This article first appeared in The Edge Malaysia Weekly on April 17, 2023 - April 23, 2023
Without a good governance structure, businesses may not be able to achieve the sustainability initiatives that they want to implement.
To gauge the current status quo, Mak Yuen Teen, a professor (practice) of accounting at the National University of Singapore Business School, recently published a report on how 150 of the largest listed Malaysian, Singaporean and Australian companies are setting up their sustainability governance structures.
The report, titled “Who governs sustainability?”, was published in collaboration with the Sustainable Finance Institute of Asia. Mak is known in Malaysia and Singapore for his knowledge of corporate governance and has worked with Singaporean authorities to revise the code of corporate governance for listed companies.
Mak found that the two most common types of sustainability governance structures were either the entire board overseeing sustainability matters without any committee being tasked with it or multiple existing committees taking on that responsibility. These committees are often the risk, audit and remuneration committees.
The next most common one was having sustainability governance responsibilities that were not formally embedded in the board or any board committee. This kind of structure could be lacking, says Mak. “My view is that, like in traditional corporate governance, if you don’t have a committee looking at remuneration issues or the nomination of directors, you may not be paying sufficient attention to it.”
To overcome this, Mak says companies can integrate sustainability responsibilities into the different existing committees. For example, the audit risk committee could include sustainability as part of its responsibilities.
The other option is to form a separate sustainability committee. Climate risk is an extremely critical issue for an oil and gas company, for instance. Thus, it would make sense for it to have a dedicated sustainability committee.
“We are not saying you have to create a separate structure. What we are saying is that [companies] have to think about their existing board structure. What do [companies] need to do with their existing board structure to adequately oversee sustainability? The board will then need to have the right competencies,” says Mak.
“When it comes to sustainability governance, it’s not a question of creating a different layer or structure of committees, but how you modify existing corporate governance structures to ensure adequate oversight on sustainability.”
Should companies have a chief sustainability officer?
On the other hand, the report highlights that only 22% of Malaysian companies have a designated chief sustainability officer (CSO), compared with Australia and Singapore, at 68% and 46% respectively.
While having a CSO with experience in sustainability or ESG is useful, Mak says not every company needs to appoint one. This depends on whether sustainability is a material issue for the company. “However, if sustainability is important from a risk or opportunity perspective, then it may make sense to have a focal person dedicated to looking at these areas,” he says.
But the CSO must have relevant qualifications and work experience. Mak says that there is a precedent whereby companies convert investor relations (IR) or communications personnel into CSOs. This raises the question of whether the companies see ESG as a communications or investor matter rather than a real business issue.
“If you are an oil and gas company and you convert your IR person into a CSO, you’re asking for trouble because when you start engaging with non-governmental organisations and investors, you will be very quickly found out,” says Mak.
He emphasised in the report, however, that the governance structures described in the report are not prescriptive. “Our objective is not to prescribe ‘one-size-fits-all’ structures and practices, but to raise issues that boards and management can consider in making decisions about the sustainability governance structures and practices to put in place for their company.”
Issues for companies to consider from the report
Mandate and support for sustainability
● Do the bodies and individuals involved in sustainability governance and management have terms of reference or mandates clearly stating their responsibilities, powers and access to information, support and resources?
● What sustainability-related information should those responsible for sustainability governance and management expect to receive to discharge their responsibilities?
Establishing a board sustainability committee
● Should the company form a board sustainability committee or a combined sustainability committee?
● Who should chair the board sustainability committee?
● If the board sustainability committee is chaired by an executive director or a non-independent non-executive director, are there conflicts that may arise?
● What is the appropriate composition of the board sustainability committee in terms of independence and competencies?
Knowledge, skills and experience
● What are the material ESG factors for the industry and company?
● Are there directors with sufficient depth in knowledge, skills and experience in those areas of ESG that are most important to the industry and company?
● Is the current board skills matrix useful in assessing whether the board has the appropriate knowledge, skills and experience in areas most important to the company, including relevant areas of ESG?
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