Last week saw the release of the latest in a steady stream of surveys assessing the state of corporate boards of directors as they relate to sustainability and environmental, social and governance (ESG) issues. This one, from BDO, a global network of public accounting and tax advisory firms, looked at the most pressing board challenges and outlined the strategies being deployed to address them, based on the responses of more than 200 public company directors across a variety of sectors.
The key ESG-related finding: Directors appear unsure how to prioritize risks and reflect them in longer-term corporate strategy. For example, it found, nearly two-thirds of board members said ESG issues pose minimal risks to their business. Indeed, some directors expect to pull back investment in ESG initiatives this year.
However, when asked about specific topics that fall under the ESG umbrella, directors indicate that these issues pose "some" or a "significant" risk to their business. And, it adds, any expected pullback may be short-lived, and more perception than reality, as I’ve written about in the past: maintaining ESG initiatives but keeping a low profile about them. "The recoil and lower perceived general ESG risk may be a result of the political noise in the system," BDO said.
Welcome to the evolving world of sustainability-minded corporate boards.
Over the past few years, sustainability has taken a seat in many, if not most, corporate boardrooms in lockstep with the growing understanding of the risks posed by climate and biodiversity issues as well as a host of social issues, from data breaches to public health crises. Let’s absolutely celebrate that.
But it’s not that simple. Just because a company states that sustainability is a board-level topic doesn’t necessarily mean sustainability garners the same level of oversight that the board likely has over finance and other strategic issues. It also doesn’t mean that the board looks at the full spectrum of ESG topics; some companies’ ESG focus is on such issues as diversity, pay equity and human rights activities, with little or no heed to greenhouse gas emissions or biodiversity impacts up and down its supply chain, let alone their impacts on the communities in which they operate or source materials.
You need to have insight in order to provide the oversight. It's hard to make informed decisions if you're not informed.
And it certainly doesn’t mean that board members are knowledgeable about ESG issues and how the company should approach them. Consider some other research from just the past six months or so.
On the one hand:
- 81 percent of board members prioritize strategic and operational ESG integration, per EY’s 2022 Board Priorities report.
- Similarly, sustainability is seen as a critical leadership competency for directors (63 percent of respondents) and senior executives (77 percent), according to Russell Reynolds Associates research.
On the other hand:
- Among Fortune 500 companies, just 25 percent of board appointees in 2022 had previous experience on sustainability committees, up from 14 percent in 2021, according to executive search firm Heidrick & Struggles (via the Wall Street Journal, subscription required).
- Only 25 percent of company directors say boards understand ESG risks, according to PwC’s 2022 Annual Corporate Directors Survey.
- Slightly under half (47 percent) of board directors felt that they have the required ESG expertise and competence to exercise board oversight, according to an INSEAD survey. And 70 percent of directors said their board was ineffective at integrating sustainability into governance and strategy building.
That’s a yawning gap between concern and competence.
So, what does it mean for a board to be fully engaged in this realm? I asked my friend Helle Bank Jorgensen, founder and CEO of the education and training firm Competent Boards, what that might look like.
First, she said, there's a difference between boards that are self-identified when it comes to engagement in sustainability and those that have demonstrated expertise on the various topics under the sustainability and ESG umbrellas. Board members, she said, need to "prove in one way or another that they both have the education and some kind of experience in sustainability topics."
But, Jorgensen continued, it’s not just about knowledge. "This is about the mindset, about seeing the risks and opportunities. This is about dealing with all the dilemmas. If you are a director, that's what you’re paid for. You need to have insight in order to provide the oversight. It's hard to make informed decisions if you're not informed."
Jorgensen's five-year-old firm provides just that kind of training to corporate boards — nearly 1,000 board members in 50 countries across six continents to date. Her firm’s coursework covers the gamut: understanding geopolitical risks and how to turn them into opportunities; how social and environmental issues can disrupt supply chains; maximizing the opportunities around stakeholder engagement; the responsible use of data and cybersecurity; and many other issues.
The goal, she told me, is helping board members establish that sustainability mindset.
And what happens when they get it? "You get that curiosity," Jorgensen said. "You start understanding the issues, you start listening to what others are doing. You gain confidence, you gain the ability to not only ask questions but also have an idea of what does ‘good’ look like. You start to be curious about, say, ‘What are we actually doing in this area about modern slavery?’ You open minds and get people to say, ‘OK, all of these are interrelated things.’"
Of course, it’s a two-way street: Just as board members need to understand and speak the language of sustainability, sustainability professionals need to understand and speak the language of business. In many cases, the two sides don’t even define certain words the same: "risk," "materiality" and "impact" are good examples, but there are many others.
"We need to ensure that boards have an understanding both of the technical jargon but also of the reporting frameworks," Jorgensen explained. "Materiality is a good example. When I talk about materiality from a sustainability point of view and from a financial point of view, they’re not necessarily the same. Determining which sustainability and ESG issues are most material to a company requires understanding both the company's business model but also its operations, its stakeholder expectations and, of course, its performance. And asking, ‘How do we ensure we have the internal controls from an accounting perspective?’"
When recruiting directors, it’s important to avoid confusing sustainability expertise with a sustainability mindset, according to Laura Sanderson, co-leader of the Board & CEO Advisory Practice for Russell Reynolds. "Simply recruiting a sustainability director, someone who perhaps served as a chief sustainability officer, will likely result in them being marginalized in the boardroom. You don’t need an expert, you need great directors."
Similarly, she added: "Make sustainability mindset a factor when hiring CEOs: Likewise, it is also critical to make sustainable leadership a requirement for executive hiring."
All of this is a work in progress. "We are still in early days," Jorgensen told me. "We see an exponential growth in leaders who want to get that insight, who want to get the foresight, so they can make informed decisions and be credible when they talk to shareholders and stakeholders."
The spate of regulations in the U.S. and European Union that mandate, or soon will, increased disclosure by publicly traded companies on climate, biodiversity and other social and environmental risks will likely build a fire under boards to better grasp these issues, and the risks and opportunities they pose to companies.
But shareholder supremacy, and the short-term focus it engenders, remain significant obstacles to boards viewing sustainability as anything but a compliance, check-the-box activity.
Said Jorgensen: "That's a waste of both time and money if you don't really understand the case for sustainability, and that this is what gives you innovation."
Thanks for reading. You can find my past articles here. Also, I invite you to follow me on Twitter and LinkedIn, subscribe to my Monday morning newsletter, GreenBuzz, from which this was reprinted, and listen to GreenBiz 350, my weekly podcast, co-hosted with Heather Clancy.