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, reflected in NN IP’s proprietary ESG Lens.
Companies with this supervisory structure account for the highest proportion (28 per cent) of companies in the top quartile of ESG Lens scores and have above-median ESG Lens scores generally, the research found.
Although companies with ‘below board’ committee oversight of sustainability also have 28 per cent in the top quartile, this category only accounts for 15 per cent of second quartile performers versus 36 per cent for stand-alone committees. Overall, the highest proportion of above-median ESG Lens scores are registered at companies with specialised committees — whether at or below board level — to oversee sustainability performance.
Companies with other types of oversight structures and their percentage representation in the top quartile include: combined board committee (16 per cent); whole board (13 per cent); and not disclosed (16 per cent).
The research shows that companies 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 per cent and 28 per cent 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.
Stand-alone committees are most prevalent in the energy sector (44 per cent), followed by materials (37 per cent); Financials and Consumer staples (both 29 per cent); Utilities (21 per cent), Industrials (19 per cent); Consumer discretionary (13 per cent) and Healthcare (10 per cent).
Adrie Heinsbroek, Chief Sustainability Officer at NN Investment Partners, says: “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.
“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.
“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.”