Boardroom Governance Under Heightened ESG Scrutiny

Corporate boards are facing unprecedented scrutiny to broaden their focus beyond financial performance and actively oversee environmental, social, and governance (ESG) matters. The responsibility for sustainability and ESG oversight lies firmly with the board of directors, as part of directors’ accountability for long-term corporate success. Modern corporate governance now demands that boards embed ESG considerations into purpose, strategy, risk management and decision-making, rather than treating them as peripheral issues. In practical terms, this means ensuring that ESG priorities are integrated into core business strategies, with defined targets and metrics monitored at the board level and high-quality sustainability reporting alongside financial reporting.

This evolution is driven by heightened stakeholder and regulatory expectations. Investors, employees, consumers and the public today simply expect companies to be actively addressing ESG priorities and opportunities. At the same time, regulators are raising the bar for board oversight. For example, proposed climate disclosure rules in the United States would require companies to detail the board’s climate risk oversight processes – including which directors or committees are responsible and whether any directors have relevant expertise. Enforcement actions have already targeted misleading ESG disclosures, underscoring that boards must ensure accurate and transparent reporting of sustainability issues. In short, ESG issues have become “mission-critical” for board oversight, viewed as integral to risk management and long-term value creation. Boards are being held to account for how well they anticipate ESG risks, meet emerging compliance requirements, and seize sustainability opportunities in their industry.

Strengthening Ethical Oversight and Corporate Culture

With ESG in the spotlight, boards are also rethinking their role in setting an ethical tone and culture from the top. Effective ESG governance goes hand-in-hand with ethical leadership. Ethical board members consider decisions in the context of the organisation’s purpose and the impact on all stakeholders, doing what is right – not just what is legally permissible or immediately profitable. In practice, an ethical board acts in the best interest of the company and its stakeholders, avoiding self-serving decisions and “grey areas” of conduct. This stakeholder-oriented mindset aligns closely with the principles of ESG, as it requires balancing shareholder returns with broader responsibilities to employees, customers, communities and the environment.

One key change is that boards are updating their ethical frameworks and oversight mechanisms to support ESG goals. Many boards have refreshed their codes of conduct and corporate values to incorporate ESG commitments (such as human rights, environmental stewardship and anti-corruption) and to clarify directors’ expectations for ethical behaviour throughout the organisation. Beyond written policies, boards are focusing on how they deliberate and make decisions. They are asking harder questions about the ethical implications of corporate strategy: Does this decision align with our purpose? Have we considered the impact on vulnerable stakeholders? What are the long-term reputational risks? By ensuring that difficult topics (like climate impact or supply chain labour practices) get sufficient agenda time and thoughtful consideration, boards demonstrate that “right versus wrong” is a core lens for decision-making, not an afterthought.

Moreover, transparency and accountability are becoming hallmarks of an ethical board. Leading boards strive to be more transparent than the corporate norm – providing clear, honest communication about company practices, strategies, and risks. This includes timely and forthright disclosure of both financial and non-financial performance, so stakeholders can hold the company to account. In addition, boards are implementing stronger internal oversight structures to ensure ethical conduct. This can involve establishing dedicated ethics or sustainability committees, or enhancing committee charters and governance policies to explicitly define roles and procedures for monitoring ESG performance. Such measures help institutionalise ethics and sustainability into the company’s governance fabric. The cumulative effect of these changes is a “trickle-down” of ethical leadership: an ethical board fosters ethical management and a corporate culture where doing the right thing is part of daily business. This ultimately builds trust with stakeholders and protects the company’s reputation – an asset which can account for a large share of market value.

Evolving Board Composition and ESG Expertise

Another clear trend is the transformation of board composition and expertise in response to ESG. In the past, few boards included directors with specialist environmental or social expertise, and sustainability oversight was often relegated to minor subcommittees (if it existed at all). That is rapidly changing. Recent research reveals that in 2018 only 22 of the Fortune 100 boards had a dedicated sustainability/ESG committee, whereas today 89 of 100 have one. Likewise, the proportion of Fortune 100 board members with any ESG credentials has jumped from 29% in 2018 to 43% today. This demonstrates a significantly greater focus on bringing ESG competence into the boardroom as a strategically important issue. Directors with backgrounds in areas like climate science, renewable energy, human rights, or corporate governance are increasingly being recruited to boards, ensuring that the board can collectively understand and oversee the ESG challenges material to the business.

