Environmental, social and governance (ESG) issues are increasingly urgent for companies, not least because investors, employees, and customers are pushing boards ever-harder to show effective and sensitive oversight around these core areas.
Here, we share the outcome of our research and of our many discussions across Ireland’s biggest companies to examine the various ways that boards manage their response to rising ESG expectations — something that is now profoundly important to an organisation’s success and reputation.
EU legislation has required listed companies since 2014 to publish information detailing progress on areas that include social impact, board diversity, and environmental concerns; areas that now loosely fall under the modern ESG umbrella.
Our findings confirm that ESG is an established part of the agenda at board meetings, and many of the ISEQ 20 members are taking steps to demonstrate their willingness to engage in this area. As part of our research for the 2022 Spencer Stuart Board Index we examined what approach to ESG each of the ISEQ 20 companies are taking, and specifically what role the board plays. Interestingly, most of our sample use sustainability to refer to these issues rather than ESG.
All the companies in our sample highlighted ESG concerns in the strategy overviews of their annual reports, with the exception of Greencoat Renewables and Malin Corporation. Greencoat has no employees and Malin has only six employees, all them at corporate level. As a result, many of the initiatives discussed here not applicable to these two companies.
The other 18 members of our sample all highlighted a number of common strategy themes, including reducing carbon emissions, water usage and waste-to-landfill, offering “green” products to their customers and looking after their employees through training and development alongside diversity, equity and inclusion programmes.
Each of the 18 companies emphasised the need to improve metrics and KPIs to support achieving these aims. Levels of data-gathering and analysis varied widely across the sample but all recognised the need to improve here in order to properly set objectives.
90% of ISEQ 20 companies have signed up to the Task Force on Climate-related Financial Disclosure (created by the Financial Stability Board) and begun to report under this framework.
It is increasingly essential that board members possess the right skills to support their company on its sustainability journey. 20% of the boards in the ISEQ 20 added sustainability as a new competence for board members in 2021. In total, 40% of our sample highlighted sustainability understanding as a key competence and it is likely that this proportion will continue to grow in the coming years. Irish Residential Properties evaluated their board members for environmental management as a core skill. 30% of ISEQ 20 boards highlighted governance as a key competence in their board skills matrix, although this had been a pre-existing competence in previous years in all cases. 25% of the total sample had both environmental management and governance as core competencies (this includes companies that fall into either of the previous categories).
In the course of the year we saw a number of notable changes to the governance of sustainability and ESG matters. 15% of ISEQ 20 boards have an ESG committee and a further 25% had a dedicated committee for sustainability or environmental, or both. AIB has a Sustainable Business Advisory Committee, but this is not a full board committee and is a mix of non-executive directors and executive committee members. In 15% of our sample, chief executives sat on the sustainability/ESG committee.
Of the eight boards with an ESG or sustainability committee, five were newly established in 2021 or early 2022. Two boards decided to expand the remit of existing committees to include responsibility for sustainability. Flutter Entertainment’s risk committee became the risk and sustainability committee and Kerry Group’s governance and nominations committee became the governance, nominations and sustainability committee. Bank of Ireland created its responsible and sustainable business committee” in early 2022, transferring responsibility for responsible business from the nominations committee to this new committee.
For those boards without a dedicated ESG or sustainability committee, responsibility for ESG policies and strategy was typically held by the entire board. Governance often came under the remit of the nomination committee, and ESG risks, such as climate change, were included in the risk assessment done by the risk committee (if the board had one) or the audit committee.
Committees with responsibility for sustainability
There is a growing trend among companies to include ESG measures in assessing variable pay awards for executive directors. 50% of ISEQ 20 companies included ESG metrics in the remuneration policy for executive directors (it should be noted here that 15% of our sample do not offer variable pay or do not have executive directors). The weighting of this varied between 5% and 30% and included objectives such as reducing greenhouse gas emissions by a specified percentage, hitting DE&I targets, and advancing the sustainability agenda.
A further 15% of ISEQ 20 companies indicated that they would be revising their remuneration policies and including ESG metrics in 2022.
While our findings indicate that ultimate oversight for ESG and sustainability rested with the board, responsibility for implementing the strategy fell to the chief executive officer and the executive committee. Responsibility among the executive committee varied widely based on the make-up of the team. In our sample, chief operating officer, chief financial officer, company secretary, chief strategy officer and chief people officer are all mentioned as having some form of responsibility for ESG objectives.
Every company in our sample (excluding Greencoat and Malin Corporation, which do not have ExCos) has at least one council, committee or forum that discusses sustainability and ESG actions and objectives and is made up of members of the ExCo. The number, nature and remit of these varied widely across our sample depending on the size, sector, and structure of the company.
Chief sustainability officers
Having a leader dedicated to sustainability is increasingly seen as more and more crucial, particularly in companies with significant manufacturing operations. 65% of the companies analysed for the 2022 Spencer Stuart Board Index have a leader specifically dedicated to sustainability. At 15% of the sample, sustainability and/or ESG matters are the responsibility of the company secretary. When we exclude Greencoat Renewables and Malin Corporation (which have zero and six employees, respectively) only 10% of our sample has no leader specifically dedicated to ESG or sustainability.
The seniority and background of the sustainability leader varied between companies. Of the 13 sustainability leaders in our sample, six were members of their respective executive committee and the other seven reported to a member of the ExCo. Five of these 13 were appointed in 2021 or early 2022 and hired externally, while two were internal promotions.
Several different professional backgrounds and skillsets were represented in our sample of sustainability leaders. Investor relations and corporate affairs were the most common backgrounds for these individuals, with strategy, finance, legal and risk also represented. Knowledge of the industry was a key factor in most cases, demonstrating that the sustainability challenges differ from company to company. For example, ISEQ 20 companies involved in construction and real estate appointed leaders with technical backgrounds in architecture and environmental science.
Many aspects of the corporate ESG agenda will feel familiar. Ensuring robust corporate governance has been a focus of regulators for years and many companies have social initiatives such as charity partnerships and community programmes that stretch back for decades. Where we see the biggest changes to boards as a result of the ESG conversation is on sustainability. Many of the ISEQ 20 companies are adding sustainability issues to their reporting, updating their risk assessments with environmental factors and gathering more data on their emissions, waste and water usage.
In this year’s Board Index, we can see companies are bringing new talent into both their executive and non-executive teams to enable them to stay on top of sustainability issues, as well as making sustainability a more prominent topic at board level through the creation of new committees. All of this change will have far-reaching impacts on the ISEQ 20 companies, from their operations to their long-term strategies to the make-up of their boards. We are just at the beginning of the sustainability journey and ESG will become a fixture of the Ireland Spencer Stuart Board Index for years to come.