Board Risk Oversight and Environmental and Social Performance

Abstract

Heightened awareness and concern about firms’ exposure to environmental and social (E&S) risks has prompted calls for boards of directors to incorporate these risks into their broader overall risk oversight practices. Using proprietary data on board risk oversight practices for a global sample of firms, we examine the relation between board risk oversight and firms’ E&S practices and outcomes. We find that firms with more extensive board risk oversight are more likely to institute E&S compensation, set environmental (but not social) targets, establish an E&S committee/team, adopt policies that address E&S risks and opportunities, and issue an external E&S report. We further provide exploratory evidence that more extensive board risk oversight is associated with the realization of better environmental outcomes, specifically lower CO2 emissions and lower monetized environmental costs, but worse social outcomes, namely lower community spending, lower monetized employee benefits, and a higher likelihood of social risk incidents. Our findings are broadly consistent with the notion that boards’ oversight of E&S risks entails costly tradeoffs associated with the need to prioritize the interests of different stakeholders and, as a result, not all E&S issues may receive the same level of consideration by the board.

Keywords: corporate boards; board risk oversight; corporate social responsibility; risk management; ESG

JEL Classification: G15, G23, G32