Shareholders are becoming increasingly aware of the impact of environmental and social (E&S) factors on returns, according to the Canadian Coalition for Good Governance (CCGG), an organization representing investors managing some $4 trillion in assets. The CCGG expects that investors will want to protect their investments by seeking fuller E&S disclosure and applying pressure to the companies to make changes where required.
In response, the CCGG has published a set of recommendations to boards of directors to help them oversee E&S factors and to guide public disclosure. The recommendations are based on work begun in 2016 and were developed with help from boards of directors of considered leaders in E&S management.
- corporate culture: without a corporate culture that recognizes the importance of E&S management, it becomes a box to be ticked on a form
- risk management: companies should have an enterprise risk management system that identifies E&S risks, and it should fully integrate into the management of material risks, not a stand-alone system
- corporate strategy: E&S factors with significant impact on value or risk to the business should be represented in the corporate strategy and overseen by the board
- board composition, structure and practices: there is no right answer here; boards should have the right mix of expertise and experience to manage E&S factors and should govern themselves in such a way as to allow for frank discussion and thorough oversight
- performance evaluation and incentives: companies should think carefully about the metrics that govern incentives and rewards; if E&S factors are integrated into corporate objectives, they should also be part of the remuneration framework
- disclosures to shareholders: companies should consider the needs of investors in E&S-related disclosures, particularly in financial reporting.