Crucially, diversity of perspective is being recognised as an asset for ESG oversight. Complex sustainability issues benefit from “combinative thinking” and innovation. A diversity of skills, experience, and backgrounds on the board leads to better problem-solving and more robust discussions – helping challenge assumptions and generate creative solutions to ESG dilemmas. This includes not only gender or ethnic diversity, but also diversity of professional expertise and age, which can broaden the board’s outlook on emerging risks and stakeholder expectations. Many boards are therefore prioritising diversity and inclusion in their director recruitment, aligning the board’s composition with the company’s ESG values and the society it operates in.

Beyond recruiting new directors, boards are also investing in building ESG literacy and knowledge among all members. Sustainability has become a standing item in director education and onboarding. Boards are organising training sessions on climate risk, carbon accounting, human capital management, and other relevant topics, sometimes bringing in outside experts to brief the board. In some cases, companies have set up external advisory councils (including academics, scientists, or civil society leaders) to provide independent insights on environmental or social issues to the board. According to one recommendation, boards should regularly assess what skills and knowledge are needed to oversee the company’s ESG priorities, and then implement learning programmes or add expertise to fill any critical gaps. The goal is that all board members become well-versed in the ESG issues facing the business, rather than leaving it to a lone “ESG expert” director. This widespread sustainability literacy enables the entire board to engage in informed oversight and strategic dialogue on ESG matters.

It is worth noting that despite progress, gaps remain in certain industries. Some sectors with outsized environmental or social impacts still have surprisingly little ESG expertise on their boards. For example, a 2024 analysis found that the utility sector – despite facing huge climate risks and regulatory pressures – had one of the lowest percentages of directors with ESG credentials, and in some cases zero board members with environmental expertise. Such gaps underline the importance of continued focus on board development. Overall, however, the direction is clear: boards are becoming more ESG-savvy, whether through new appointments or upskilling of existing directors. This shift in human capital is enabling more effective oversight of corporate sustainability performance.

Governance Structures for ESG Oversight and Accountability

Boards are not only changing who sits at the table, but also how the board organizes its oversight of ESG. The traditional board committee structure is being rethought to ensure sustainability issues receive adequate attention and expertise. There is no one-size-fits-all approach – the right model depends on the company’s circumstances – but a few models have emerged as common practice:

• Full Board Oversight: Some companies keep ESG oversight with the full board. The board schedules deep-dives on sustainability topics at its meetings. In this model, boards may also convene external expert panels for advice on specific ESG issues. Full-board oversight signals that ESG is a priority integrated across all governance (though it requires all directors to stay well-informed on ESG matters).
• Dedicated Sustainability Committee: Many companies have created a board-level ESG or sustainability committee. Over half of FTSE 100 companies now have an ESG committee on the board (notably 100% of mining and oil & gas firms have one). A dedicated committee typically helps establish sustainability goals and strategy, monitors performance, and reports back to the full board. This can concentrate ESG expertise and ensure focused oversight.
• Integrating ESG into Existing Committees: Another approach is to embed ESG responsibilities into the charters of existing committees. Because ESG is a broad domain, different aspects can be allocated to the committees best suited for them:
  • The audit and/or risk committee overseeing ESG-related risk management processes and ensuring regulatory compliance and robust disclosure controls.
  • The audit committee (or disclosure committee) supervising ESG reporting and alignment with standards, as well as any assurance on sustainability data.
  • The remuneration (compensation) committee integrating ESG performance targets into executive pay and incentives.
  • The investment or finance committee considering ESG factors in capital allocation and major investments (e.g. evaluating climate risks in project finance).

Hybrid approaches are also common. In fact, a majority of large companies use a mix of committees: 67% of S&P 100 companies spread ESG oversight across two or more board committees rather than relying on a single body. Regardless of structure, a key governance principle is to avoid gaps or overlaps in oversight. Boards must clearly delineate responsibilities for various ESG issues, while maintaining coordination so that important matters (like climate risk) are not siloed. Some boards address this by having certain directors sit on multiple committees, or by receiving integrated reports that tie together financial and sustainability performance. The overarching trend is that boards are evolving their committee charters and structures to ensure effective oversight of ESG and sustainability, embedding these topics into the core governance framework.

