company?What are the interim and long-term goals?And therefore,which metrics make sense for the company to use?For additional considerations on tying ESG metrics to executive compensation,see Purpose-driven leadership:the evolving role of ESG metrics in executive c

131、ompensation plans.20|Sustainability and ESG oversight:the corporate directors guideUsing compensation to create incentivesMany investors are focused on the connection between sustainability goals and executive compensation.By tying incentive plan metrics explicitly to the companys sustainability str

132、ategy,a company is not only encouraging the achievement of those sustainability goals,it is also signaling the importance of those issues.A growing number of shareholder proposals are asking companies to link the two.And a number of large companies have already taken steps to do so.As boards work to

133、 integrate sustainability concerns into discussions of company strategy,many are also considering how to create the right incentives for achievement of sustainability-related goals.Incentive plans have long been driven primarily by traditional financial goals.That often means quantitative goals rela

134、ted to things like revenue,cash flow,units sold,EBITDA,earnings per share or total shareholder return.But at many companies,a shift is underway as sustainability goals become more common.In 2022,nearly three-quarters of companies in the S&P 500 have adopted ESG metrics.Part 3:Mapping sustainability

135、to oversightGiven how broad and complex sustainability can be,how exactly does the board go about overseeing this area?Over the past decade,practices have evolved organically as sustainability has evolved from text-heavy corporate social responsibility reports to the investor-grade data and concrete

136、 strategies that are expected today.Poor controls over sustainability information creates risk for companies,and that risk calls for new controls.More recently,regulatory changes and stakeholder pressure are pushing even more shifts.The board can play an important role in driving the maturity of the

137、se governance processes.Corporate governance or operational governance?The concept of combining environmental,social and governance issues into an ESG wrapper often causes confusion.Does“governance”refer to the traditional corporate governance topics like shareholder rights,board leadership,compensa

138、tion and ethics?Or does it refer to the governance systems in place to manage environmental and social risks and opportunities(operational governance)?Both answers can be correct,depending on the circumstances.The nominating and governance committee is the traditional home for corporate governance m

139、atters.Operational governance discussions are likely to be split between the audit committee and the full board.Overseeing the policies,procedures and controls necessary for accurate public communications is a core competency of the audit committee,whereas discussions of reporting lines,strategy own

140、ership and execution are more suited for the full board or a standalone sustainability committee.21|Sustainability and ESG oversight:the corporate directors guideAllocating sustainability oversight responsibilityBecause sustainability strategy should align with business strategy and focus on materia

141、l risks and business drivers,the full board will want to understand how those risks and opportunities are being addressed.The board will also be interested in how management is using sustainability to differentiate the company in the market.If this is a new area of focus for the board and the compan

142、y,directors may need to assign detailed oversight to specific committees to help the sustainability strategy launch smoothly.Ultimately,though,sustainability issues will be relevant to all committees.Equally important to the board oversight structure is how the board and management will interact and

143、 where accountability lies within the management team.According to PwCs Global investor survey,66%of investors say that they are more confident that companies are on top of ESG risks and opportunities when someone in the C-suite is accountable.But the scope of sustainability topics does not lend its

144、elf to a single reporting line.This makes it more important for the board and management to articulate how ownership and accountability is established inside the company.Once they are identified,the board will need regular access to the individuals responsible for developing and executing the sustai

145、nability strategy.Board considerations:Do we have a committee with the capacity,interest and skills to take the lead on overseeing the companys overall sustainability efforts?If not,will the full board take on this responsibility?Or should we create a new committee or add directors to the board/comm

146、ittee to fill the skills gap?How will the committees stay aligned on sustainability?Have committee charters and proxy statement disclosures been updated to clearly communicate the boards allocation of sustainability oversight responsibility?Is it clear how management is governing sustainability stra

147、tegy development,execution and sustainability reporting?Getting the message across on board oversightInvestors are continuing to expect more transparency from boards in how they oversee particular topics,including sustainability.In fact,some shareholders may vote against directors if oversight respo

148、nsibilities are not explicitly disclosed.Boards can find a number of ways to provide shareholders with the information they seek:Robust disclosure in the proxy statement describing the boards oversight efforts Updates to board committee charters to address committee oversight responsibilities relate

149、d to sustainability Additional information about directors skills that enhance their contribution to sustainability oversight efforts 22|Sustainability and ESG oversight:the corporate directors guidePercentage of directors who think their boards understand the following:Talent and corporate cultureD

150、iversity and inclusion effortsData privacy/cybersecurityESG strategyInternal controls/processes around data collectionClimate risk/strategyCarbon emissions93%89%91%91%65%64%60%Q:How well do you think your board understands the following as they relate to your company?Responses:Very well and somewhat

