Boards of Directors and Corporate Social Responsibility: a role to fulfil… and questions to be asked!
Corporate directors play an increasingly demanding role. They work in a tighter regulatory and ethical framework, in an environment characterized by innovation and rapid technological change and in a time when extra-financial risks continue to grow in importance. Members of Boards of Directors now need to take these issues into account in the oversight of their company’s operations.
Interrelated issues
According to the World Economic Forum, companies are facing a multitude of significant and highly interrelated, environmental, social and governance (ESG) issues. ESG elements can affect corporate strategy, risk management and oversight, regulatory compliance, the company’s reputation and stakeholder relations, so they must be integrated into the governance provided by Boards of Directors.
Environmental factors include the impacts that a company’s operations can have on climate, including greenhouse gas emissions, the risks and opportunities resulting from climate change, energy efficiency, pollution, water and waste management, site remediation, biodiversity and habitat protection. Research firm Trucost estimates that external environmental costs on corporate activities will double every 14 years.i
This said, although some of these issues are risks that need to be mitigated, others may represent business opportunities that are just waiting to be seized (for example, opportunities to develop new technologies).
15 Key Environmental and Social Issues
(World Economic Forum / CPA Canada)ii
- Climate change
- Waste and waste management
- Deforestation
- Energy
- Water scarcity and quality
- Air pollution
- Biodiversity loss
- Earthquakes and volcanic eruptions
- Population growth
- Corruption
- Human rights
- Food security
- Human health and safety
- Poverty
- Social unrest
ESG risk management at CDPQ
La Caisse has a leadership role to play in the ESG risk management. In fact, in 2004, la Caisse became the first Canadian investment institution to adopt a responsible investment policy. La Caisse was also the first to set targets for greenhouse gas emission reductions as part of its investment strategy to address climate change, announced in 2017.
Act in society’s best interests
In Canada as well as in Quebec, corporate directors must fulfil their general duties of diligence and loyalty. Under the latter, they are expected to act in the best interests of the corporation. In the BCE case, the Supreme Court of Canada stated that directors are responsible for looking to what is in the “best interests of the corporation.”iii For the court, this “is not confined to short-term profit or share value,” and “where the corporation is an ongoing concern, it looks to the long-term interests of the corporation.” In certain circumstances, it may also be necessary to take into account the impact of decisions on stakeholders (shareholders, employees, creditors, consumers, governments and communities) in the pursuit of corporation’s best interests of the corporation.
Directors’ duty
ESG dimensions must be taken into account in strategic planning, risk management, performance monitoring and external disclosure. The Board of Directors, which oversees these activities, must question management on these matters and their impact.
Questions to ask on ESG concernsiv
Identification of relevant ESG issues
- Which ESG issues and trends (risks and opportunities) are likely to have an impact on the corporation’s strategy, operations and performance?
- How has the corporation identified and assessed these ESG issues?
Corporate strategy
- Does the strategic planning take ESG issues into account? What assumptions have been made about their impact on strategy?
- Do our major investment, acquisition and divestiture activities take ESG issues and trends into account?
Risk management and oversight
- How are ESG risks monitored and managed?
- What is the company’s strategy for mitigating and responding to ESG risks?
Governance
- Does the Board have sufficient knowledge and expertise to assess the corporation’s social and environmental responsibilities?
- Does the Board have sufficient information to evaluate the appropriateness of the controls and measures implemented to track the corporation’s ESG performance?
External disclosure
- Does the corporation disclose sufficient, reliable and appropriate information on ESG performance to the various interested stakeholders?
Human resources
- Are employees aware of and trained on social and environmental issues?
- Has the corporation implemented incentives to encourage employees to take into account ESG issues and corporate performance in this area?
Taking ESG issues into account is essential for any organization that wants to sustainably and responsibly maintain and develop their operations. And Board members have a responsibility to provide leadership in the implementation of required governance tools and of a corporate culture that is sensitive to these issues.
i Study cited in KPMG’s Sustainable Insight, Expect the Unexpected: Building business value in a changing World, p. 8 (2012).
ii Adaptation of a table in The Canadian Institute of Chartered Accountants’ Sustainability: Environmental and Social Issues Briefing - Questions for Directors to Ask, p. 4 (2011).
iii BCE Inc. v. 1976 Debentureholders, 2008 SCC 69.
iv Adapted from The Canadian Institute of Chartered Accountants’ Sustainability: Environmental and Social Issues Briefing - Questions for Directors to Ask (2011).