Herbert Smith Freehills-AICD guide to board structures and sustainability

A new HSF-AICD guide Bringing together ESG: Board structures and sustainability helps directors and management establish and elevate ESG matters to the board.

Australian companies are embracing environmental, social and governance (ESG) issues as a strategic business imperative to ensure they can meet accelerating ESG risks and opportunities, as well as increasing expectations from investors and stakeholders. The increased focus on ESG requires directors to consider the appropriateness of existing governance structures.

What does the guide cover?

Herbert Smith Freehills and AICD have jointly prepared this new guide to step directors and management through different models for ESG governance. It explores:

• Directors’ duties and effective stakeholder engagement on sustainability
• The role of existing committee structures in elevating ESG matters
• The function, structure, and benefits of a Sustainability Committee

The guide draws on learnings from market practice and trends seen in overseas jurisdictions and includes a template Sustainability Charter – a useful starting point for organisations considering how a standalone ESG or sustainability committee would operate in practice.

Directors’ duties - effective ESG stakeholder engagement

Australian directors have a duty to act in good faith in the best interests of the company, taking account of relevant facts and circumstances. This requires directors to consider the organisation's long-term interests, including its reputation and long-term sustainability, rather than adopting a narrower focus on short-term shareholder return.

Effective stakeholder governance is crucial to securing the appropriate balance between short-term financial considerations and the long-term sustainability of an organisation. It ensures that the board hears and engages with a range of perspectives that inform sound decision-making, especially on sustainability issues. To ensure that a company is properly equipped to manage ESG risks and opportunities, effective stakeholder engagement will be critical, with the board and management needing to be clear on their respective roles and responsibilities.

Do you need a Sustainability Committee?

Boards across Australia take different approaches to ESG depending on the entity type, sector, size and maturity of the organisation – there is no ‘one size fits all’ approach. Board oversight of ESG issues can reside with the full board, an existing board committee, or a dedicated Sustainability Committee. This oversight can also be shared across committees.

It is important for boards to step back and consider what ESG governance structure aligns best with their business structure, strategy and market dynamics.

Sustainability Committees can help focus a board’s attention on climate and ESG. Tim Stutt, Partner at Herbert Smith Freehill notes, “Climate change is something which has a number of touchpoints across the business, from risk management to capital allocation, to disclosure, to the way it interfaces with stakeholders and regulators. A committee can be a good way of bringing a company up the curve and helping support the board.”

Equally, existing committee structures may allow the full board to focus on the most significant ESG matters, with specific issues delegated to committees as appropriate. For example, the Audit Committee may have responsibility for the verification of ESG-related reporting and the Remuneration Committee may be tasked with considering how ESG targets can be incorporated into performance hurdles for senior executives).

Ultimately, however, oversight of strategy and risk is a key board accountability – so regardless of an organisation’s approach to ESG issues, committees are only support structures.