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INEDs to Play a More Proactive Role in ESG within a Board

susie December 1, 2022 0 Comments

According to the Independent Non-Executive Directors Effectiveness Survey 2022, role of Independent Non-Executive Director (INEDs) in Hong Kong is witnessing a steady evolution and it is climbing up into the corporate governance framework. In particular, as Environmental, Social and Governance (ESG) issues continue to become increasingly complex with no remorse, practices that guide ESG disclosures and reporting too are maturing. It has been proven that organizations who prioritize ESG disclosure and reporting have had greater and more successful financial outcomes. ESG and related issues have the potential to enhance the role INEDs play in operations of companies and contribute more to challenges posed by ESG, along with other regular responsibilities they have.

Results of the survey show that 40% of INEDs collectively agree that they should play a more proactive role in ESG matters. INEDs with over nine years of experience tend to be more confident that they are effective in improving risk management and addressing major weaknesses in internal controls. This also includes initiating discussions on management decisions they consider not appropriate or effective and even having them reversed at times. ESG disclosures and reports include categories such as Risk Management and Governance which align directly with the Task Force on Climate-related Disclosures guidance. This eases the work of INEDs who prioritize ESG in providing information and structuring the reports. The guidance effectively helps INEDS who have less experience in addressing ESG concerns since it provides a foundation and a structure to work with.

Independence is the defining characteristic of an INED. While no individual is completely without bias, the INED is not affected by a host of factors that influence executive directors. This impartiality enables INEDs to focus on the bigger picture and empowers them to fulfill their role as “the custodians of corporate governance”. The well-being of the company should be the chief concern of an independent director. Investors generally regard INEDs as value-adding and useful. ESG finance and investment issues are separate from ESG considerations such as climate change mitigation and adaptation, pollution prevention and inequality, etc. These are viewed as “sustainable finance” and a way to support economic growth while reducing environmental pressures by taking into account social and governance aspect. Sustainable finance is vital for imparting transparency to reporting of ESG related risks to stakeholders and that is impacting the current economic system in a palpable manner. To summarize, INEDs need to continue to play a positive role and help make operations of rated companies more transparent for investors and even the public.

To see the full survey, please click here.