APAC companies behind on stand-alone ESG committees, but ahead of US in disclosure quality: study

COMPANIES with stand-alone committees focusing on ESG (environment, social and governance) issues tend to have the highest sustainability scores, with Europe and US companies paving the way, a joint study by NN Investment Partners (NN IP) and governance services provider Glass Lewis showed.

In the study based on 129 companies, it was found that companies located in Europe and the US, which have more developed extra-financial reporting expectations and obligations, tend to have stand-alone board-level ESG committees, at 26 per cent and 28 per cent respectively. Firms in the Asia-Pacific are slightly behind at 25 per cent.

Companies with this supervisory structure account for the highest proportion (28 per cent) of companies in the top quartile of ESG Lens scores and have above-median ESG Lens scores generally, with reference to NN IP's proprietary measurement tool.

Companies with other types of oversight structures and their percentage representation in the top quartile include combined board committee (16 per cent) and whole board (13 per cent).

However, even though the US and Europe have the highest proportion of stand-alone ESG committees, the quality of disclosure differs.

The US has the highest proportion of companies with poor disclosure at 38 per cent, beating the Asia-Pacific with 33 per cent and Europe with 18 per cent.

"The somewhat better performance of Asia-Pacific companies than US companies in terms of disclosure may stem from the different reporting regimes in the two regions," said the report.

"The US has a shallow but mandatory reporting regime, while disclosure mechanisms in Asia-Pacific countries tend to be voluntary; as a result, companies that choose to disclose may be more focused on disclosing high-quality ESG information."

Compared with Europe, reporting requirements in the US are more lax and many companies seem to take a "legal minimum" approach to disclosure, said the report.

Stand-alone committees are most prevalent in the energy sector (44 per cent), followed by materials (37 per cent), and financials and consumer staples (both 29 per cent).

Adrie Heinsbroek, chief sustainability officer at NN IP, said: "The decision to adopt stand-alone or combined board-level ESG committees remains voluntary but is influenced both internally, such as having a company culture that values sustainability, and externally by factors such as stakeholder and regulatory pressures."

He added that given these committees are voluntary, they could be viewed as signalling a company's heightened focus on the strategic performance of ESG, but this may only reflect a superficial commitment.

"While recommendations, soft law, and shareholder expectations can influence companies into setting up committee oversight of sustainability and ESG issues, mandatory extra-financial disclosure requirements have a more direct and material impact on the presence of defined oversight structures," he noted.

The study is based on a sample of 129 companies in the US, Europe and the Asia-Pacific.