151、 wellBase:512-560Source:PwC,2023 Annual Corporate Directors Survey,October 2023.23|Sustainability and ESG oversight:the corporate directors guideofdirectors52%Board oversight process solidifies assay that ESG issues are regularly partof their boards agenda.Q:With which of the following statements do

152、 you agree about ESG issues?(select all that apply)Base:531Source:PwC,2023 Annual Corporate Directors Survey,October 2023.Directors are confident about sustainability24|Sustainability and ESG oversight:the corporate directors guideOversee:Engagement:Is the companys sustainability story being effecti

153、vely communicated to investors and other stakeholders?Board composition:Does the board have the necessary expertise and skills to oversee sustainability risks and opportunities?Education:Does the board understand why ESG is important to investors and other stakeholders?Is the board appropriately edu

154、cated on ESG and the companys sustainability?For more information about shareholder engagement and board composition see:Board composition:The road to strategic refreshment and succession and Director-shareholder engagement:getting it right.Oversee:Accountability:Are the sustainability goals and mil

155、estones effectively integrated into executive compensation plans?Talent and culture:How is management organized to execute the sustainability strategy?Are the right people and processes in place?Does the company have a culture that embraces sustainability efforts?For more information on ESG in execu

156、tive compensation see:Purpose-driven leadership:The evolving role of ESG metrics in executive compensation plans.Oversee:Disclosures:Is the company or any of its subsidiaries subject to mandatory reporting?For voluntary reporting,which ESG frameworks and/or standards is the company using and are the

157、 disclosures(both qualitative and quantitative)investor grade?Processes and controls:Are there processes and controls in place to support high quality data collection and reporting?Assurance:If not required,should independent assurance be obtained to enhance reliability?For more information on ESG a

158、nd the audit committee see:The audit committees role in sustainability/ESG oversight.Nominating and governance committeeCompensation committeeAudit committeeOversee:Strategy:Are sustainability risks and opportunities integrated into the companys long-term strategy?How is the company measuring and mo

159、nitoring its progress against milestones and goals set as part of the strategy?Messaging:Do sustainability messaging and activities align with the companys purpose and stakeholder interests?Risk assessment:Have material sustainability risks been identified and incorporated into the ERM?Has the board

160、 allocated the oversight of these risks to the full board or individual committees?Reporting:What is the best communication platform to use for the companys sustainability disclosures?Full boardIntegrating sustainability into board oversight responsibilities 25|Sustainability and ESG oversight:the c

161、orporate directors guideMaking time for sustainability on the board agendaIn the past,sustainability topics and data may have been reviewed by the board on an ad hoc basis,perhaps centered around the publication of proxy materials and a sustainability report.However,sustainability is now a recurring

162、 topic at most board meetings and sometimes in every committee meeting,as 52%of directors say ESG is a regular part of their agendas.Given the demands and expectations for board involvement in sustainability oversight,it is important to create the right cadence.The board needs to regularly hear from

163、 management on sustainability strategy,reporting progress against goals and challenges that have arisen.Some topics,such as human capital during a labor crunch,may need frequent updates.By taking a considered approach to spreading responsibilities across the full board and appropriate committees,and

164、 setting expectations for management reporting,the board can ensure sustainability topics receive the attention they need without putting undue pressure on their time.Additionally,high-performing boards and directors are always embracing educational opportunities.Because sustainability topics are wi

165、de-ranging and can be very complex,its an area well-suited to different types of director education.Many boards engage outside experts to provide the board with briefings and specific training on sustainability.Others send directors to intensive programs focused on specific areas of sustainability.B

166、oard considerations:Which topics have a direct impact on near-term performance or capital allocation decisions?Are there topics the board needs to monitor but may not require direct input?Can performance be monitored using a dashboard or does it require time for discussion on the agenda?Are there an

167、y skills or abilities identified during the board evaluation process that should be prioritized for more intensive board education programs?ConclusionCompanies have made rapid strides in unlocking the business value of sustainability in recent years.The sustainability issues a company faces vary wid

168、ely by industry and company maturity,and there is no one-size-fits-all solution.The rapidly evolving regulatory environment,including the final SEC rules on climate-related disclosures and the laws instituting California disclosure requirements for companies doing business in California,means compan

169、ies should act now to reduce the burden of future disclosure requirements.Directors have a big role to play in guiding management to allocate the appropriate resources and attention.Forward-looking companies value being a frontrunner on sustainability issues because they see the connection to the co

170、mpanys long-term success.26|Sustainability and ESG oversight:the corporate directors guideAppendix A:A deeper dive into materialityBackgroundAs discussed in Part 1,investors are paying more attention to the sustainability risks and opportunities facing the companies in which they invest and are in m

