As investors, regulators, and stakeholders increasingly recognize environmental, social and governance (ESG) risks and opportunities as financially material, companies are looking for ways to link management incentives with ESG performance on climate change, diversity and inclusion, and other key issues. Though integrating ESG goals into the existing compensation program may seem like the obvious next step, there are several processes that board members need to implement first—and critical questions that they need to address—to ensure the new compensation structure is appropriately tied to corporate strategy.

We have teamed up to provide guidance to companies that have begun to integrate ESG issues into their corporate strategies and may be considering ESG in incentives. This three-part series focuses on that process, including guidance to corporate boards on how they can: 1) effectively identify and oversee top ESG issues, 2) focus and clarify efforts around establishing a select set of critical performance goals for material ESG issues, and 3) consider whether and how to integrate ESG metrics into incentive compensation programs. In this first article, we will focus on how companies can implement the foundational steps of board-level ESG oversight.

The board’s role in ESG oversight

As stewards of long-term corporate performance, boards have a critical role to play in ensuring that companies are aware of, and able to navigate, an ever-evolving risk landscape—one that increasingly involves social and environmental impacts. It is the board’s responsibility to ensure that processes are in place to identify material risks and opportunities—including those that arise from ESG concerns. In doing so, directors should look beyond the information they receive from management and actively inquire about processes employed and issues identified. This is not only best practice, but a fulfillment of director fiduciary duty, which includes the “duty of care,” or responsibility to adequately inform oneself prior to making decisions.

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