ESG Governance

On 4 June 2024, the Board Leadership Center welcomed Michael Wagemans, Head of Sustainability at KPMG in Belgium, An Vanderhulst, Principal in Risk & Regulatory at KPMG in Belgium, Pierre Gurdjian, Member of the Board of Directors and Governance and Remuneration Committee at UCB, and Charlotte Ersbøll, Chair of UCB’s External Sustainability Advisory Board, for a discussion on what ESG governance is, the role of the board, and the different models for board oversight, including a look at UCB’s External Sustainability Advisory Board and how it supports UCB’s board in its ESG oversight responsibilities. This article summarizes the key takeaways from the discussion.

Environmental, Social, Governance – or “ESG” – has been a topic on the board agenda for years. However, there’s been a shift at board level more recently. ESG is moving from an important, though perhaps secondary, theme to a core topic high on the agenda. This is especially true within Europe, with the European Commission (EC) driving the tone at the top through legislation such as the Corporate Sustainability Reporting Directive (CSRD).

Companies and boards are being inundated with new regulations and legislations, which can be frustrating and expensive. However, it can also be an opportunity to learn and improve, have richer conversations, gain new insights, and become more aware of rising threats – so long as it’s not treated as a tick-the-box exercise.

So, what is ESG Governance?

When addressing ESG factors, governance is the often-forgotten third pillar of E-S-G. In and of itself, the ‘G’ in ESG includes several critical issues relating to the way an organization is structured and operates, including corporate culture, business conduct, third party relationships, anti-bribery and corruption, whistleblowing, political influence, lobbying activities, and payment practices.

In addition, organizations must consider the way in which they govern all aspects of ESG, from setting and implementing a strategy to monitoring and reporting their performance.

The CSRD requires companies to report on ESG governance. Specifically, European Sustainability Reporting Standards (ESRS) 2 specifies the disclosure requirements for the description of the governance and organization in relation to sustainability matters. This includes disclosing the composition of the administrative, management and supervisory bodies, their roles and responsibilities, how the administrative, management and supervisory bodies are informed about sustainability matters, how these matters were addressed during the reporting period and the main features of its risk management and internal control system in relation to the sustainability reporting process.

Common challenges and pitfalls

With the growing demands placed on business units overseeing ESG responsibilities, KPMG has observed that both corporates at the beginning of their sustainability journey and those with extensive experience are grappling with the same question: how to effectively embed sustainability responsibilities across all levels of the organization. This challenge underscores the importance of developing strategies that enable seamless incorporation of sustainability initiatives at every level of operation.

Organizations also face other challenges and pitfalls, including:

Strategy & ambition: ESG strategy and ambition is insufficiently clear throughout the organization and not aligned with the overall organizational strategy.
Corporate governance: Board-level ESG expertise is often lacking, which impacts board-level support and steering.
Ownership: Unclear ownership of certain ESG metrics, roles, responsibilities, or delineation of duties poses a challenge.
ESG organization: The organization of ESG within the company may lead to inefficient reporting structures and manual processes with unclear roles and responsibilities.
ESG leadership: Sustainability is insufficiently integrated in core decision-making processes.
Employees & communication: Insufficient resources or capacity with the right skills set, internal silos and limited communication between departments bring further inefficiencies.

Organizations that understand these potential obstacles can address them pre-emptively when designing and implementing a (more) robust ESG Governance structure.

The board’s role in ESG

Although ESG falls under the responsibility of executive management of an organization, implications for boards are significant concerning governance and overall business strategy, underscoring the necessity for board involvement in three essential roles: strategic, oversight, and leadership.

Strategic Role

Boards have an important role to play in defining the strategic direction of the company, focusing on sustainable value creation for current and future shareholders, defining its risk appetite, providing new, independent and objective perspectives and ideas, and ensuring the inclusion of diverse and dissenting points of view.

Specifically in relation to CSRD implementation, some of the most important areas for board involvement include the double materiality assessment, the subsequent revision of sustainability goals and business strategy and ensuring the company is prepared for the audit.

Oversight Role

Boards also have a role to play in governing the organization, overseeing its activities and the performance of executive management in implementing corporate strategies, ensuring there is an effective strategic risk management plan in place and being followed, and ensuring the right operational governance is in place to support the ESG performance.

Under the CSRD, boards have the responsibility to ensure that the company complies with the new rules and requirements related to ESG reporting. Given these (new) responsibilities, it’s important for boards to consider how to structure their ESG governance. Some have fully integrated ESG, such that the full board works directly with management on ESG matters. Others have delegated ESG to (an) existing committee(s), such as the risk or audit committee, who will oversee it and provide advice and recommendations to the board. Still others have created a dedicated Sustainability Committee to oversee ESG matters and support the board by providing advice and recommendations.

In any case, effective oversight hinges on having the right people in the boardroom, supported by qualitative information.

Leadership Role

Finally, boards have a role to play in recognizing responsibility for ESG issues at board level and ensuring that ESG governance is appropriately delegated across the organization. They are responsible for selecting, appointing, evaluating and rewarding the executive team, and for setting the right tone at the top.

UCB’s External Sustainability Advisory Board (ESAB)

The ESAB was launched four years ago to support the UCB’s sustainability ambitions and bring the board closer to the company’s ESG strategy. Its aim is to connect decision makers with the key themes and emerging trends surrounding UCB.

It’s been a journey

At the start, it was important for the ESAB to focus on learning about and understanding the company – through listening to and engaging with key stakeholders (the board, executive committee, family reference shareholder, key functional leaders, etc.). The involvement, openness and curiosity of these stakeholders helped build trust between the parties and enabled enhanced value creation.

With a solid foundation in place, the value of the ESAB has become more profound over time. They bring pragmatic views while also challenging the board to be more ambitious – a role that was reinforced by the outcomes of a recent assessment of the ESAB.

Quality conversations

The impact of the ESAB is derived from the quality of the conversations it drives – not only between the ESAB and the board, but in how the ESAB prompts more thoughtful dialogue within the board itself.

Through their expertise, experience, networks, research and stakeholder engagement, the ESAB prepares and brings informed discussions to the board on topics ranging from building a future fit organization to health equity.

The richness of the discussion comes on one hand from the trust built and open conversations fostered, and on the other from the ESAB’s diverse backgrounds, expertise and experiences, including in life sciences, innovation, the Global South, access to healthcare, systems change, design thinking leadership cultural change and more.

While they are not necessarily always aligned, a foundational aspect of the relationship has been how they actively listen to each other. Through considerate conversation and successive framings, they’re able to arrive at decisions that shift mindsets and resources. It’s in this way that the ESAB helps the board to continually push the envelope, for example, looking at health equity not only through the lens of access in the Global South, but also access within western countries, such as the US.

Value creation

The value creation process of a life science company was also discussed. Health equity was further elaborated as well as the need to define and monitor clear KPIs in domains where the societal responsibility of the company is on the top of the agenda.

About the Board Leadership Center

KPMG’s Board Leadership Center (BLC) offers non-executive and executive board members – and those working closely with them – a place within a community of board-level peers. Through an array of insights, perspectives, and events – including topical seminars and more technical Board Academy sessions – the BLC promotes continuous education around the critical issues driving board agendas.