Independent Directors' Evolving Role In Facilitating Esg

With temperatures soaring high, climate changing unfavourably, social wellness gaining importance and bad corporate governance practices sweeping the newspapers, it is not wrong to say that the entire world is caught in an ESG wave. Governments and companies are facing national and international pressure from all communities globally to act on ESG concerns on a priority basis. Companies have already started to catch up on the ESG trend as they are realizing their responsibility towards the planet and people. They are aware that their inaction will lead to the company’s downfall. Sustainability means bringing a change in the vision and operations of a company towards fighting climate change and inculcating a positive work culture within the organization. And the responsibility to get the needed change is shouldered upon the board of directors. 

It is rightly said that a company is best known by its board of directors. Chalking out the best ESG policies, practices and strategies is something that has kept the board on the go these days. A quality outcome is expected from the board only when the board is comprised of the right set of people, the right skills, and the expertise. Whenever we talk about the company board, the name of ‘Independent Director (ID)’ always pops up as he is one of the most significant people on the board.

Who is he and what role can he play in the ESG transition?  

ID is best described as the watchdog of a company that watches over the functioning of the board with neutral eyes. He is a board member who is a non-executive director, meaning he has no role to play in the day-to-day management activities of a company and who does not bear any direct or indirect material relationship with the company and also its promoters.

The rationale behind including IDs on board has been to bring in transparency. With major corporate scams being exposed over the years, the role of an ID has time and again been reiterated. He is inextricably linked to good corporate governance.

In India, IDs form a major part of important committees such as the Nomination & Remuneration Committee and Audit committee. Where corporate frauds are mainly attributed to finance, two third of Audit committees having IDs bring in a lot of transparency and objectivity to the financial transactions minimizing the risk of fraud.

As can be observed even in corporate history, company decisions are often influenced by the private interests of promoters and their greed for excessive profits. And when a company's fraud worth millions is exposed, the one who is at the receiving end is innocent stakeholders. The fraudsters often flee to other nations and stakeholders spend years waiting for justice to get back their hard-earned money. IDs oversee the board decisions as an outsider and they are trusted with this duty because they have no private monetary interests in the company because of this their decisions could never be swayed by greed or any malafide intention. They protect the rights of minority shareholders. They play a crucial role in risk management. They are responsible for regulatory compliance. Thus having IDs on board improves the credibility of an institution. 

As companies brace ESG, they must take important decisions on ESG risks and opportunities and set out ESG targets. Since IDs are instrumental in decision-making on company matters, they are bound to play a key role in decisions pertaining to ESG. They have a pivotal part in the integration of ESG within the company’s boardroom. It is time for IDs to gear up their ESG knowledge and attain expertise on the subject. It is only when they achieve expert proficiency in ESG, they shall be able to guide companies in drawing the best strategies around ESG considering all relevant risks & opportunities, aligning ESG with business interests and defining long-term ESG goals. They can ensure that ESG experts are hired by the company to further sustainability goals. They can also make sure that the company abides by ESG regulations like mandatory ESG reporting. In addition to regulatory compliances, the role of ID also extends to bringing in real sustainability benefits such as an increase in profits and revenues. IDs can bring the company on the right track leading to the destination of sustainability and augmenting value creation.

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