Governance, which is an often-overlooked aspect of ESG, is the most important of the trifecta, writes Emily Easley, CEO of NOVUS Energy Advisors.
Early in my career, I had the opportunity to participate in our organization’s board of directors meetings, which comprised 12 members from the electric utility and solar energy industries. This was during the 2000s when solar penetration into the market had started to disrupt the electric-power utility model, with customers now requesting changes to the way they procured power.
As a young associate, it was a fascinating time to see how the various members of the board navigated through what were often contentious and passionate debates. Our board was not just diverse by gender and race, but also by perspective—an often overlooked component of diversity—that surely sprang from differences in geography and plain ol’ technical know-how. After all, the experience of an executive from a regulated electric investor-owned utility is very different from one whose career has been spent in solar power.
These diverse perspectives had a meaningful impact on the company’s bottom line, with exponential growth occurring year after year. The discussions might have been fiery, but the results spoke for themselves. Diversity in perspective—in thought and experience—worked.
I’m reminded often about something a mentor once told me. “It takes a team,” he said. “A contributing, involved board and an exemplary executive management team.” No one on a team does the exact same thing as anyone else. Likewise, boards should be made up of members whose perspective and purpose varies greatly.
As ESG has become more mainstream, the “G,” which stands for governance, is often the area we focus on the least. Governance is seen as boring, mechanical and something that is beneath the great big ideas behind environmental activism and social change. But, I argue, the G is the most important of the trifecta.
More recently I held a board position for a small startup in the clean energy business. While smaller, our board consisted of members from California, Colorado, Texas and Virginia, and it contained a wide range in experience in oil and gas businesses and renewables. The executive management team was young, which meant that the board had to be actively engaged to keep the operation running. In a word, governance was needed. Good governance.
In June 2021, SEC Commissioner Allison Herren Lee specifically called on companies to “consider ways to enhance the ESG competence of their boards.” This included efforts to integrate ESG considerations into their nominating processes to recruit directors that would bring ESG expertise to the board, training and education efforts to enhance board members’ expertise on ESG matters, and considering engagement with outside experts to provide advice and guidance to boards.
While difficult to quantify the exact relationship between diversity and performance, companies with standalone ESG committees at the board level or below-board committees surpass ESG scores compared to full board ESG oversight. Companies that do not disclose details of their supervision of ESG risks and opportunities have the lowest ESG scores.
Corporate governance is a component of ESG with a long history of SEC regulation, including major expansions of governance and related disclosure requirements stemming from the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010. New SEC disclosure rules may be coming soon, though, that address human capital concerns, which, some may argue, don’t fall directly within those objectives.
Initial SEC proposals regarding new ESG disclosure requirements were expected in late 2021, but such a rule is now expected to be released to the public some time in 2022. Further, because any such rule proposal would need to undergo a period of public comment, it is likely that actual reporting requirements under the new rules would not take effect until 2023.
With institutional investors starting to incorporate diversity thresholds into their proxy voting policies and anticipating SEC rulemaking related to board diversity disclosures, companies proactively clarifying how environmental and social matters are governed by the entire board or expanded committees might also include key executive appointments such as chief sustainability or diversity officers as well as new management-level ESG steering committees.
What seems clear, however, is that it is not a matter of if the SEC will issue new ESG disclosure rules, but rather when it will happen and what the rules will be. The prudent thing for in-house counsel to do is begin preparing for ESG disclosure metrics now.
See original article published on Hart Energy here.