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For some years, company boards have been setting up stand-alone committees to cover specific matters. Today, some boards are setting up stand-alone committees to cover Environmental, Social and Governance (ESG) issues in response to directors’ increasing role in the oversight of extra-financial performance. How effective are these stand-alone committees though in enhancing the ESG and sustainability performance of companies? A joint study by NN Investment Partners (NN IP) and governance services provider Glass Lewis reveals that companies with stand-alone ESG committees do tend to have higher ESG scores, reflected in NN IP’s proprietary ESG Lens.* Companies with this supervisory structure account for the highest proportion (28%) of companies in the top quartile of ESG Lens scores and have above-median ESG Lens scores generally.
Although companies with ‘below board’ committee oversight of sustainability also have 28% in the top quartile, this category only accounts for 15% of second quartile performers versus 36% for stand-alone committees. Overall, the highest proportion of above-median ESG Lens scores are registered at companies with specialized committees — whether at or below board level — to oversee sustainability performance.
Companies with other types of oversight structures and their percentage representation in the top quartile include: combined board committee (16%); whole board (13%); and not disclosed (16%).
The research shows that companies located in Europe and the United States, which have more developed extra-financial reporting expectations and obligations, tend to have stand-alone board level ESG committees (26% and 28% respectively). However, while the quality of disclosure is strong in Europe, the same cannot be said for the US, where many companies appear to have taken a “legal minimum” approach to disclosure. The relatively weak reporting requirements in the United States versus Europe may explain the differences in disclosure quality.
Figure 1: Supervisory structures by region
Stand-alone committees are most prevalent in the energy sector (44%), followed by materials (37%); Financials and Consumer staples (both 29%); Utilities (21%), Industrials (19%); Consumer discretionary (13%) and Healthcare (10%).
Adrie Heinsbroek, Chief Sustainability Officer at NN Investment Partners, commented: “How much oversight boards provide on sustainability varies and may often be quite limited. The decision to adopt stand-alone or combined board-level ESG committees remains voluntary but is influenced both internally, such as having a company culture that values sustainability, and externally by factors such as stakeholder and regulatory pressures. Given these committees are voluntary, they could be viewed as signalling a company’s heightened focus on the strategic performance of ESG, but this may only reflect a superficial commitment.
“In terms of external factors, while recommendations, soft law, and shareholder expectations can influence companies into setting up committee oversight of sustainability and ESG issues, mandatory extra-financial disclosure requirements have a more direct and material impact on the presence of defined oversight structures.
“European companies, for example, which are affected currently by the greatest regulatory pressure to report extra-financial information, are the most likely to have some form of ESG committee in place, while companies in the energy sector may have more stand-alone or combined committees due to greater scrutiny of environmental issues, most notably climate change.
“The research findings once again show the important effect of companies having ESG in focus, and the impact on their ESG performance. As active investors, we continue to engage with companies to put this on their radar and exert our influence by having discussions on this topic.”
On 6 September 2021 NN IP/Glass Lewis published a report that explores the links between ESG supervision and performance. Please find the full report here.
*Source: NN IP/ Glass Lewis, 6 September 2021. Based on a sample of 129 companies in the US (32), Europe (57) and APAC (40). ESG performance data is based on NN IP’s “ESG Lens”, a proprietary tool that assesses a wide range of data points to arrive at a single ESG score for a given company. Glass Lewis provided data on disclosure, board-level ESG expertise and ESG governance structure of the companies.
