Article Summary
- ESG is an important part of business and should not be ignored by a company board/management.
- Climate risks are inevitable and should form a part of risk and strategy discussions in a company.
- The board of companies should have an ESG committee, as it is fundamental to long-term sustainability and value creation.
KPMG Nigeria has advised company boards to get involved in Environmental Social and Governance (ESG) issues.
The company stated this in its May 2023 ESG Oversight report. According to KPMG, a company’s position on climate change, Diversity Equality and Inclusion (DEI) issues, and other Environmental, Social and Governance (ESG) risks are important.
This is because they are viewed by investors, research and rating firms, activists, employees, customers, and regulators, as fundamental to business and critical to long-term sustainability and value creation.
The report notes that in Nigeria, most boards do not yet have a dedicated ESG committee. However, some companies are beginning to delegate ESG oversight to committees.
In the report, KPMG provided some points that could help companies strengthen their ESG goals. They include:
Risk and strategy discussions must include climate risks
ESG risks such as those relating to climate change have become fundamental and critical to long-term value addition. For many, the associated “transition risks” are as important and arguably more urgent, whether that be tax and regulatory interventions, technological changes, or customer behaviours.
A challenge for the committee responsible for ESG is to help ensure that these transition risks are properly addressed as the company plots its future strategy, together with physical climate-related risks.
Coordination in identifying ESG risks and opportunities
Consideration needs to be given to the coordination between committees as well as the information flows to the committees from the corporate functions (risk, internal audit, operations, legal, etc.) and from the committees to the board itself.
For example, climate change might initially appear to reside with an ESG responsible committee, but it will also likely touch the audit committee (data, the systems that produce that data, and the disclosures within the annual report), the remuneration committee (management incentives), and the nomination committee (the skills and experience of board members and senior management).
Have an enterprise-wide view of ESG
The oversight and opportunities of ESG risk start with an ESG-competent board. Not every board member needs to have deep expertise in ESG, yet it is recommended that ESG risk and its impact on long-term value creation should be prioritized.
Boards need to identify issues of greatest risk or strategic significance to the company, how they are embedded into the company’s core business activities, and whether there is strong executive leadership behind the company’s response to ESG matters.
Build stakeholder trust
Good stakeholder engagement, particularly through the supply chain, which is a component of an organization’s circle of influence, can also provide an opportunity for the company to encourage others to behave responsibly and do what is right over the long term.
To best understand the views of its key stakeholders and the ability of the company to exert responsible influence, the board should request periodic updates from management as to the effectiveness of the company’s engagement activities.
