As public concern about the climate crisis, environmental degradation and social inequalities is growing, businesses are under increasing pressure from regulators to address their impacts on society and the environment. Recent legislation, such as the EU Corporate Sustainability Reporting Directive (CSRD), is setting new expectations for businesses’ environmental and social performance.

This will make an impact on companies’ governance, business practices, operations and reporting.

Company boards need to prepare and take up their role in steering companies’ efforts. This can be uncharted territory for many boards, even those who have been doing voluntary sustainability reporting for years.

To this end, Accountancy Europe, ecoDa and ECIIA have issued ESG governance: questions boards should ask to lead the sustainability transition. The paper proposes a set of practical questions to support boards with embedding sustainability into the company’s strategy and business model, and to ensure that proper governance supports this.

Beyond compliance

Many companies and boards may be tempted to approach ESG from the reporting angle. Still, we need action before reporting to get sustainability reporting right.

Action entails embedding ESG in the business model and decision-making. This means integrating ESG into strategic objectives, KPIs, day-to-day activities, risk management, internal control systems and company culture. These considerations should prevail when companies plan their reporting; and not the other way around, which would risk turning it into a compliance exercise.

Approaching ESG as a mere compliance exercise will miss the point and be counterproductive. Companies should rather see ESG as a source for long-term success, innovation, business value proposition and financial risk mitigation.

Governance over sustainability is not about incremental tweaks or a separate sustainability strategy on top of a company’s main strategy. It means reconsidering why, how and for whom a company creates value.

Board leadership will be instrumental to set the direction and initiate the necessary changes. To this end, boards need to understand how the company’s business activities, including through their value chains, can impact people and the environment. They also need to grasp the company’s own exposures to ESG factors and how these exposures could pose financial risks for the company.

Creating a receptive culture

Integrating sustainability and ESG factors in the business also requires a mindset change across functions and a different approach to decision-making—essentially, a revamped organisational culture.

Creating an executive sustainability committee at management level or establishing an advisory board are examples of how some organisations approach mainstreaming sustainability into corporate culture, especially on an interim basis or at the early stages. However, it will be paramount to ensure that the board and governing bodies do not just delegate their duty to act on ESG to such ad hoc functions.

Boards must assume their leadership, responsibility and accountability for sustainability as for any other aspect of the company’s business. They should consider, for example, how the management promotes a culture that encourages consideration of ESG as part of day-to-day business decisions across departments, and whether the company’s recruitment, retention, reward and training practices support the desired mindset change.

Board committees hold a crucial role in advancing boards’ sustainability efforts. However, boards should refrain from delegating their leadership on the sustainability agenda to distinct board committees. Only assigning sustainability to a separate dedicated function, for example, a sustainability committee, risks undermining other board committees’ responsibility to get involved with the sustainability agenda.

That is why all board committees should take ownership in ensuring that sustainability is truly and fully embedded into the company. Committees should clarify how they see their respective roles in this agenda and report to the board.

Boards should review their Terms of Reference to enable committees to fulfil their responsibility towards the company’s sustainability efforts. Boards also need to ensure interaction and active communication between board committees on their ESG related work.

Be brave—and start now

The board—through its governance model—must define the oversight over ESG controls, risks, KPIs, data, and their relevance for the strategic decisions and the company’s purpose. Difficult dilemmas and trade-offs should be expected—and bravely tackled.

The board will have to reflect, for example, on how it identifies and addresses such potential ethical dilemmas and trade-offs. They must also question the management on how it aligns potential conflicting KPIs and KRIs between the company’s financial and ESG performance.

Companies need to embark on the sustainability journey if they are to remain relevant and stay in business. The volume and complexity of the regulatory requirements are increasing. This only reinforces the importance to start the journey now. Boards are in a unique position to lead their companies’ sustainability transition.

Boards should focus their efforts and prioritise the most salient elements that would call for a change in their business model and strategy. This means defining in simple terms what sustainability transition means for their business and our paper aims to support them in this process.

Iryna de Smedt is a senior policy advisor at Accountancy Europe.