Holding boards accountable for ESG: A business case

This article sets out the case for investors to ensure that investee company boards are held accountable when it comes to ESG issues. We look at how ESG competency and accountability are interlinked, why they matter for investors and investees, and when and how investors should engage with companies to improve their practices.   

The case for corporate sustainability is generally understood; however, what is less frequently discussed is how boards design and implement corporate strategy, and how board duties and responsibilities extend to the adequate management of material ESG-related risks and opportunities. In interacting with investors, boards should demonstrate that they are well equipped to understand sustainability issues and that they are acting to address them. Investors should also consider how investee company boards show accountability for ESG issues when making stewardship and investment decisions.     

A definition of board accountability

A board’s duties and responsibilities vary depending on factors such as a company’s ownership structure and jurisdiction. However, there is broad consensus that a board’s fiduciary duties encompass those of care and loyalty. As highlighted in the OECD’s Principles of Corporate Governance, “Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders, taking into account the interests of stakeholders.”  

Who are boards accountable to? 

According to the ICGN’s global corporate governance code, “the board is accountable to shareholders and relevant stakeholders for preserving and enhancing sustainable value over the long term in alignment with a company’s purpose and long-term strategy.”  

Figure 1: Board accountability: A process¹

What are boards accountable for?

For responsible investors, board accountability goes beyond traditional governance concerns such as adequate attendance at board meetings and truthful disclosures of company actions, policies and accounts. It encompasses boards responding to investors when they raise ESG concerns – be it via engagement, or filing or voting shareholder resolutions at listed companies’ AGMs – and positioning the company to respond to key ESG risks and opportunities. 

Accountability is a multi-layered issue

Investors wishing to understand a board’s level of accountability for and approach to addressing business-critical ESG issues may first consider a company’s ESG disclosures. Understanding what issues are deemed material, what measures are being implemented to address them, and what progress has been achieved to date – can paint a picture of the remit and scope of a board’s own oversight.  

Besides ESG disclosures, investors also need to factor information about the board itself and its degree of accountability into their investment decisions and stewardship strategies. Investors should consider a few key concepts: 

• Board transparency. Investors require transparency about the board’s structure, the remit of its different committees or individual member responsibilities, as well as detail about members’ relevant backgrounds, experience, and qualifications in relation to ESG issues.  

• Board independence. To ensure their interests are adequately represented, investors should assess the presence of non-executive (independent) directors, their remit, background, as well as any affiliations. 

• Board remuneration. Incentives such as ESG-related pay policies and ESG-linked KPIs may also play a key role in aligning board members’ and shareholders’ interests, including those related to sustainability.  

• Board-level ESG competency. A company’s directors should have the right skills, resources, and knowledge to manage current and future ESG risks and opportunities. Competency is a precondition for accountability, and therefore competency gaps should be identified and addressed.  

• Board education. There are several ways to improve boards’ ESG competency, from educating and upskilling directors through investor engagement, to adding members with relevant backgrounds through board nominations or hiring external consultants.  

Why board accountability for ESG matters to companies

Companies whose boards are not accountable to shareholders with regards to sustainability may not be able to protect shareholder value effectively. Companies may find that greater accountability can help to:  

• Enhance their ability to spot current or emergent risks and opportunities in a changing business environment; 
• Avoid or reduce future legal, regulatory, and compliance costs relating to corporate impacts on sustainability issues;  
• Keep pace with investors’ evolving expectations and maintain investor trust; and  
• Enhance the attractiveness of the firm to investors and creditors by demonstrating good governance mechanisms and potentially reduce the cost of capital.  

ESG issues are shareholder issues

Responsible investors should consider both the impact of material ESG factors on the companies they invest in, and the impact of investee companies on society and the environment, as both could be material to the company’s long-term value.  

Company boards play a key role in protecting value and investment returns. Board accountability for ESG issues therefore helps investors assess how companies respond to a variety of investor concerns. Greater board accountability enables investors to:  

• Maintain critical governance structures by scrutinising effective board oversight of and eliciting accountability for all material issues, including ESG issues. 
• Obtain accurate disclosures on the company’s financial and sustainability performance (as overseen by the board) and incorporate this information into investment analysis and capital allocation decisions.  
• Protect and maximise value through stewardship, based on disclosures from the board and encourage higher standards of ESG performance. 
• Help the company improve its sustainability performance. If a board is competent when it comes to ESG issues and accountable for delivering a company’s sustainability strategy, it is better positioned to:   
  • consider ESG risks and opportunities, including those raised by shareholders;  
  • unlock and allocate resources to achieve strategic priorities; and  
  • deliver value to shareholders, employees and other stakeholders.  

Fulfilling shareholder rights and duties

In exchange for providing capital, investors obtain shareholder rights. These rights may differ across jurisdictions, asset or share classes, but generally provide an expectation of accountability and an opportunity to voice approval or concerns around the board’s approach. These rights are upheld through board disclosures, dialogue, and formal interactions, including voting on proposals, filing resolutions or nominating directors.  

Without board accountability, these rights cannot be meaningfully exercised. For example, without adequate information, investors are unable to effectively assess a company’s performance. Similarly, investors need to hold boards accountable for implementing majority-supported ESG shareholder resolutions (see resource below) to make sure that shareholder voices do not lose their meaning. The lack of board accountability therefore represents a potentially material governance failure for both the board and its investors. 

When and how should investors seek increased board accountability? 

 Indicators that a company’s investors ought to be holding the board more accountable on ESG matters include:    

• The company has a poor level of disclosure or performance on material ESG factors.   
• The company has experienced a recent ESG-related failure or controversy.    
• The company invests in projects or engages in activities that run counter to global sustainability goals and risk becoming stranded assets. 
• The company has failed to enact an ESG proposal that received majority support from shareholders or has not responded to high levels of support / dissent on shareholder / management proposals.  
• The company has failed to respond to other investor stewardship efforts, including those resulting in a shareholder lawsuit.  

Investor efforts in relation to board accountability tend to materialise via engagement or existing processes, such as voting at AGMs or filing shareholder proposals. 

In 2023, overall levels of support for director elections remained on a par with the previous year; at individual company scale, a smaller percentage of nominees received over 95% support^[3]. This may signal increasing willingness from investors to use director elections as a tool to voice or escalate concerns regarding board oversight and decision-making. 

Call to action: Board accountability should be part of stewardship

Investors tend to seek and request board accountability after controversies have occurred. While investors may be concerned that holding boards accountable could impact their relationship with investees, they should envisage it as an iterative process, based on dialogue. This process would ensure that investee boards are competent when it comes to ESG issues and can be held to account on sustainability.  

To effectively protect and enhance long-term value, we encourage signatories to make board accountability for ESG issues central to their relationship with investee companies.