In the past few years, the pressure for companies to act on ESG issues has intensified astronomically—and from all sides, from investors and regulators to customers and employees. Now, the SEC’s proposed mandatory climate disclosure for public companies signals a dramatic maturation in ESG matters facing companies and their boards.
Yet, data from our What Directors Think survey shows only 14 percent of the 400 public company board members surveyed listed issues like climate/environmental risk as prominent topics on their agendas this year, and only 12 percent cited the risk of a climate or environmental crisis as a concern.
Anecdotal evidence from the research shows disagreement among directors as to the importance of tackling ESG matters in the boardroom—or at all. Many respondents indicated that with the emergence of these issues, the role of directors was becoming too wide-ranging and muddied. Some added they worried about their ability to oversee and understand ESG issues, even questioning, in some cases, whether the issues were worthy of board-level discussion at all.
“[It’s] the shiny new toy,” commented one director. “Doesn’t have a whole lot to do with creating shareholder value.”
“I personally think many of the ESG items being pushed on corporations are irrelevant and politically motivated and should be ignored,” said another director.
“It’s important but should not dominate boards and management’s agenda,” echoed another board member.
And while that sentiment isn’t uncommon, according to our research, the data also suggests significant polarization with some directors saying ESG is—and should be—a top focus of the board and management team.
“We are VERY focused on all aspects of ESG, none more important than the $5 billion+ we spend annually to move our company to higher, unprecedented levels of renewable energy,” said one director surveyed.
“We are leading our industry in the fight to save the planet,” said another.
“Unless you have been living under a rock for the past three years, it’s hard to imagine that your board has not discussed this topic at every meeting recently,” another director commented.
Complicating matters further is the ongoing debate about the “best practices” for structuring oversight of ESG initiatives. While 46 percent of directors say the senior management team “owns” ESG for their companies, the majority of respondents were split on where the ownership falls—including 18 percent who said “nobody owns ESG” for their companies.
Meanwhile, mounting pressure from external stakeholders—and now the SEC—nevertheless appears to be driving change, particularly in the area of environmental risks and sustainability. Data from the January 2022 Director Confidence Index, also conducted in partnership between Corporate Board Member and the Diligent Institute, shows 58 percent of directors reporting that their board had either already approved or executed on a plan pertaining to their company’s physical risk strategy.
The What Directors Think survey also found an increase in the percentage of directors who indicated their boards are tying (or planning to tie) social and environmental metrics to executive compensation: 39 percent say they are linking environmental targets to compensation, up from 26 percent just a year prior—and 40 percent are doing the same with respect to social considerations.
As scrutiny around how companies establish, communicate and meet ESG goals continues to escalate, directors may want to get ready for potential rule changes by addressing gaps and identifying best practices to allocating oversight of these matters in the boardroom. Corporate Board Member will be offering a live, online forum on the matter on May 5. We hope you’ll join us >>
Until then, you can download a copy of the 2022 What Directors Think report, in which we present how U.S. public company boards are preparing and handling ESG and other new and evolving risks. Read more >>