Board Risk Oversight and Environmental and Social Responsibility

By | November 9, 2020

Risk oversight is one of the primary responsibilities of boards of directors. While boards have traditionally focused on the oversight of financial compliance, credit, and liquidity risks, they are increasingly being pressured – by regulators, investors, and other stakeholders – to provide oversight over a broader range of risks that threaten the achievement of firm objectives. These broader risks include environmental and social (E&S) issues, such as pollution, climate change, resource usage, labor practices, and consumer safety. Failure to manage E&S risks can result in lawsuits, penalties, regulatory actions, operational problems and higher costs, reputational damage, lost customers, and difficulty attracting employees (Bénabou and Tirole 2010; Chava 2014). Conversely, addressing these risks can create opportunities to innovate, attract customers, develop new markets, and reduce costs (Kotsantonis, Pinney, and Serafeim 2016; Albuquerque, Koskinen, and Zhang 2019).

Despite growing calls for boards to incorporate oversight of E&S issues into their broader board risk oversight practices (e.g., COSO 2018; KPMG 2018; Ceres 2019; Wachtel, Lipton, Rosen & Katz 2019), recent surveys of corporate directors call into question whether directors actually view E&S issues as an important risk consideration (KPMG 2018; PwC 2019). Consistent with this view, a large portion of surveyed directors report that their boards do not have a strong understanding of the impact of E&S issues on their firm, and that E&S issues are not part of their normal risk management activities or board risk oversight discussions. Motivated by this apparent disconnect, our recent studyexamines the relation between board risk oversight, as captured by the extent of risk-related reporting, understanding, and communication, and firms’ overall E&S ratings and individual E&S practices and outcomes.

If greater board awareness, evaluation, and monitoring of existing and emerging risks of all kinds leads to greater emphasis on E&S issues, more robust board oversight should be positively associated with third-party E&S ratings. These ratings are an aggregate measure of a firm’s various E&S commitments, practices, processes, and outcomes.

Moreover, board risk oversight should be associated with specific channels that the board can use to direct management’s attention to E&S issues. We examine two such channels: 1) the overall corporate strategy, and 2) executive compensation, which can be tied to E&S performance metrics and targets. Finally, if more board risk oversight leads to a greater emphasis on E&S activities, this should ultimately influence firms’ observable E&S outcomes, such as environmental emissions and waste, employee health and safety incidents, or green product innovation.

Conversely, we should observe no association between the robustness of board risk oversight and E&S practices or outcomes if boards do not incorporate E&S issues into their risk oversight processes, if E&S issues are considered to be non-strategic and peripheral to the firm’s operations, or if attention to E&S issues is included on the board agenda through avenues outside the scope of board risk oversight (e.g., through female board members; see Dyck et al. 2020).


We examine the relation between board risk oversight and a firm’s E&S ratings, practices, and outcomes using proprietary survey data on firms’ risk management systems and board risk oversight practices, as well as data from the Thomson Reuters ASSET4 Environmental, Social, and Governance (ESG) database. Our survey data comes from Aon, a leading provider of insurance brokerage, risk management, and human resource services. Aon launched their Risk Maturity Index (RMI) survey in 2011. It was designed as a self-assessment tool for organizations to evaluate and benchmark their enterprise risk management capabilities. Our analyses focus on 298 firm-years. These responses represent 249 unique publicly traded firms from 29 countries (some firms completed the survey in more than one year). The firms completed the RMI survey between 2011 and 2018 and also had the required E&S data and other data necessary for our analyses.

Our measure of board risk oversight comprises five components, each one using one or more questions from the Aon survey. These components are: 1) the board’s understanding of risk; 2) the frequency and content of risk reporting to the board; 3) board and management risk alignment; 4) board and risk manager communication; and 5) the incorporation of risk responsibilities into board members’ performance evaluations. Our E&S rating variable combines a firm’s overall environmental pillar score and overall social pillar score from ASSET4. We capture E&S integration into strategy, the use of E&S metrics and targets, and E&S outcomes using various individual items from the ASSET4 database. Full details of how these variables are constructed are available in our paper. We use data from both Incentive Lab and ASSET4 to capture whether executive compensation is tied to E&S performance.


We find strong evidence that firms with more robust board risk oversight have better E&S ratings, controlling for firm fundamentals and a variety of observable board attributes. This finding indicates that board oversight practices provide incremental ability to explain variations in overall E&S ratings.

The relation between board oversight and E&S ratings is stronger in countries with greater investor protection and more stringent E&S disclosure requirements, and when there is greater scope for boards to shape a firm’s E&S activities (i.e., when a firm’s historical E&S rating is lower). In addition, board risk oversight is more strongly related to firms’ E&S ratings when shareholder monitoring costs are lower (i.e., greater institutional ownership and absence of a dual class share structure), contrary to claims that boards facilitate E&S practices that provide personal benefits to directors and executives (such as fulfilling personal desires to engage in philanthropy at the expense of shareholders) (e.g., Bénabou and Tirole 2010).

Investigating specific mechanisms through which board risk oversight can influence firms’ E&S activities, we find that board risk oversight is positively related to the integration of E&S objectives into corporate strategy and into executive pay design, both of which are important decisions that are directly under the board’s control. We also find some evidence that board risk oversight is positively related to the use of E&S metrics and targets in general (our measure is not specific to metrics and targets for executive compensation purposes). Consistent with the management of E&S risks being integrated with the firm’s general risk management approach, firms that incorporate E&S issues into corporate strategy and executive pay are also more likely to align their risk management strategy with corporate strategy and to hold executives accountable for risk management performance.

Finally, we find that greater board risk oversight is associated with better E&S outcomes, using an aggregate measure of positive outcomes (e.g., E&S awards) minus negative outcomes (e.g., employee injuries). Further analysis shows that this association is primarily driven by a positive relation between board risk oversight and positive E&S outcomes, rather than board risk oversight reducing negative E&S outcomes (a caveat being the measurement constraints we face when capturing E&S outcomes).

Consistent with the idea that addressing E&S issues can not only reduce risks but also provide opportunities (Kotsantonis et al. 2016), this finding suggests that firms with more robust board risk oversight are more likely to exploit such opportunities. In line with this interpretation, we find that firms with more robust board risk oversight are more likely to emphasize the upside potential of risk management and to engage in more environmental product innovation.


Our study adds to a growing body of research on the determinants of firms’ E&S practices and outcomes, which is an important topic given the significant societal and environmental impact that firms have. In contrast to prior research, which has primarily examined observable board characteristics, our study’s detailed proprietary survey data allow us to delve into the black box of board processes by measuring the extent of board-level risk reporting, understanding, and communication, and to examine how these practices are associated with E&S practices and outcomes. Consistent with the notion that firms with more robust board risk oversight are more likely to consider E&S risks and opportunities, we show that these firms indeed have higher E&S ratings, are more likely to integrate E&S issues into their corporate strategies and executive compensation contracts, and ultimately experience better E&S outcomes.


Hami Amiraslani is an Assistant Professor of Accounting and Control at INSEAD.

Carolyn Deller is an Assistant Professor of Accounting at the Wharton School of the University of Pennsylvania.

Christopher D. Ittner is the EY Professor of Accounting and Accounting Department Chair at the Wharton School of the University of Pennsylvania.

Thomas Keusch is an Assistant Professor of Accounting and Control at INSEAD.

This post is adapted from their paper, “Board Risk Oversight and Environmental and Social Responsibility,” available on SSRN.

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