The Evolving Role Of Independent Directors
The climate crisis is causing a shift in corporate behavior
Today, companies operate on a more economic footing that most governments. – warranting greater moral and social obligations, towards a world in climate crisis. As the expectations of stakeholders evolve; there is a greater focus on companies’ contributions, their ability to manage increasing levels of risks, and their responsibilities towards stakeholders and society. A growing need exists for proactive measures and greater transparency regarding how businesses manage their effects on society and the environment.
Environmental, Social and Governance (ESG) performance is an area of growing interest for all stakeholders – investors, regulators, supply chain partners, consumers, employees, and the communities businesses are based in. As evidenced by COP27, companies and governments are increasingly being asked to address the challenges presented by climate crisis. This clarion call demands that businesses acknowledge and understand their impacts and then design, develop, implement and evaluate sustainable strategies that will deliver both environmental and social benefits while also delivering value for investors.
Independent directors must take the initiative
As they engage in climate and ESG-related risk and opportunities, corporate boardrooms are experiencing rapid changes. An example: analysis of selection of S&P100 proxy statements It was found that 78% had at least 1 board committee responsible for overseeing environmental sustainability issues, and 42% had at least 1 director who is an expert in ESG, sustainability, corporate accountability, or environmental policy.
Despite being members of the company’s Board, Independent Directors have no material relationships or transactions with the company. Independent Directors are an objective pair of eyes that look out for the company’s best interests. They protect minority interests and keep an eye on the Board’s activities. They play a crucial role in risk management and enhancing credibility. As ESG becomes more popular, the independent director’s importance is likely to increase.
Independent Directors: Developing ESG expertise
Independent Directors can play a vital role in ensuring compliance with regulatory requirements and the integration of ESG within boardrooms. But to do this, they need to understand the Board’s role in overseeing ESG transition and integration, and be able to provide guidance across key areas of consideration including:
These Independent Directors are also responsible for providing guidance and assistance in the hiring of ESG experts in the appropriate roles. They also ensure that ESG strategies in companies go beyond regulatory compliance to generate tangible benefits. They are trusted to help understand the ESG-landscape’s changes and the risks and potential opportunities.
ESG integration in corporate strategies: Accelerating
Independent Directors with ESG expertise can help in unlocking opportunities for ESG-driven value creation by upskilling the rest of the Board and ensuring that the company’s ESG-agenda is well-rounded and fit for purpose. ESG reporting can be complicated, especially when there is a significant negative impact on one or more KPIs. The Independent Director must disclose ESG information in a transparent, accurate, complete, consistent, and transparent fashion, without greenwashing or tokenism.
It is important that companies make clear and timely reports to the board about their commitments and goals. Corrective actions should also be taken. The board must have the Independent Director create the systems and metrics necessary to hold the correct people accountable.
Indian regulators have played an important role in the integration ESG into corporate practices in India. The ultimate goal of the Business Responsibility and Sustainability Reports (BRSR) is to make companies more cognizant of their material environmental, social and governance impacts; develop long-term sustainability strategy; and generate standardized and comparable information that enables stakeholders (especially investors) to understand a company’s ‘real’ performance.
This is a common objective for policymakers globally – and regulations are evolving quickly towards standardization. The Independent Director is responsible for keeping the board informed about all changes and ensuring compliance with any new reporting and regulatory requirements.
ESG will increase value creation for both companies and their stakeholders
Sustainability and ESG are not just buzzwords. Boardrooms are realizing that sustainability integration at the highest levels is crucial to future success. ESG can help create value by generating top-line growth, managing rising operating expenses, minimizing regulatory or legal interventions, accessing impact capital and funds and improving talent retention and productivity. It also helps to increase capital expenditures and investment returns.
Although there is no ‘one-size-fits-all’ solution – by exercising oversight of ESG – Independent Directors can ensure that the Board stays on track to deliver on their commitments for a sustainable and inclusive company, economy, and society.
Author: Madhu Sudankani, Partner, DeloitteTohmatsuIndia LLP
Nachiketa Das, Director, Deloitte Touche Tohmatsu India LLP