There is a growing trend towards increasing numbers of sustainability and ESG committees at board level. If your company is considering establishing one, there are a few factors to consider.
Whether you are choosing whether to establish one, have decided to go ahead and create one, or already have one and want to develop a better understanding of how yours compares to other organisations’, CGIUKI’s terms of reference can help.
For a broader discussion of the pros and cons of sustainability committees – and top tips for establishing or maintaining one – join us at our ESG Summit on 2nd May 2024, where we will be launching an in-depth report on the what, why, who and how of sustainability committees.
New terms of reference for ESG and sustainability committees at board level
The Financial Reporting Council (FRC) requested that CGIUKI create a model set of terms of reference for sustainability or ESG committees. They are rooted in the UK Corporate Governance Code and the FRC’s associated guidance, published at the end of January 2024.
Developed with the input and expertise of dozens of Company Secretaries, the model terms of reference are designed to allow you to easily tailor them to the specific needs of your company. They are based on the real-world experience of organisations ranging all the way from FTSE 100 companies, to large private companies, to venture capital firms, to local government. They are a comprehensive consolidation of many organisations’ terms of reference – but most importantly, they are also reflective of the practicalities and realities of running a sustainability or ESG committee.
Crucially, the terms are forward-facing, to allow the committee’s remit to develop and respond flexibly to evolving regulatory, investor and stakeholder expectations. They also highlight key areas of overlap with other, already established board committees, including the audit, risk and remuneration committees. This allows organisations to clearly identify the particular remit of each committee, to avoid the risk of duplication of work, and to encourage deeper collaboration.
So, what does a sustainability or ESG committee look like? And should your company have one?
There is a wide range of activities which sustainability or ESG committees can oversee, and the name chosen for the committee can have implications for what is covered in its remit. These committees have the time and opportunity to do deep dives into particular ESG issues, and in doing so, can free up more time for the full board. They oversee and monitor the development and implementation of ESG or sustainability strategies across the business. They can also streamline the process of reporting against external and internal ESG standards and frameworks, and can support compliance with relevant regulations.
The most relevant and material ESG and sustainability issues for each company will be specifically associated with its strategic and operational activities. It is essential that the duties of the sustainability or ESG committee are tailored to the business needs and context of each company.
Certain areas which may fall under the remit of a sustainability or ESG committee may also be the responsibility of other board committees. For example, the monitoring and assurance of non-financial reporting is often handled by audit committees. Environmental and social risk factors may already be covered by the audit or risk committee too, and the incorporation of ESG metrics in the setting of executive remuneration may fall to the remuneration committee. As such, when drafting or re-drafting the terms of reference for a sustainability or ESG committee, it is crucial that defining lines are drawn between the responsibilities of different committees. That is not to say, of course, that committees should not collaborate, or that the sustainability or ESG committee cannot support other committees in their work.
What do regulators think about sustainability committees?
The UK Corporate Governance Code states that: ‘A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.’ Some companies choose to establish a sustainability or ESG committee to support them in achieving the long-term sustainable success of the company.
For the first time in 2024, sustainability committees were referenced in the FRC’s Guidance associated with the Code. The Guidance states that there has been growth in the number of companies with these committees, and that whilst they are certainly not a requirement, companies may find them helpful. It highlights that these committees can support the board in developing, reviewing and monitoring sustainability reporting, targets and metrics.
Whether a company chooses to have such a committee, and what it is called, is ultimately a matter for that company and its board to decide.
