Corporate directors downplay ESG issues, defying investors
There's a schism between what shareholders are requesting and what’s prioritized in the boardroom.
Talk about a disconcerting disconnect. The investor community is putting more pressure than ever on companies to consider environmental, social and governance issues in strategic decisions — everything from climate change to diversity — but that message is falling flat in some boardrooms.
Here’s the stark reality. Close to 39 percent of directors responding to advisory firm PwC’s annual survey of this community said that climate change shouldn’t be taken into account when forming corporate strategy, and roughly 30 percent think shareholders pay too much attention to this topic.
What’s more, more than half of the directors don’t see a need to bone up on this topic: Knowledge of environmental issues or corporate sustainability was the attribute that the survey respondents valued least in board candidates.
This was the first year that directors were asked specifically about ESG issues, so there isn’t any comparative data.
Paula Loop, leader of the PwC governance insights practice, said at least some of the gap between what investors are interested in hearing about and what directors are willing to talk about may come down simply to semantics.
For example, the directors surveyed in late 2018 by PwC were attuned to the need to pay more attention to "resource scarcity" — a question asked in prior surveys. About 31 percent said it was important for this to be factored into corporate strategy; that compares with 21 percent who indicated the same in the 2017 survey, according to the strategy firm’s analysis of the results.
So, while some directors aren’t convinced that "ESG" is something they should prioritize, many fundamental issues that fall under this umbrella — such as ensuring that a company has future access to resources such as water or cocoa — is something that will get their attention.
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That disconnect underscores the case for corporate sustainability teams to be embedded more holistically into key operational functions, rather than handled separately, so that key members of the C-Suite are better acquainted with their concerns. "I think you could safely say that it would be a very low number of companies that don’t have exposure to these issues," Loop said.
Digging more deeply into the survey results exposes a gap of another nature: Male directors were far more likely to downplay the need to focus on issues including the environment, corporate social responsibility, diversity and pay inequity than their female counterparts.
For example, while 33 percent of the men responding to the PwC survey said shareholders pay too much attention to the environment, only 14 percent of the women said the same. Conversely, 27 percent of the female directors said their company should "very much" take climate change into account when forming strategy. Only 13 percent of the men said the same.
Over the past year, the institutional investment community has doubled down on its scrutiny of how major companies address and account for climate risks, gender and ethnic diversity, and human rights in the emerging nations where many of them support supply chain operations. In late January, investors representing more than $6.5 trillion in assets wrote a letter to the leaders of fast food companies McDonald’s, Restaurant Brands (parent of Burger King) and Yum Brands (owner of KFC and others). Recent research suggests that at least 70 percent of investors seek more disclosure (PDF) about ESG-related issues.
The PwC report suggests that the release of new reporting guidelines from the Sustainability Accounting Standards Board could help change the boardroom dialogue by help translating the data often crammed into CSR and sustainability reports into a format that’s more digestible for both investors and C-Suite executives.
Among the questions that can drive that conversation:
Are ESG risks including in the company’s risk management program?
Are climate and social issues part of long-term strategic considerations?
How can the company improve transparency?
Do we have the information we need?
Who is best equipped to represent your organization’s agenda?
"Companies that are getting it right on ESG have identified material ESG-related risks and opportunities, and embedded them into their long-term value creation story," the firm notes.
Loop suggests that sustainability leaders can play a role in educating directors not necessarily by engaging them directly but by identifying an executive champion in an operational, finance, risk management or investor relations role who can help tell that story — instead of by letting investors tell the story for your organization, which is often the case today.