Accountability mechanisms are also being strengthened. An important development is the linking of executive accountability and incentives to ESG outcomes. In the past, a company’s sustainability goals might have been aspirational, with little consequence for management if they were missed. Now, boards are increasingly tying a portion of CEO and senior executives’ compensation to the achievement of ESG targets. Incorporating ESG metrics into performance-based pay can “incentivise the right behaviours” and hold leaders accountable for delivering on sustainability commitments. This has gone from an experimental idea to a growing trend – one global survey found that 75% of board directors believe there is now more focus on the personal responsibility of board and management teams for progress against ESG goals. Moreover, many boards identified executive remuneration as a primary focus to strengthen ESG oversight in the near term. In Europe, for example, boards say that aligning pay with sustainability will be a main priority in the next two years.

Designing effective ESG-linked pay schemes is complex. Boards must carefully choose which metrics to include (covering all relevant E, S, and G pillars), how to measure them, and what portion of compensation to tie to these metrics. They need to set targets that are ambitious yet achievable, to avoid perverse incentives or complacency. There is also the question of time frames – many ESG goals (like emissions reductions) are long-term, so boards often use multi-year targets with interim milestones to ensure accountability along the way. Despite these challenges, the direction is clear: linking pay to sustainability performance sends a powerful signal that the company is serious about its ESG commitments. It aligns management’s interests with those of long-term stakeholders and provides an extra layer of accountability at the top.

Finally, audit and assurance mechanisms are being bolstered. Given the increasing importance of ESG disclosures, audit committees are expanding their role to cover oversight of sustainability reporting and controls. Boards are establishing processes to ensure that ESG data is verified and of high quality – in some cases engaging external assurance for key non-financial metrics, similar to financial audits. This strengthens confidence that the company’s sustainability reports are accurate and not greenwash. Boards are also insisting on internal controls that integrate ESG risks into financial reporting (for instance, ensuring climate-related risks or environmental liabilities are properly reflected in audited financial statements). By tightening oversight of disclosure and assurance, boards aim to enhance transparency and trustworthiness of the company’s ESG communications.

Stakeholder Engagement and Transparency

Effective ESG governance has encouraged boards to broaden how they engage with stakeholders and how transparently they communicate. Stakeholder engagement is now seen as a critical component of board oversight in the ESG era. Rather than only hearing from management, boards are taking steps to establish more direct and regular dialogue with various stakeholder groups, including investors, employees, customers, and community representatives. For example, some boards host annual stakeholder forums or roundtables on sustainability topics, invite employee representatives or independent experts to board meetings when discussing ESG issues, or form advisory councils as mentioned earlier. By actively listening to stakeholder concerns and expectations, boards can better align the company’s ESG strategies with societal needs and mitigate potential conflicts before they escalate. This kind of engagement also demonstrates accountability – it shows stakeholders that the board takes their input seriously and is willing to be responsive.

Transparency is the twin pillar of stakeholder trust. Boards are pushing for greater transparency in ESG reporting and overall corporate conduct. This involves providing candid disclosures about the company’s ESG performance, goals, and challenges. Increasingly, companies are publishing detailed sustainability reports or integrated annual reports that cover not just financial results but also environmental and social impacts. The quality and comparability of these disclosures is a key concern, and boards are embracing emerging global standards to improve them. Many companies now align their reporting with frameworks such as the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), or the Sustainability Accounting Standards Board (SASB) to meet investor expectations. These frameworks provide consistency in what is reported (e.g. carbon emissions, workforce diversity, supply chain ethics) and how risks are assessed, enabling stakeholders to evaluate companies on a like-for-like basis.

On the global stage, efforts are underway to unify sustainability reporting standards, which boards are closely watching. The International Sustainability Standards Board (ISSB), for instance, has introduced new IFRS Sustainability Disclosure Standards intended to bring globally consistent, investor-focused ESG disclosures. In parallel, regulatory regimes like the European Union’s Corporate Sustainability Reporting Directive (CSRD) are mandating a comprehensive set of ESG metrics and board sign-off on sustainability reports for large companies. These developments are effectively raising the floor on transparency and making robust ESG disclosure a standard part of corporate accountability. Boards that proactively adopt best-practice standards not only avoid compliance risks but can gain reputational benefits for openness. As one executive notes, transparency around planning for a net-zero economy or other ESG goals is now considered an essential element of demonstrating a company’s long-term strategy to shareholders.

