Board oversight of climate and ESG is growing amid growing risks

Growing pressures from employees, investors, regulators, and the public are leading boards of directors to improve their involvement in environmental, social, and governance (ESG) activities, according to information from WTW Kenneth Kuk, executive director, work and awards.

According to Kuk, board directors now view climate change as a major business risk that needs to be managed and overseen, making it an integral part of their duties. WTW's 2024 Global Directors and Officers Survey revealed that 55% of board members worldwide see climate change as a “very important” or “very important” risk, up from 42% last year.

Climate governance, Kuk said, should be incorporated into all board activities to ensure compliance, organizational performance, and long-term sustainability.

As part of their governance functions, boards are encouraged to integrate climate monitoring into the work of existing committees, such as audit, compensation, and nominations, while some companies have introduced dedicated sustainability or ESG committees.

These structures help ensure that climate risks and sustainability are factored into core business decisions, Kuk said, adding that formalizing climate accountability through revisions to committee charters and board reporting processes is important.

Another challenge for boards is to ensure they have the necessary skills to address the strategic and operational implications of climate risk. Last year, WTW and NASDAQ conducted a global survey that found 48% of respondents believed their boards lacked the knowledge to oversee climate risks and opportunities.

However, Kuk stressed that climate is the fastest-growing area of ​​skill development for boards, indicating the need for advanced training and expertise to effectively manage this evolving area.

Boards are also increasingly combining climate performance with higher incentives. A recent WTW webinar, co-hosted with the Climate Governance Initiative's Global Financial Sector Hub, explored the use of ESG metrics in incentive programs.

Kuk noted that while there is growing scrutiny regarding the alignment of ESG metrics with long-term sustainability commitments, it is important for companies to ensure that these metrics are measurable, transparent, and aligned with their overall business strategies and goals.

In addition to climate and sustainability, human resource governance is emerging as an important focus for boards. Kuk pointed out that more than 90% of S&P 100 companies have expanded their compensation committees to include governance, a trend that has been seen across Europe.

Strong people governance requires clear, contextual metrics that match the company's risk profile and growth aspirations, Kuk said.

The role of boards in ESG and climate governance is expected to grow as stakeholders continue to push for stronger governance. Kuk emphasized that boards should adopt a long-term strategic mindset, rather than a compliance-driven approach, to ensure the effective integration of sustainability into business strategy and sustainability.

By addressing complex risks such as climate and population change, boards can future-proof their organizations and maintain long-term value.

As boards adapt to these challenges, Kuk advised that governance reviews – including climate, sustainability, and human resources – will become more common. These updates, he said, help boards to embed climate and sustainability considerations into corporate culture, management practices, and incentive structures, positioning businesses to meet the growing expectations of stakeholders and regulators.

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