Should boards have a sustainability committee?

Research published at the end of 2024 by the INSEAD Business School, found that sustainability was firmly on board agendas and that confidence in sustainability governance had grown.

The survey of 444 directors and executives from around the world, found that significantly more respondents were confident in their organisation’s understanding of the effects of sustainability than last year. Its 2023 survey had found that 25% of directors lacked confidence in their organisation’s understanding of how sustainability would impact value creation. In 2024, that figure stands at just 9%.

While previously 37% of respondents said their organisation lacked the capability to scan for weak signals of future sustainability shocks, in 2024 only 24% said the same. Meanwhile, 46% of directors said their organisation lacked a plan to turn sustainability shocks into competitive advantage in 2023, that figure fell to 27% in 2024.

The latest report concluded that these improvements were likely down to efforts to enhance board expertise. Almost three-quarters of respondents (74%) indicated that sustainability was now a formal part of their board’s competency matrix.

The issue of how best to consider sustainability issues at the board-level is one of much debate, including whether a sustainability committee is a useful approach.

In recent years, INSEAD and the Chartered Governance Institute (CGI), have published research that concluded a sustainability committee is not essential for every organisation and, in some cases, could even be undesirable. The key findings included that:

• Whether an organisation should have a sustainability committee depends on the individual needs of the organisation.
• There is no one-size-fits-all approach to how boards should tackle sustainability, but these issues ultimately need to be addressed at full board level.
• Sustainability committees should be more of a bridge to sustainability being fully integrated into full board strategy.
• Having a sustainability committee sends a clear message of commitment to investors and other stakeholders so can serve as a good reputational tool.
• Boards need to have the right skills and ensure consistency in measuring goals and metrics.

Here we take a look at the research in more detail, and what it shows about how boards are approaching sustainability.

Board structures

The INSEAD Corporate Governance Centre report, Designing Sustainability Governance: board structures and practices for better ESG performance, concludes that setting up a sustainability committee is not the right approach for every organisation.

The report closes with a recommendation that a combined model of existing board committees feeding into the full board may be the best route to the ideal model (full board integration of sustainability matters). Making use of ‘plug-ins’, for example, seeking advice from external experts can help along the way. The given reasoning was that:

• More work by committees gives the board more time for strategic reflection, which is what so many directors say they strive for.
• ESG affects all aspects of business. By distributing sustainability to different committees, you take it to the heart of discussions about the most important aspects of your business.
• Ultimate decisions and responsibilities remain with the full board, which keeps all directors engaged. At the same time, broad strategic reflection at board level is linked to specific operational insights from the different committees and individual directors.
• A board that doesn’t yet live up to the ideal is constantly learning by getting input from committees to trigger whole-board reflection and vice versa.

There is no one-size-fits-all approach for organisations to meet regulatory and stakeholder demands as sustainability requirements continue to grow and evolve. Businesses are finding themselves answerable to a growing number of stakeholders including shareholders, suppliers and customers – and organisations that fail to adapt their business models accordingly risk losing out. INSEAD’s report cites the key issues of a vicious circle of skills shortages and a paralysis trap of speed and complexity and how board structures and complementary practices can help.

The report encourages a mix and match of models and approaches in the short to medium-term. The ‘fully integrated’ at board level model is considered to be the ideal long-term business strategy. Lego is a recent example of an organisation’s board fully integrating sustainability by tying KPIs to pay rewards for all employees.

INSEAD noted that adding sustainability duties to existing committees (remuneration, risk, audit etc.) or making sustainability a multi-committee issue can be helpful in the meantime to help avoid duplication of work as organisations find their feet. Although the report acknowledges the popularity of the approach, designating a sustainability champion was seen as a good short-term solution but relying too heavily on one person’s expertise is not optimal in the longer term. The least favourable model was ‘not formally embedding’ sustainability within the board.

The INSEAD Report focuses on structures (models) and supplementary corporate governance practices (plug-ins) that boards can use to integrate ESG considerations into business strategy. It outlines six of each.

With regards to addressing skills gaps, INSEAD’s report does not show preference for reliance on internal or external experts. Rather, organisations need to find the right mechanism for them. With the Financial Times finding that the average age of a board member now exceeds 60, finding board-ready people with ESG skills is difficult. Structures like advisory boards or shadow boards could bridge this knowledge gap. See our guide on shadow boards for more information.

INSEAD also found that 31% of organisations that participated in the BCG-INSEAD Board ESG Pulse Check March 2022 were already using the ‘fully integrated’ model to embed ESG into corporate governance practices. The Pulse Check captured the thoughts of 122 board members from a range of sectors, 80% of whom were NEDs. Close to half of respondents worked for a publicly listed organisation, with 23% privately owned and 13% owned by private equity firms. The report found that having a dedicated committee and designating board champions were the next most popular models at 20% and 15% respectively. Sustainability Committees are most popular in large organisations (34%) as complexity can put off smaller organisations.

