Business and Human Rights – Are Boards Equipped to Address Emerging Risks?

The NYU Stern Center for Sustainable Business published a report in January 2021 finding that US corporate Boards suffer from inadequate expertise in financially material ESG matters such as human rights.

In a survey of 1,188 Fortune 100 Board directors, only 18 (or 1.5%) had any experience or credentials relating to human rights. Findings amongst Board directors outside the US are unlikely to be very different. The Stern report found limited expertise across the full range of ESG risks (beyond human rights to climate change, water scarcity, pollution, #metoo, #blacklivesmatter, employee diversity, cybersecurity and bribery and corruption) and questioned whether “today’s Boards [are] fit for today’s challenges and opportunities“.

In this Blog Post, we discuss what Boards should do to address this capacity deficit.

The Stern report advocates that the Board must:

• understand the material ESG issues for the company, “today and tomorrow“;
• understand the perspective of critical stakeholders, such as employees, civil society and long-term investors, on ESG issues and ensure their concerns are built into the culture and business strategy of the company;
• diversify to include people with expertise in those material issues;
• ensure that the company has a “sustainability strategy that is embedded in the company’s business strategy and that KPIs are developed that are aligned with key reporting standards, that are built into work plans and compensation and that are third party assured”;
• ask their executive team to report on the financial impact of their ESG investments in a comprehensive way, including intangible and tangible benefits such as risk avoidance, employee retention and operational efficiency; and
• reflect the new ESG reality in the Board culture, their own expertise and through proactive engagement with management on its sustainability strategy and with key stakeholders.

Norges Bank Investment Management helpfully elaborates on these recommendations from an investor perspective, so far as human rights issues are concerned, in their Human Rights Expectations document, which we covered in a previous Blog Post.

Board representation aside, it is important to note that companies are increasingly looking to systematically integrate external expertise to promote constructive exchanges on ESG issues, to better understand different perspectives and to help address conflicting goals.

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