Rise of the Sustainability Committee in the ASX 200

Analysis of ASX 200 board charters reveals a 10 per cent increase in companies with a Sustainability Committee since 2021, accompanied by a growing number of companies mentioning climate change in their governance documents

New analysis of ASX 200 board charters, undertaken by Herbert Smith Freehills (HSF) in January 2024 and commissioned by the AICD, reveals a 10 per cent increase in the number of dedicated Sustainability Committees within the governance structures of Australia’s largest listed companies.

Eighty-two companies, accounting for 41 per cent of the ASX 200, now have a Sustainability Committee, up from 61 (31 per cent) since HSF undertook similar research in 2021.

According to HSF, the increase indicates that environmental and sustainability-related issues are becoming core governance priorities among more ASX-listed companies, and across various industries.

"The increased prevalence of sustainability committees indicates a solidification of their role within ASX board structures and the growing necessity of supporting structures to help boards oversee ESG risks, regulation and disclosure," said Tim Stutt, partner and Australian ESG lead with Herbert Smith Freehills.

"We're witnessing Sustainability Committees emerge in a broad range of industries, including software, retail, and transportation companies, as well as in mining, energy, and property which have had to focus on these issues for a while."

Integration of sustainability in board charters

The analysis also assessed the incorporation of environmental considerations within ASX board charters. Notably, the board charters of 37 of the ASX 50 companies now reference 'environmental impact' or consider the 'environment', a quarter more than the 25 companies in the 2021 analysis.

Similarly, among the ASX 200 cohort, 52 per cent (104 companies) include references to environmental considerations in their board charters – up from 38 per cent in 2021.

Responsibility for environmental and sustainability issues often spans several committees, with references found across the spectrum of Risk, Audit, and Sustainability board level committees, demonstrating their relevance across enterprise governance.

"Risk committees have traditionally been more likely to incorporate environmental impact as part of broader risk oversight, but we are now seeing that responsibility shifting to Sustainability Committees or being shared given the expanding breadth of considerations for the board," said Mr Stutt. "It's a sign that the Sustainability Committee is here to stay, and its role is growing."

Focus on climate change

This year, 'climate change' appeared more commonly as a specific focus area within board charters, with a notable increase in references to climate-related issues, albeit from a small base. Ten ASX 50 companies mention 'climate' and/or 'climate change' in their board charters, including BHP, Woodside Energy, Telstra, Aristocrat Leisure, REA Group, Coles, Insurance Australia Group Limited, APA Group, Ramsay Health Care Limited, and Stockland. This is more than double the four companies that had board charters referencing climate in 2021.

Across the broader ASX 200, 31 companies’ (16 per cent) board charters include direct references to climate change, doubling from five per cent in the last analysis. References to climate change were most likely to appear in Sustainability Committee charters (23 per cent) compared to Risk (18 per cent) and Audit equivalents (16 per cent).

"In 2021, we found this was the other way around, with Risk committee charters most likely to reference climate change. The shift to Sustainability charters is another indication that boards see these committees as important spaces to assess the range of climate risks and opportunities," said lead researcher and HSF solicitor Samuel Goodear.

More boards include climate in their skills matrix

In board skills matrices, 34 companies on the ASX 50 reference ‘sustainability’, the ‘environment’ or ‘ESG’. Fourteen companies in the ASX 50 (28 percent) included a specific reference to 'climate'. Among the ASX 200, a smaller proportion of 41 companies (20 per cent) have a board skills matrix that specifically references ‘climate’. The advent of new mandatory climate reporting requirements in Australia and internationally could be behind the growing desirability of climate skills on the board among the largest companies.

"We still find 'sustainability' or 'environmental' skills are more common, but the climate skillset being sought after makes sense," Mr Goodear said. "It will be interesting to see if this strengthens over the coming years as the new mandatory climate-related financial disclosure laws are introduced."

Looking ahead

The analysis points to a broader trend towards deeper integration of sustainability and ESG principles within corporate governance structures. As nature and biodiversity gain prominence on corporate agendas, particularly with the finalisation of the Taskforce on Nature-related Financial Disclosures (TNFD) framework in 2023, there is an expectation that sustainability committees will further evolve to encompass these new focus areas. It appears this is already beginning to happen, with two per cent of board charters (three companies) now referencing nature and one per cent (two companies) referencing biodiversity.

"We do expect sustainability-related responsibilities to continue to appear in governance frameworks and for these to become more granular. Climate and nature, as well as broader environmental issues, are increasingly being recognised as essential for driving long-term value creation and a way for companies to foster resilience in the face of environmental and social challenges," said Mr Stutt.

The analysis will be published as part of the AICD’s second Climate Governance Study, scheduled for release in March 2024.