How a better governance approach can help avoid ESG lapses

governance

With the rise of ESG meaning companies have more eyes on them than ever to make positive differences, it can be tough to be able to meet all these governance standards without occasionally lapsing.

According to Diligent, a three-dimensional approach to governance – one that enables effective insight, oversight and foresight – is more important for boards than ever.

The company said, “Oil and gas companies aren’t the only ones in the crosshairs of escalating investor and regulatory scrutiny, as the following examples demonstrate.”

Many climate activists have had their eyes on the financial sector for some time. Back in 2015, when the Paris climate agreement was announced, the industry had arranged roughly $4.2trn of bonds and loans for oil and gas firms.

In 2022, the Sierra Club Foundation and other investor members of the Interfaith Center on Corporate Responsibility filed first-of-their-kind resolutions to ‘simply ask the banks to align their practices with their public commitments to climate action’.

Diligent explained, “Across many industries, companies and their boards are finding all aspects of sustainability under scrutiny.” The company gave the example of Home Depot, whose shareholders voted on a proposal last year by Green Century Funds requiring the firm to study the certification standards of its wood suppliers and asking how the firm could boost the ‘scale, pace and rigor of its efforts to eliminate deforestation and the degradation of primary forests in its supply chains.”

Diligent highlighted that a number of gaps in oversight can make a board vulnerable. These include a lack of established oversight processes for monitoring risk, particularly in mission critical aspects of the business, insufficient time and attention spent on risks and compliance, inadequate documentation of oversight efforts and missed red flags of looming problems.

The company said, “Amid these escalating consequences for lax oversight, a three-dimensional approach to governance can help directors understand, fulfill and document their evolving duties — and reduce their vulnerability to investor, shareholder and legal action.”

When defining the three-dimensional approach, that firm said it can be defined as real-time visibility into internal and external factors for critical decisions — for compliance, risk management, audit and especially ESG.

“This approach, and the technology that empowers it, leverages data from across the organization and combines it with proprietary intelligence to give directors, committees and leadership teams a comprehensive view of the internal and external landscape. And it gives boards assurance and confidence by equipping them with the data necessary for three key aspects of effective governance: insight, oversight and foresight,” said Diligent.

The firm went on, “Given today’s rapidly evolving ESG landscape, there’s not a moment to waste to strengthen visibility and shore up defences against vulnerabilities.

“This might involve identifying what issues spur an ESG red flag, determining who on the board should receive regular reports, setting up systems for monitoring compliance and taking action when these systems identify issues, documenting board efforts in sufficient detail and anticipating emerging risks and taking preventative action to mitigate them.”

Read the full post here.

Last year, Diligent partnered with capital markets communications platform Q4 to provide pre-IPO and public companies with IR and board governance solutions.

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