171、any cases using the information available in the market to make buy,sell,hold and vote decisions.Leading companies are responding by bringing together multiple functions within the organization under close oversight by the board to identify and report on those sustainability risks and opportunities

172、that will impact resilience and value creation for the short,medium and long term.Recently,the vast majority of the S&P 500s market value has been tied up in intangible assets,such as human capital,customer loyalty and brand identification,which can be substantially affected by a companys sustainabi

173、lity position.Determining whether those sustainability risks and opportunities will have a material impact on a companys strategy,messaging,risk assessment and reporting is critical as companies compete for capital.Boards have a key oversight role to play.Additionally,many companies have expanded th

174、e population of whom they consider stakeholders beyond investors to include employees,customers and communities.Materiality in the context of sustainability informationWhen materiality is considered in the sustainability context,it often has a broader lens than investor-focused federal securities la

175、ws and may consider the environmental and social impacts of a companys activities.Companies will need to understand each of the definitions in the required and voluntary frameworks and standards that they are using.In performing a materiality assessment,it is helpful to think about where a company m

176、ight disclose and/or communicate sustainability risks and opportunities,and the corresponding regulatory requirements,when applicable.Regardless of where it is presented,the information should be developed under a system of processes,policies and procedures on measurement and reporting to support it

177、s completeness,accuracy and reliability.In financial statementsFor some companies,sustainability risks and/or opportunities may have a material impact on the financial statements under the US GAAP financial reporting framework or another framework they may be using.For instance,a company may be exec

178、uting a plan to reduce emissions,which may result in a significant change in how certain of its physical manufacturing assets will be used.This could lead to a material impairment which would need to be disclosed in the financial statements.27|Sustainability and ESG oversight:the corporate directors

179、 guideIn documents filed or furnished to the SECBecause the time horizon over which sustainability-related risks and opportunities will impact a company vary by company and industry,certain risks may exist that do not yet have a material impact on the financial statements but have the potential to b

180、e material.Management may choose to disclose these risks in SEC filings because they view them to be important to the companys strategy and/or operations,even if not otherwise required to include them as risk factors.While there is significant judgment in determining what constitutes material disclo

181、sure that should be included in an SEC document,federal securities laws provide the context for management to make those decisions.In other company communicationsReporting on financially material sustainability risks and opportunities in financial statements and SEC documents is targeted at investor

182、s and done within the construct of securities laws and US GAAP.There is,of course,other sustainability-related information that could be of interest to a broader set of stakeholders that the company may decide to actively monitor,manage and report on in a sustainability report,for example.The factor

183、s that influence the financial impact of and investor interest in different sustainability risks and opportunities are evolving,and as such,something disclosed in the risk factors section of the Form 10-K today may impact the financial statements tomorrow.Further,the regulatory requirements for repo

184、rting are evolving quickly,as shown by publication of the SECs final rule on climate-related disclosures and the EUs adoption or proposal of various sustainability reporting requirements.Over the past several years,strong investor interest has shifted the analysis of how both climate-and diversity-r

185、elated actions must be assessed for materiality.As such,the assessment of financial and nonfinancial impacts of sustainability issues should not be static.So that materiality assessments reflect the dynamic nature of investor and broader stakeholder concerns and remain current in this evolving lands

186、cape,companies should have a robust process for regularly reviewing their sustainability materiality assessments,the factors covered in those assessments(including the applicable regulatory requirements),and decisions about what to disclose and where.The boards roleNot all sustainability risks and o

187、pportunities need to be discussed at the board level.Given the strong interest of institutional investors,the impact of certain sustainability matters on risk assessment,talent recruitment and retention concerns,regulatory changes,and the potential impact on brand value,overall sustainability strate

188、gy is an appropriate topic for a board to discuss regularly.The level of detail and the balance of time committed to sustainability issues will vary by company.Managements judgment about which of the issues to bring to the board should be informed by a materiality analysis.The board should understan

189、d managements process for identifying the sustainability issues relevant to the company,assessing those issues for materiality,and deciding what to disclose and where.The board should understand and challenge managements materiality assessment process.28|Sustainability and ESG oversight:the corporat

190、e directors guideThe board may want to consider asking management the following questions:How has management determined those sustainability risks and opportunities that could have a material impact on strategy,operations or financial performance under each of the definitions in the required and vol

191、untary frameworks and standards that they are using?Beyond investors,to which groups of stakeholders is the company accountable?Is the company considering the interests of employees,customers,suppliers and communities?Has there been an assessment of how the broader group of stakeholders could impact

192、 long-term value?How has management assessed what sustainability-related information is relevant for each of its stakeholder groups?Has management engaged with investors and other key stakeholder groups about sustainability to inform the companys materiality analysis?For example,have the sustainabil

