A joint study by NN Investment Partners (NN IP) and governance services provider Glass Lewis reveals that companies with stand-alone ESG committees do tend to have higher ESG scores. According to the asset manager, this is reflected in its proprietary ESG Lens.
The research shows that companies with this supervisory structure account for the highest proportion (28%) of firms in the top quartile of ESG Lens scores and have above-median ESG Lens scores generally. Although those with ‘below board’ committee oversight of sustainability also have 28% in the top quartile, this category only accounts for 15% of second quartile performers versus 36% for stand-alone committees. Overall, the highest proportion of above-median ESG Lens scores are registered at companies with specialized committees -whether at or below board level- to oversee sustainability performance.
Firms with other types of oversight structures and their percentage representation in the top quartile include: combined board committee (16%); whole board (13%); and not disclosed (16%).
Besides, those located in Europe and the United States, which have more developed extra-financial reporting expectations and obligations, tend to have stand-alone board level ESG committees (26% and 28% respectively). However, while the quality of disclosure is strong in Europe, the same cannot be said for the US, where many companies appear to have taken a “legal minimum” approach to disclosure. The relatively weak reporting requirements in the United States versus Europe may explain the differences in disclosure quality.
Supervisory structures by regions
Stand-alone committees are most prevalent in the energy sector (44%), followed by materials (37%), financials and consumer staples (both 29%), utilities (21%), industrials (19%), consumer discretionary (13%) and healthcare (10%).
“How much oversight boards provide on sustainability varies and may often be quite limited. The decision to adopt stand-alone or combined board-level ESG committees remains voluntary but is influenced both internally, such as having a company culture that values sustainability, and externally by factors such as stakeholder and regulatory pressures. Given these committees are voluntary, they could be viewed as signalling a company’s heightened focus on the strategic performance of ESG, but this may only reflect a superficial commitment”, commented Adrie Heinsbroek, Chief Sustainability Officer at NN IP.
He believes that in terms of external factors, while recommendations, soft law, and shareholder expectations can influence companies into setting up committee oversight of sustainability and ESG issues, mandatory extra-financial disclosure requirements have a more direct and material impact on the presence of defined oversight structures: “European companies, for example, which are affected currently by the greatest regulatory pressure to report extra-financial information, are the most likely to have some form of ESG committee in place, while companies in the energy sector may have more stand-alone or combined committees due to greater scrutiny of environmental issues, most notably climate change”.
Heinsbroek pointed out that the research findings “once again” show the important effect of companies having ESG in focus, and the impact on their ESG performance. “As active investors, we continue to engage with companies to put this on their radar and exert our influence by having discussions on this topic”, he concluded.
You can find the full report by NN IP/Glass Lewis that explores the links between ESG supervision and performance here.
For Funds Society, Madrid
