Dissecting ESG And What Those Letters Mean For Boards Today

A survey of 300 public company board members shows the landscape for ESG is evolving, though it remains a secondary concern that directors say is “important but not pressing.”

When announced, the SEC’s proposed climate disclosure rules were expected to have material impacts on public companies’ consolidated financial statements, but research conducted by Corporate Board Member and Nasdaq has found nearly three-quarters of U.S. public company directors believe the proposal, if approved, would have minimal impact on their company.

While most boards now schedule regular conversations around ESG, our research finds that despite public scrutiny and increasing investor pressure, it remains a secondary concern overall, best characterized as “important but not pressing.”

What the data—and anecdotal evidence gathered by CBM—shows is that the situation is still evolving. Most boards report having identified E, S and G targets for the company to achieve, but half of them do not yet have defined timelines to achieve them. They report meeting with management periodically to review progress, with most doing so most commonly on a quarterly basis, but the majority say their boards, at least for now, have delegated the oversight of the E, S and G to a committee.

A few takeaways from the research, breaking down the E, the S and the G:

The E

There’s growing consensus over corporate accountability as it relates to a company’s impact on the environment, but much of what is being talked about surrounds the issue of climate. This singular focus has led many companies to equate the E of ESG to climate alone—and thus pigeonhole it into very specific sectors.

For instance, while 39% of directors overall reported having set environmental targets over a defined timeline, that proportion jumps to 74% among energy companies specifically—and 67% among utility companies. In contrast, only 16% of IT board members said the same, and 47% said they had neither targets nor timelines.

While it’s understandable that some sectors play a bigger role in the environmental discussion, board members in industries that are typically less concerned with climate may still want to get ahead of the conversation—with shareholders, activists or regulators—since E reporting in the U.S. may become a regulatory requirement regardless of sector. Frameworks like the TCFD can help boards think about and communicate the company’s approach in reporting to shareholders and regulatory agencies as they navigate evolving disclosure requirements.

The S

The S component of ESG has certainly gotten its fair share of exposure in recent years, and it remains at the forefront of the agenda today, as companies continue to grapple with all sorts of talent-related issues.

DE&I, of course, stands out as a topic of interest. The concept of diversity isn’t debated; few business leaders question the value of a diverse set of perspectives at the table—however this “diversity” is defined: race, gender, age, background or otherwise. And while there is still progress to be made, years of research from CBM has shown directors remain divided on the idea of regulating this space—or much any space for that matter. But despite the general aversion to governmental overreach among board members, some say they believe regulation has become necessary due to boards and management teams’ inaction to improve their “social game.”

According to our 2022 research, 71% of directors say that their boards have set social-related targets, but only 40% of them have a defined timeline for achieving them. Setting a target without a formal progress-monitoring intent can signal that the goal and matter are not of significance. After all, only 29% of directors said they are making enhancing their S goal-setting and related oversight a top priority.

Yet, that too is evolving. The pandemic has affected companies’ approach to talent, and matters that used to be exclusively within the realm of the HR director have since moved up to the board, in part due to the legal, financial and reputational risks they carry. Our research shows directors are cognizant of the importance of a well-thought-out and adaptable human capital strategy. Boards are deepening their understanding of their workforce and reviewing relevant data, which enables them to work more effectively with management in setting human capital goals, understanding related progress and challenges, and messaging these areas to internal and external stakeholders.

The G

The governance component of ESG encompasses a wide range of issues, mainly because of the very definition of governance, but also because governance, by its nature, is intended to change. Evolution of a company’s governance is critical to foster board effectiveness and support corporate success. However, the types, degree and rate of change of the governance structure, practices and approach necessarily vary and must be aligned to the trajectory and timeline for the business and its strategy.

According to our survey, 74% of directors say their board has governance targets, showing few are being complacent in their approach to governance. A significant proportion of directors said it is important for them to enhance their governance practices (81%) and set governance-related goals (71%). Yet, of those, only 30% and 28% said, respectively, they were top priorities, which may indicate a mis-prioritization of an important area that can be a strategic differentiator to a corporation.

Directors seeking to improve their G practices can work with their boards to identify what governance practices are required to enable high quality, effective and independent oversight of the company. This may require regular, iterative and thorough review and analysis of the strengths, weaknesses and opportunities of the company’s governance and deliberate actions by board members—often in collaboration with their management team—to address weaknesses and avail themselves of the opportunities.

Beyond the work that the board (and/or its governance committee) does to enhance the quality of its governance practices, directors also may want to seek support from key partners on the management team who often have responsibility for effectuating board practices. Nearly all (96%) directors noted that they have discussions with management on progress toward governance objectives—54% of which said these discussions occur quarterly. This certainly has the potential to enhance the board’s agility in making proactive changes to support the company’s strategy.

Where to Next

Governance has become more complex and dynamic. A robust and thoughtful approach to governance indicates the importance the board places on upholding its responsibilities and fiduciary duties in promoting the interests of the company’s stakeholders and its long-term sustainability.

If boards understand how and what E and S factors are integral to their business and strategy, as well as what governance is required to provide effective oversight, then ESG becomes core to successful companies and effective boards with independent, high-quality oversight, rather than this all-encompassing umbrella term that is distracting from the ultimate role of boards and corporate officers.

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