193、ity concerns of institutional investors been considered?Have employees been consulted on which sustainability issues are most likely to affect their decisions about employment?Is the materiality analysis used as a strategic business tool to identify both risks and opportunities arising from sustaina

194、bility issues as well as to guide disclosure decisions,considering regulatory and reporting requirements?How does management determine the sustainability matters to be discussed with and reported to the board?What is the process to oversee that communications are aligned with the companys purpose an

195、d the messaging is consistent across financial and other company reporting?29|Sustainability and ESG oversight:the corporate directors guideAppendix B:Summary of board considerationsTopicQuestionPagePurpose and strategy Has the company clearly articulated a purpose that considers key stakeholder nee

196、ds and aligns with business strategy?Has the company considered how its purpose compares to that articulated by its competitors?Are sustainability risks and opportunities integrated into the companys long-term strategy?How is the company measuring and monitoring its progress against milestones and g

197、oals set as part of the strategy?9Risks Do the companys existing risk processes include identification of any sustainability risks?Would expanding the risk identification process lead to a broader scope of risks to be captured?Does the ERM process include assessment and mitigation plans for all sust

198、ainability-related risks identified?How does management prioritize sustainability risks and opportunities?Are these sustainability risks and opportunities included in capital allocation decisions?10Disclosures Is the company subject to any required disclosures?How is the company communicating its pu

199、rpose and goals in furtherance of long-term sustainable success?Is the company using both quantitative and qualitative information to measure its progress?How does the company monitor what competitors are doing,what the rating agencies are reporting and other benchmarking data?Is the company transpa

200、rently tracking and reporting its performance against milestone goals,as well as long-term goals,so stakeholders and others can monitor progress?What time periods should be presented in sustainability disclosures?For example,will the company only present current year data,or present a one or two-yea

201、r comparative?Should the information be disclosed on the aggregate,at a company or subsidiary level?1130|Sustainability and ESG oversight:the corporate directors guideTopicQuestionPageReliability of sustainability information Does the company have robust policies and procedures to support the develo

202、pment of its disclosures?Do the companys disclosures adhere to the requirements of particular frameworks or standards?Are the disclosures meeting investor expectations?What is the role of the finance/reporting function in sustainability disclosures?Has management found any gaps in the internal contr

203、ols that support the completeness and accuracy of the disclosures?If so,how does management plan on mitigating those gaps?What is the role of the disclosure committee in the process?When not required,would stakeholders be confident with the accuracy of the disclosure without independent assurance?Co

204、uld independent assurance serve as a differentiating factor among peers?13ESG standards and frameworks Has the company leveraged various ESG standards and frameworks to help determine whether it is addressing the most significant risks and issues facing the company?What considerations were taken int

205、o account when deciding on the standard and/or framework to adopt?For example,were the target audience,materiality considerations and scope considered?How is management monitoring and responding to changes in voluntary and mandatory reporting standards and frameworks in markets where the company ope

206、rates?16Where to disclose sustainability information Do the companys disclosures address various stakeholder preferences?For example,a customer or an employee will most likely refer to the companys website for sustainability information,while an investor would more likely refer to either corporate r

207、esponsibility reporting or annual reports.Are disclosures consistent across various platforms and appropriate for the different audiences of each?For example,are material risks disclosed in a corporate responsibility report aligned with those identified in the companys Form 10-K filing?Is the messag

208、ing being incorporated in operational discussions,such as quarterly analyst calls?Has the company considered its legal liability when including sustainability information in SEC filings?1831|Sustainability and ESG oversight:the corporate directors guideTopicQuestionPageMeasuring and monitoring progr

209、ess How does the company determine which metrics,frameworks and standards will be used for disclosure in mandatory and voluntary reporting?What sustainability commitments has the company made publicly,what is the strategy to achieve the commitments and how is management monitoring performance?19Usin

210、g compensation to create incentives How do the companys compensation practices benchmark against peers as it relates to tying sustainability to executive compensation?Do peer companies use sustainability metrics and if so,what metrics do they use?Which goals are important for the company?What are th

211、e interim and long-term goals?And therefore,which metrics make sense for the company to use? 2024 PwC.All rights reserved.PwC refers to the PwC network and/or one or more of its member firms,each of which is a separate legal entity.Please see for further details.This content is for general informati

212、on purposes only,and should not be used as a substitute for consultation with professional advisors.2059128-2024 JCHow PwC can helpTo have a deeper discussion about how this topic might impact your business,please contact your engagement partner or a member of PwCs Governance Insights Center.Maria Castan Moats Leader,Governance Insights Center Paul DeNicola Principal,Governance Insights Center Matt DiGuiseppe Managing Director,Governance Insights Center Tracey-Lee Brown Director,Governance Insights Center tracey-