Increased pressures from employees, investors, regulators, and society are leading boards of directors to enhance their involvement in stewardship and environmental, social, and governance (ESG) activities, according to insights from WTW's Kenneth Kuk, senior director, work and rewards.
According to Kuk, board directors now view climate change as a critical business risk that requires management and oversight, making it an integral part of their duties. WTW’s 2024 Global Directors and Officers Survey revealed that 55% of board members globally see climate change as an "extremely important" or "very important" risk, up from 42% in the previous year.
Climate governance, Kuk said, should be incorporated into the board's overall responsibilities to ensure regulatory compliance, organisational performance, and long-term resilience.
As part of their governance duties, boards are being encouraged to integrate climate oversight into existing committee functions, such as audit, compensation, and nominations, while some companies have introduced dedicated sustainability or ESG committees.
These structures help ensure that climate and sustainability risks are incorporated into core business decisions, Kuk said, adding that formalising climate accountability through revisions to committee charters and board reporting processes is becoming essential.
One challenge for boards is ensuring that 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 expertise to oversee climate risks and opportunities.
However, Kuk highlighted that climate is the fastest-growing area of skill development for boards, reflecting the need for enhanced training and expertise to govern this evolving area effectively.
Boards are also increasingly tying climate performance to executive 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 plans.
Kuk noted that while there is growing scrutiny around the alignment of ESG metrics with long-term sustainability commitments, it is important for companies to ensure these metrics are measurable, transparent, and strategically aligned with their overall business objectives.
In addition to climate and sustainability, human capital governance is emerging as a key focus for boards. Kuk pointed out that over 90% of S&P 100 companies have broadened their compensation committees’ remits to include human capital governance, a trend also seen across Europe.
Strong human capital governance requires clear, contextualised metrics that align with the company's risk profile and growth ambitions, Kuk said.
The role of boards in ESG and climate governance is expected to grow as stakeholders continue to push for stronger oversight. Kuk emphasised that boards must adopt a long-term strategic mindset, rather than a compliance-driven approach, to ensure the successful integration of sustainability into business strategy and resilience.
By addressing complex risks such as climate change and human capital, boards can future-proof their organisations and preserve long-term value.
As boards adapt to these challenges, Kuk advised that governance reviews – covering climate, sustainability, and human capital – will become more frequent. These reviews, he said, help boards embed climate and sustainability considerations into corporate culture, governance processes, and incentive structures, positioning businesses to meet the growing expectations of stakeholders and regulators.
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