ESG as part of corporate governance

Blogs Lieke van Aarssen ESG
It has long since ceased to be a matter of debate that companies have a major social influence and thus have an important social role to play. The functioning of companies affects not only the interests of direct stakeholders (such as employees, shareholders and customers), but also the climate and society. Companies must take these aspects into account when defining their strategy. Gone are the days when shareholder value could dominate the agenda of the management and supervisory boards. Shareholder interests are important, but not decisive. With that, the role of the various bodies within a company has also changed. Governance is not for nothing one of the 3 pillars of the ESG legislation. Governance deals with the role of the various bodies within the company and their relationship to each other and looks at how the company incorporates rules, principles and responsibilities between different stakeholders into its policy and strategy. Consider the remuneration of board members, conflicts of interest, and strategy and policy on social issues. A good governance structure helps harmonize the interests of different stakeholders within the company and makes a company future-proof. In this context, each body within a company has its own role with corresponding responsibilities.

Governance

In managing the company, the board should consider the impact of its decisions on sustainability issues, in the short, medium and long term. Not only based on ESG legislation, but also because stakeholders expect it. A concrete example of this is making investment decisions. The board should include ESG aspects in its considerations. ESG aspects must also be taken into account when dealing with labor relations. Consider diversity and inclusiveness within the company. In addition, on the basis of the CSRD report on (i) the effects of their business operations on the environment and society and (ii) what impact, risks and opportunities the ESG themes have on the company. The CSRD may also have implications for companies that do not (yet) fall within the scope of the CSRD, for example, by requiring a company to provide information by a customer on the production process and the emissions involved. This forces directors to think critically about the company's strategy and policy and how it should be adjusted to be and remain sustainable as a company. Failure to take ESG aspects into account can create reputational and operational risks for the company. It can further result in investors, banks, customers or employees choose parties where ESG does have priority. In addition, non-compliance with legal ESG obligations can lead to civil, board and/or criminal liability for companies, with all associated penalties and fines. The board will also have to account annually to its shareholders (and supervisory board). If insufficient attention is paid to ESG, a director may be fired or miss out on a bonus. Conversely, a field of tension can also arise if the board fulfills its responsibilities in the context of ESG, while the shareholders see less value in doing so.

Supervisory board

The role of the supervisory board is increasingly changing from a reactive attitude to a proactive, critical one. The supervisory board should critically question the management board about the sustainability policy pursued by the company and the associated risks. The supervisory board not only has a role in formulating the policy, but also with regard to its implementation. Against this background, it is increasingly obvious to have one or more supervisory board members with specific expertise on ESG-related issues sit on the supervisory board. The CSRD also requires sustainability expertise to be part of the supervisory board. The management report should account for the expertise and skills of supervisory board members regarding the sustainability aspects of the company, or the access the supervisory board has to external advisors with such expertise and skills.

Shareholders

The prevailing view with respect to shareholders (and the general meeting) is that they do not have to focus on the interests of the company (and all stakeholders), but may in principle - unlike the management board and supervisory board - focus on their own interests. However, more and more you see that shareholders also focus on the broader, societal, interest. Shareholders have no direct obligations under ESG legislation. However, they can influence the company's ESG policy. Among other things, shareholders can appoint and dismiss directors, amend the articles of association, have dividends paid and, to some extent, issue instructions. In addition, the management board and supervisory board will have to account annually to its shareholders. If insufficient attention is paid to ESG, a shareholder can use the aforementioned means and, for example, dismiss a director or not pay his bonus. Shareholders who want to be able to influence ESG policy within the company can do so in addition, for example in shareholder agreements:
  • document that certain ESG-related decisions are subject to shareholder approval; and
  • document agreements on information obligations, for example, requiring the board to provide periodic information on ESG factors.

Come into action now!

In the coming years, the currently non-committal nature of ESG for smaller companies will disappear completely into the background and every company will be required to take action. Moreover, stakeholders such as investors, banks, employees and customers will become (increasingly) critical. Companies that score well on ESG factors are often seen as future-proof companies. It is therefore important to take action and make your company ESG-proof and to enter into dialogue about this with (depending on your role) the management board, shareholders and/or (if applicable) the supervisory board of your company.