MOHIN: Boards are woefully behind On ESG - What can they do about It today?
While disappointing, it is hardly surprising to discover that most corporate boardrooms lack ESG expertise. Still, the scope to which this is the case is disconcerting, particularly given the challenges facing industry today.
Among many of the observations noted by Professor Tensie Whelan, Director of the NYU Stern Center for Sustainable Business, and her team, the following stand out:
Only 38% of board members think ESG concerns have a financial impact on a
company (PWC 2020)
Just 34% felt they needed more racial/ethnic diversity on their boards (PWC 2020)
As recently as 2019, more than half of board members "complained that investors are giving too much focus to ESG (PWC 2019)."
Then came COVID-19, the Work-from-Home trend, and the business world - indeed, the world itself - has changed overnight.
The situation is starker still when identifying the actual makeup of boards. "CERES reviewed the board credentials of the top 475 of the Fortune 2000 companies and found that most board members do not have demonstrable sustainability credentials (only 17% qualified) and just 13% of boards have robust oversight of ESG issues. Only 10% regularly reviewed relevant sustainability issues at board meetings (CERES 2018)."
Analysis of the Fortune 100's board ESG expertise highlights this problem:
It is not that Boards need members who are solely experts on Environment, Social, or Governance; ESG is a small portion of what’s required to competently run a large enterprise.
However, that the percentage is in the single digits – indeed, around one percent for Environmental – represents a gross failure on the part of business leaders to adequately measure the risks facing their organizations. Risks that are both direct, in the form of environmental jeopardy, and indirect, in the form of access to capital.
Boards can't simply hide from this anymore; investors are waking up, and with them, Access to Capital for organizations. "One study (Khan et al 2016) of 2300 companies found that a portfolio invested in companies that perform well on material ESG issues would have a 6% outperformance on stock price. A portfolio characterized by companies with low performance on both material and immaterial ESG issues would underperform the market by -2.9%."
Yes, these are relatively new and fast emerging challenges. However, a better grasp of ESG issues is a necessary part of one’s fiduciary duty on a Board, and far too many organizations are at best woefully, and at worst recklessly, underprepared. A fact becoming quickly apparent to institutional investors the world over.
With that in mind, here are some immediate steps Boards should consider taking:
Add the ESG topic to an existing committee
If it doesn’t exist already, a good first step is to add the ESG topic to an existing
committee or form a committee to manage it. Intel did the latter after some high-profile ESG resolutions. The committee can be supported by outside ESG advisors to accelerate progress; for example, I am an ESG advisor to the BASF Board. This doesn’t absolve the Board of having members with expertise, but it is a practical (and valuable) first step.
Keep abreast of the landscape
Establishing a stakeholder consultation process will help the board keep abreast of the dynamic ESG landscape. The Board assess this information in light of the company’s strategic plan to understand the risks and opportunities for the company – which is their function. In addition to external stakeholders, the Board should meet with key company leaders, hire ESG consultants, or both.
Board recruiters need to add ESG to their set of key skills and capabilities. As ESG risks and opportunities increase in importance, Boards need directors that can weigh them in the context of the overall corporate strategy. While people with the full breadth of needed skills are more difficult to find, NACD and specialized programs like “competent boards"’ are providing training and certifications to help fill the gap. As ESG roles are elevated in the corporate hierarchy, a larger pool of qualified people will emerge to fill this need.
You can’t fix what you don’t measure. It seems obvious, but it is often overlooked. There are a number of technologies emerging today that will allow Boards to treat their organization's carbon transactions with the same depth of tools and confidence that they currently treat their financial transactions. Better tools are needed that provide real-time and forecasted data analytics. Using AI and machine learning, company leaders will be able to assess opportunities and weaknesses/risks across the organization and empower business unit managers in the field. It is not simply about identifying a carbon footprint … investors/shareholders and regulators, not to mention your customers and employees, will want to see demonstrable progress towards decarbonization.
It's important to mention this problem isn't isolated to corporate boards: not-for-profit and NGO boards face many of these same challenges as they too plan for a world where Carbon Management, and all ESG, is exponentially more relevant.