It would be difficult to overstate the level of stakeholder interest in company ESG practices and performance. The topic has largely dominated much of the discourse around corporate governance in the past year, with near-continuous market-driven and regulatory developments accelerating the pace of change and shaping stakeholder expectations.
In a recent survey conducted in partnership with the EY Center for Board Matter, Corporate Board Member found boards fully willing to comply with shareholder requests to report on their company’s sustainability initiatives in the context of their respective businesses but struggling to understand precisely what the expectations are—what do shareholders want to see, and how do they want to see it.
Directors participating in the research rated their understanding of shareholders’ interest in governance issues (the “G” in ESG) a 4.1 out of 5 (on a scale where 1 = low understanding and 5 = great understanding)—but the S and the E a mere 3.4/5.
What investors have stressed most is that they want ESG disclosures to focus on what is material and to align to external frameworks. But without a standardized framework, it can be challenging for boards and leadership teams to feel confident in the depth of their reporting on these matters. In fact, disclosures are often so fragmented and company-specific that investors say they can’t use them as benchmarks in their performance analysis.
Not surprising, investors seek a baseline level of standardized data to support relevance, objectivity and comparability. Nearly all the investors contacted by EY researchers in a recent investor outreach cited the Sustainability Accounting Standards Board (SASB) as a decision-useful framework. But some directors argue the topic of ESG is too broad and complex for standardization.
“How do you have a standard for the S side of that?” asks Mike Gianoni, president, CEO and executive director at Blackbaud and chairman of the board at Teradata, who says that because every company starts from a different place, investors should evaluate the company’s improvement across all categories over time—rather than compare companies against one another. “Our company is half male, half female, so our big focus on diversity is all of the underrepresented groups. And for gender diversity, are we helping our female associates get higher and higher in our chart? If in the next three years, we go from 50 percent female to 70 percent, but we do not improve the total percentage of the other underrepresented groups, I think we failed. Everyone starts from a different place, so to have those standards, it’s really tough to do.”
According to the survey, the majority of boards are using company-specific metrics/frameworks to report their ESG information externally.
With stakeholders increasingly relying on ESG data to make informed decisions, it has become paramount that companies develop robust governance policies regarding this information. Boards and their committees can play a crucial role here in deepening the focus and directing appropriate attention to various environmental and social areas—and how these matters are integrated into strategy, talent and risk management.
Data from the survey shows that some companies are starting to expand the mandates of the nominating and governance committee and the compensation committee to include environmental and social oversight responsibilities. For example, 20 percent of directors say oversight of climate-related risks and opportunities primarily resides with the nominating and governance committee. Similarly, 27 percent say workforce DEI oversight responsibilities primarily reside with the compensation committee.
“I think one of the things that’s become more standard is that comp committees and companies feel like they need to at least look at the subject,” says Robin Ferracone, CEO of Farient Advisors and a member of the compensation committee at Trupanion. “So, even if they decide not to put stakeholder incentive measure into the incentive system, they’ve at least looked at it, considered it, understand the pros and cons of it, and they move on with that knowledge. I’m seeing a lot more people taking it seriously.”
One thing’s for certain: This context has created a steep learning curve for directors, executives, investors and other stakeholders. But there are opportunities for boards to continue to deepen their knowledge and enhance their oversight of ESG to help guide their companies through these dynamic, disruptive times. In a special report for public company boards, we highlight four steps public company boards can take to strengthen their effectiveness and meet stakeholder expectations. Download your complimentary copy >>
Steve Klemash, Americas Leader for EY Center for Board Matter, will also be discussing the research and strategies boards can put in place in a panel at our upcoming Boardroom Summit. Find out more about the event and how you can attend, either in person or virtually.