Unseen but Critical: The Board’s Role in ESG Risk Oversight
ESG oversight has evolved from a box-ticking exercise to a defining boardroom priority which has the power to differentiate between ordinary and extraordinary organisations.
For Australian boards, ESG risk is now firmly recognised as a material financial and legal issue. Directors are expected to integrate ESG into governance, strategy and accountability frameworks as a way of protecting long-term value and reputation in addition to meeting basic compliance standards.
Regulators, investors and stakeholders increasingly expect boards to go beyond awareness and take a more active, forward-looking role in ESG oversight. The shift from reactive to proactive governance is underway, and being risk-aware is a big part of this.
In order to reduce the risk presented by the need for detailed ESG oversight, the following steps can be combined for a more forward-thinking approach:
Committees and clear accountability
While ESG risk oversight may remain with the board, most companies delegate responsibilities to existing committees or establish new committees to oversee aspects such as workplace equality or sustainability.
Regardless of how these committees are structured or operate, accountability is paramount. Each committee requires a clear charter with ESG integrated into its function, and boards must receive regular reports to keep ESG a standing agenda item.
Individuals must be held accountable for their responsibilities within their committee, and the board must check in regularly for updates on progress or problems.
Strategy approval
Executives set ESG policies and strategies, keeping in mind the guidance and requirements of internal and external stakeholders, and conducting any relevant material analysis. This is then presented to the relevant board committee to review and approve.
Strategic risk oversight means challenging those responsible for the day-to-day management of ESG to explain how goals contribute to business resilience and shareholder value, as well as meeting legal requirements, and asking them to include data and evidence to back up claims when they provide information about ESG activities and outcomes. Data may be qualitative from stakeholder engagement or quantitative, figure-based information.
Stakeholder engagement
Effective ESG risk oversight depends on robust and ongoing engagement with investors, regulators, employees and communities, enabling directors to understand and anticipate expectations.
Boards which engage early and openly with stakeholders are better equipped to identify ESG risks so they can be proactively and effectively managed.
Transparent reporting and legal responsibilities
Boards are accountable for the integrity of ESG disclosures and ensuring they reflect requirements set by ASIC, the National Greenhouse and Energy Reporting Scheme and the Modern Slavery Act.
Claims around net zero, diversity targets, or community impact must be evidence-based to avoid regulatory and reputational risks, including accusations of greenwashing. To ensure this, directors must actively question, challenge the quality of ESG data, seek third-party assurance where necessary and confirm disclosures align with the required standards, as would take place with traditional financial reporting.
Continuous review and board capability
As ESG risks evolve, so must the board. Company directors need ongoing education and a mix of skills to reflect the growing complexity of ESG oversight.
Regular reviews of committee charters, governance frameworks and board composition will ensure relevance and alignment with shifting regulatory and market expectations, and minimise risks associated with ESG.
A governance imperative
Shareholders are no longer satisfied with short-term returns from the companies and brands they invest in. They want to see those dividends tied to responsible, transparent and sustainable business practices.
Strong ESG risk oversight signals how a board takes these expectations seriously, helping to preserve reputation, strengthen market position and support sustainable growth.
Why is ESG oversight a board responsibility?
Australian governance standards assign directors accountability for risk management, including ESG-related risks that affect financial performance and reputation. This has shifted ESG from a box-ticking exercise to a priority for board members.
Which ESG risks should boards be most concerned about?
Common risks around ESG include climate impact, modern slavery, workplace inequality, and governance failures, all of which can lead to regulatory breaches or reputational damage.
Boards need to be concerned about ensuring ESG reporting is transparent, accurate and in line with regulatory requirements.
How can boards structure ESG oversight effectively?
Many boards delegate ESG oversight to existing or dedicated committees, with clear charters, regular reporting and individual accountability, then collaborate with these groups to review and refine strategy and implementation.
What role does stakeholder engagement play in ESG oversight?
Early, open engagement helps boards anticipate risks, respond effectively to stakeholder expectations and reduce the chance of regulatory scrutiny. This stakeholder engagement should be structured and documented through material issue analysis and reporting.
Why does ESG oversight affect shareholder value?
Investors increasingly want to know their returns come from responsible, future-focused companies. Strong ESG governance reduces risk and signals long-term value creation.
