ESG through a fiduciary lens: a framework for non-executive directors
Increasingly, as NEDs we are asked to consider risks arising from environmental effects as well as those arising from social equity and from poor governance, both internally and throughout the value chain.
There has been a plethora of developments in this area for NEDs to consider across both current and likely future rules and regulations. Some of these are universal to all organisations, regardless of their legal form, while others are industry- or sector-specific.
There is a lot of material to cover, and only so much time that can be spent in the Boardroom being updated on relevant issues, or outside the Boardroom undertaking recommended reading or additional professional education. Having a broad framework in which to think about these responsibilities is helpful though, to ensure that Board time is spent on the most important issues, that strategy appropriately addresses them and that risks are understood, monitored and managed.
Key take-aways
- ESG-related rules and expectations for NEDs have multiplied fast, and they don’t stop multiplying. You don’t need to track all of it, you need a framework for deciding what matters.
- Board responsibility splits into three groups: legal and regulatory requirements, direct physical risk, and strategic choice. Any one of them can touch environmental, social or governance issues; they don’t map neatly onto E, S and G.
- Compliance is the easy part. The harder job is stopping it from becoming a tick-box exercise, and watching for the point where “high” regulatory risk aversion starts costing more than it saves.
- Physical risk is not hypothetical. Insurers rate their own preparedness well above the sector’s and only 43% say scenario analysis meaningfully informs their underwriting at all.
- Strategic ESG choices carry real costs. Boards should be honest about the trade-off rather than dressing it up as something else.
- If you’re managing someone else’s capital, document your reasoning, monitor and measure what actually happens.
What does ‘ESG through a fiduciary lens’ mean?
For NEDs, the fiduciary lens is the essential starting point. ESG is not a separate objective: environmental, social and governance factors should be considered where they are material to the organisation’s purpose, strategy, risk profile or long-term success. For UK company directors, this includes the factors identified in section 172 of the Companies Act 2006, while other organisations, such as charities and pension schemes, operate under different legal duties.
Where do responsibilities lie?
Board responsibilities with respect to ESG issues can be categorised into three broad groups: current and future legal and regulatory requirements; direct physical risks arising from the changing environment; and indirect, more strategic risks and opportunities. Each of these groups may have issues which relate to one or more of the environmental, social or governance concerns: the two frames don’t map neatly onto each other.
| LEGAL Regulatory Requirements Current and incoming rules that must be met, the tractable, compliance-led category. | PHYSICAL Direct Physical Risks Real, bottom-line exposure to the changing environment: underwriting, cost base, operations. | STRATEGIC Choices – Risks & Opportunities Decisions beyond legal or physical necessity, aligning strategy with belief, values or licence to operate. |
👉 Legal and regulatory requirements
Meeting legal and regulatory requirements related to ESG matters is a reasonably tractable problem. Most organisations have a function which covers compliance with these matters, and larger organisations are likely to have a regulatory change team to assist with incoming legislation etc. Beyond confirming compliance however, the role for the NED is to challenge how the new requirements integrate into current risk management practices. It is important that this does not become simply a “tick a box” exercise. It is also important to consider the degree of regulatory risk that the organisation chooses to adopt. Most NEDs would rate regulatory risk as a “high” risk factor for the organisation. However, it is possible to overspend or overdeliver to the point where it has a cost impact on the business. Monitoring compliance costs and understanding the opportunity cost associated with an unnecessarily zealous compliance function is worthwhile.
👉 Direct physical risks
There are some organisations where changes to the physical environment directly impact the bottom line. A good example is the insurance industry where evolving climate risks must be embedded into the underwriting costs. A 2026 MSCI Institute survey of more than 50 global insurers found a telling pattern: individual firms consistently rate their own preparedness for physical risk higher than the industry’s collective readiness. Aas many as 62% of North American insurers say the sector overall isn’t ready, even as they feel confident about themselves.
The future health of the business relies on NEDs ensuring that the direct effect of the changing environment is properly assessed, in the short, medium and longer term. Whereas forecasting has previously relied on years, even decades of data, the same research found that insurers are already finding historical catastrophe models less reliable, and are developing new techniques to augment them. We can’t rely on the past to fully inform the future. For NEDs, this may mean asking the executive team to explain how they are incorporating these changes into business cases and future strategy. Scenario analysis can be helpful here. The MSCI Institute survey found that only 43% of insurers say their underwriting is meaningfully informed by physical-risk scenario analysis at all and, separately, that nearly all insurers want scenarios that only look ahead to 2030, rather than the decades over which climate risk actually compounds.
While insurers are the most obvious example, all businesses should be aware of how changes in the physical environment can impact their cost base and operations. Scenario analysis can also be used to show, for example, the potential changes to costs of inputs affected by climate change, such as electricity, raw materials, labour.