INSEAD predicts that one day sustainability practices and considerations will be fully integrated into board and governance structures, rendering the need for sustainability-specific models obsolete. For now, businesses are encouraged to choose the model that best fits with their existing governance structures. The report also encourages regular review of structures and practices given the fast-moving nature of ESG.

Are sustainability committees the answer?

In May 2024, the Chartered Governance Institute (CGI), published a report taking a higher-level view of organisations that have implemented sustainability committees (or similar), setting out the positives and negatives of setting one up as well as the typical duties and responsibilities of such a committee.

Like the INSEAD report in 2022, many people the CGI spoke to felt that sustainability committees should act as a ‘bridge’ to more deeply integrated sustainability activity on boards.

The CGI also recognises the call from regulators and other stakeholders (including investors) for concrete evidence to prove sustainability claims. Undeniably, having a dedicated committee at board level sends a strong signal to investors – and other stakeholders – that an organisation is taking sustainability and ESG issues seriously.

The duties of a sustainability committee can overlap with those of other committees, for example, the remuneration committee can be responsible for tying bonus incentives to ESG KPIs. Avoiding duplication of work is why working towards fully integrating sustainability into board structures without the need for a standalone committee is the optimal long-term goal. CGI also suggests boards should be careful to guard against over-reliance on one sustainability champion or a select few experts.

Arguably every member and committee of the board has a stake in sustainability:

 

• the audit committee (disclosures and assurance),
• the risk committee (management of ESG-related risks),
• the nomination committee (workforce DEI and board composition),
• the remuneration committee (ESG incentives in executive pay and fair pay policies), and
• the full board (budgets, culture, modern slavery and ESG strategy).

Like INSEAD, the CGI’s report dedicated a section to the glaring sustainability skills gap that persists at board level. The report, which was based on a cross-sectoral survey of 130 governance professionals, found a large disparity in what people deemed to be the most valuable sustainability skillset. Of those surveyed, 72% ranked ‘understanding of appropriate ESG data, metrics and goals’ as most important and 50% said ‘knowledge of ESG-related regulatory and reporting requirements’. Only 4% of survey respondents considered financial and strategic acumen to be most important.

A skillset sometimes overlooked is the need to be able to communicate sustainability data to shareholders and other stakeholders transparently and accurately. The research found that the younger generation of directors are generally seen as more ESG-literate than more seasoned directors and tapping into younger talent is one way to plug the skills gap in the short to medium term.

Aligned with INSEAD’s conclusions, the CGI notes that committees must ensure regulatory compliance, but must also consider market expectations, which often go far beyond what regulators are mandating. This is why skills considerations are so important when appointing new directors and succession planning.

The CGI encourages organisations to include sustainability skills in the board’s skills matrix and skills audit process, as well as including ESG issues in inductions and ongoing training for all directors to avoid over-reliance on a few individuals.

 

The death of the ESG Committee

In an episode of the Better Boards Podcast Series, Vicky Moffatt, Chief Executive of Chapter Zero argued that segregating climate issues into an ESG committee is an ineffective approach.

Moffat explained that climate and sustainability are not just a governance issue but a call to action that should be addressed at every level of the organisational structure. She argued that it is the directors' responsibility to take the lead in designing and executing the clean energy transition, thereby making a significant impact on the future of the planet.

In short, ESG committees can be hugely important in driving change around business models and strategies, but the issues of climate and sustainability impact so much that the whole board needs to be involved especially once an organisation’s strategy matures and becomes more advanced. Especially in light of the new double materiality lens emerging across Europe and the ESG pushback being seen in the USA, it has never been more important for boards to champion the cause.

Furthermore, regulation is fast evolving and considering the long-term impacts of climate change is in line with boards’ duty to ensure long-term sustainability of an organisation and giving back to society as set out in the Corporate Governance Code. What is needed now goes beyond changing mindsets of individual NEDs – we need a whole boardroom culture shift if the UK is to meet its net zero goals and remain a competitive place to invest and do business.

Moffat outlined three key takeaways:

• There are only two scenarios: invest in the clean economy or experience runaway climate change.
• A good transition plan is linked to good governance and must be led by the board.
• Climate change is an issue for the full board.

Anyone considering setting up or retaining a sustainability committee, must think carefully about their organisation’s specific needs. The research demonstrates that there is no single solution to ensuring that boards are best able to tackle sustainability. However, every board needs a fundamental understanding of the issues and to have the right skills in place. Ultimately these issues will need to be addressed by every member of the board, but a sustainability committee may be a useful stepping stone for some organisations in their journey.