In sum, boards are leaning into transparency as an enabler of trust and a competitive differentiator. By communicating openly about both successes and setbacks on ESG matters, companies build credibility with stakeholders. In turn, this transparency and stakeholder trust can translate into business advantages – from easier access to capital (as ESG-focused investors favour transparent companies) to stronger brand loyalty among consumers and employees who value corporate responsibility. The antidote to scepticism about ESG is, in many ways, more engagement and disclosure: boards that actively engage stakeholders and report transparently are better positioned to navigate the rising expectations in the ESG landscape.

Emerging Global Standards and Best Practices

As ESG moves from a niche concern to a central board priority, a body of global standards and best practices is coalescing to guide corporate governance. Forward-looking boards are benchmarking their governance against these emerging norms to ensure they stay ahead of the curve. One significant milestone is the ongoing update of the G20/OECD Principles of Corporate Governance – a key international reference for governance best practice. The OECD is revising these principles to explicitly incorporate sustainability, even proposing to elevate sustainability to a dedicated section in the guidelines. This reflects a consensus that effective governance now inherently includes oversight of ESG risks and opportunities. Boards would do well to heed such shifts, as they often prefigure changes in national governance codes and investor expectations globally.

In terms of reporting and accountability, several frameworks have already been mentioned (GRI, TCFD, SASB, ISSB standards, etc.), which provide technical guidance on disclosure. But beyond reporting, best practices for board process and structure are also being shared across industries. For instance, it’s increasingly seen as a best practice that boards formally map out the material ESG issues for their company and ensure each of those issues has clear oversight at the board level. Many companies conduct a materiality assessment to pinpoint which environmental and social factors are most critical to their business and stakeholders. Board leadership can then review whether the current mix of director expertise covers those areas, and if not, take action by training or recruiting to fill the gaps. This kind of proactive skills matrix is becoming routine.

Another recommended practice is to embed ESG into existing board responsibilities rather than treating it as separate. For example, audit committees should incorporate sustainability into their charter (ensuring ESG disclosures and controls get audit-level scrutiny). Nominating/governance committees should integrate ESG criteria into board succession planning and director evaluations. Compensation committees should determine what portion of executive pay is tied to ESG targets and verify that those targets are meaningful and stretching. And many boards are choosing to establish a dedicated sustainability committee (if they haven’t already) to work closely with management on embedding sustainability into the business strategy and tracking progress (with a chair who has a strong sustainability background to lead it). These structural choices are becoming commonplace in guidance from governance advisors and institutes around the world, highlighting a move toward an integrated approach: ESG is woven into the board’s oversight fabric, rather than bolted on.

Crucially, the concept of fiduciary duty itself is being viewed through an ESG lens. Jurisdictions differ, but there is growing acceptance that considering ESG factors is part of a director’s duty to act in the company’s long-term interest. In practice, that means boards should identify which ESG risks and opportunities are “strategic” or “mission-critical” for their firm, and ensure those are actively governed at the highest level. Ignoring material ESG issues could expose directors to claims of failing in their oversight duties. Thus, best practice frameworks now encourage boards to explicitly factor ESG into their enterprise risk management, strategic planning, and performance oversight. Tools like ESG risk dashboards, scenario analyses (for climate change impacts, for example), and regular sustainability updates in board packs are becoming part of the governance toolkit.

Finally, leading boards are sharing their experiences and learning from peers in order to improve. Cross-industry forums and initiatives (such as the World Economic Forum’s ESG initiatives or director network groups) allow board members to discuss challenges and successful approaches to ESG governance. Through such collaboration, a set of practical guidelines is emerging – from how to run an effective sustainability committee, to how to engage shareholders on ESG issues, to how to evaluate CEO performance on non-financial metrics. The movement toward consistent global standards is still ongoing, but boards are no longer waiting passively. By voluntarily adopting high standards of ESG accountability and ethics today, companies can set themselves apart as governance leaders and be better prepared for any future mandates.