👉 Strategic choices, risks and opportunities
Strategic decisions will be made around ESG issues that don’t fall into either of the categories above. Organisations may also choose to align strategy with core beliefs or philosophies which are not legal or regulatory requirements, nor represent a (large) direct physical risk. As an asset consultant, I worked with an organisation funding cancer research. The organisation’s strategy required that the investment portfolio, which funded both the administration of the charity and the research programme, did not invest in companies which they felt contributed to the prevalence of cancer. This meant that any investment in tobacco companies was prohibited. Further, it did not accept donations from these types of companies. This was not a legal or regulatory requirement. It was a strategic decision. Firstly, it reflected a desire on the part of the Board to ensure that it did not indirectly contribute to more instances of cancer, by investing in companies producing products which were associated with high cancer risks. Secondly, it addressed the real concern that fundraising and financial support would be undermined by the reputation risk from an association with these companies, either as an investor, or as a recipient of financial support.
Some of the financial consequences of this strategic decision were easy to calculate. Quantifying the opportunity cost of the excluded investments was a relatively simple exercise. However, quantifying potential donations and any potential positive research outcomes that may have come from those donations would require some heroic assumptions.
The term “social licence to operate” is sometimes used to describe these strategic choices. The term originated in mining and extractive industries in the 1990s but is now used more broadly, in energy, agriculture, tech, and other sectors, especially for projects with visible environmental or community impact. It rests on a company maintaining the trust of the community (however defined) in the way it does business. This extends to how it manages its own workforce, what expectations there are of the labour practices throughout its value chain, and how it considers the health of the community in which it operates.
The challenge for the Board then is to balance the additional cost of “doing the right thing” against the profitability of the business. In doing so, the Board must consider the short-term costs against potential longer-term positive impacts. For example, gender pay parity may be a cost this year but should result in lower costs in future years through better staff retention.
Organisations responsible for managing the capital of others, such as pension funds, are faced with a particular problem. Their objective is to act in their members’ best interest, maximising the return on capital, adjusted for risk appetite. The time horizon over which this objective is expressed can be anything from quite short-term for a 65-year-old about to withdraw money to fund their retirement, to the 16-year-old making their first (small) contribution to their savings pot. However, pension fund trustees and boards face growing expectations around sustainability and other secondary objectives.
A number of Boards have looked to align ESG strategy by surveying members to understand preferences around the nature of companies in which to invest. With or without this input, it will be important for NEDs to understand the financial consequences of the chosen investment philosophy and the time horizon against which they expect it to play out. They should document their reasoning and monitor the bottom-line effect of the choices made.
Having a framework to think about ESG concerns doesn’t make the trade-offs disappear. Boards will still have to decide how much to spend on compliance, how far ahead to look when the past is no longer a reliable guide, and how honest to be about the cost of doing the right thing. What a framework like this buys you is not an answer – it’s a way of knowing which question you’re actually answering, and why. It’s only half the job, though. Measuring what actually happens as a result of a decision, not just documenting the reasoning behind it, is what makes a board accountable for it, and what makes the next decision better than the last. Both are worth having in place before the next headline forces the question on you anyway.
📌 Questions for NEDs to take into the boardroom
Which ESG-related issues are genuinely material to our purpose, strategy and risk profile?
What legal or regulatory obligations apply, and how does the board receive assurance over compliance?
Are our assumptions sufficiently forward-looking, and which scenarios have been tested?
What are the financial and strategic trade-offs, over what time horizon?
How will the board monitor whether the decision produces the intended outcomes?
FAQs
1️⃣ Does this framework apply the same way to a charity as to a listed company?
The three categories hold, but what fills them doesn’t. A listed company’s legal requirements run through the FCA and the Corporate Governance Code; a charity’s run through the Charity Commission and CC14. Same structure, different rulebook. Directors’ Duties will typically apply to directors (NEDs) of both.
2️⃣ Do NEDs need to become climate or ESG specialists to do this well?
No. The job is to ask the executive team the right questions and to push back when the answer relies on the past repeating itself. Scenario analysis, not expertise, is what closes that gap.
3️⃣ How much Board time should this actually take up?
Less than the sheer volume of material would suggest, if you’ve got a framework for triaging it. That’s the whole point of categorising by risk type rather than trying to read everything. Monitoring the financial impact on a consistent ongoing basis creates time efficiency and helps identify problems early.
4️⃣ What’s the single biggest risk of getting this wrong? Assuming that things won’t continue to change. The legal and regulatory framework is still evolving. Modelling of the future impact of climate change is improving. Public attitudes to ESG factors will shift.
About the author: Stephanie Weston is an independent Non-Executive Director with over 25 years’ experience spanning pension funds, insurers and central banks in the UK, Europe and Australia, including early career roles at the Bank of England and Reserve Bank of Australia. Her board and executive career includes PGGM, AustralianSuper and HESTA, with a long-standing focus on value for money, ESG integration and outcomes for pension scheme members.
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