Practical Strategies for Strengthening ESG Accountability and Ethics

For boards seeking to bolster their ESG oversight, there are several practical strategies and considerations that have proven effective across industries:

• Set a Clear ESG Vision and Purpose: The board should establish and articulate a clear commitment to sustainability that aligns with corporate strategy. This means defining what ESG success looks like for the organisation (e.g. carbon neutrality by 2030, zero harm to employees, top-quartile governance ratings) and ensuring every major decision reflects these objectives. A public commitment to measurable ESG targets can unify the company towards common goals.
• Integrate ESG into Risk and Strategy Discussions: Treat ESG factors as integral to business risk management and strategic planning, not as standalone topics. Ensure the board agenda regularly includes analysis of how climate change, resource constraints, social unrest, or other ESG issues could impact the company’s risk profile and competitive positioning. This helps the board anticipate challenges and drive the company to innovate in response.
• Enhance Board Expertise and Diversity: Evaluate the board’s composition in light of ESG priorities. Consider recruiting directors with sustainability or ethics expertise and provide training for all board members to improve ESG literacy. Diverse perspectives (across gender, ethnicity, age, and skillsets) will strengthen the board’s ability to navigate complex ethical and ESG issues. Where needed, use external experts or advisory panels to supplement board knowledge.
• Define Oversight Roles and Responsibilities: Clearly assign ESG oversight duties within the board structure. Whether through a dedicated sustainability committee or spread across committees, formalise who monitors what (climate risks, human capital, supply chain ethics, etc.) and how they report to the full board. Update committee charters and board governance policies to embed ESG accountabilities, and avoid overlaps or gaps by coordinating between committees. An explicit framework ensures no material topic falls through the cracks.
• Link ESG Goals to Executive Performance: To drive accountability, incorporate ESG criteria into CEO and executive performance evaluations and remuneration. Align metrics with the company’s ESG strategy and determine a meaningful portion of pay to tie to these metrics. Ensure targets are concrete and ambitious, and communicate them transparently to investors and employees. This creates personal accountability for results and signals that sustainability is taken as seriously as financial performance.
• Engage Stakeholders and Report Transparently: Strengthen the board’s engagement with key stakeholders on ESG matters. This could involve regular outreach to investors focused on sustainability, soliciting employee feedback on company practices, or community consultations for major projects. Use these inputs to inform board decisions. Moreover, commit to high standards of transparency by reporting ESG performance in a clear, consistent manner. Benchmark against global reporting frameworks to provide credible, comparable data. Being open about progress and setbacks builds trust and keeps the company accountable to its promises.

By implementing these strategies, boards can significantly enhance their oversight of ethics and ESG. The overarching theme is integration: weaving ethical principles and sustainability into the DNA of corporate governance. For today’s boards, success is no longer measured only by short-term profits, but by the ability to sustain long-term value responsibly – balancing the needs of shareholders with those of society and the planet. In rising to this challenge, boards that rethink their approach to ethics and accountability in ESG are positioning their organisations to thrive in an era where corporate integrity and sustainability are paramount. The best-governed companies will be those whose boards lead with a strong ethical compass, hold management accountable for ESG outcomes, and remain transparent and engaged with the stakeholders they serve. Such boards are not only meeting the demands of heightened ESG scrutiny – they are leveraging it as an opportunity to strengthen trust, resilience, and long-term success in their businesses.

Sources:

• Directors’ Institute – Independent Directors: Catalysts for Advancing ESG Agendas in Corporate Boards, Jun 2024
• EY (Teigland & Hobbs) – How can boards strengthen governance to accelerate their ESG journeys?, Feb 2022
• NYU Stern (T. Whelan) – Boards Better Prepared in 2024 for Tackling Sustainability Issues, Directors & Boards magazine, May 2024
• IFAC – Board Oversight of Sustainability and ESG, Dec 2022
• Stanton Chase – The Ethical Boardroom: A Guide to Establishing Ethical Leadership, Sep 2023
• Harvard Law School Forum – A Board’s Guide to Oversight of ESG, Jul 2022
• Aplanet – ESG Governance: A Board’s Guide to Success, 2023