Facing significant pressure to increase their oversight of ESG issues including climate and diversity, directors around the world say they’re concerned that their companies will not be able to execute on their ESG ambitions, according to a new report from Boston Consulting Group (BCG) and the INSEAD Corporate Governance Centre.
The firms’ new report, Directors Can Up Their Game on Environmental, Social and Governance Issues: The BCG-INSEAD Board ESG Pulse Check, also found that in addition to board concern about the overall ability of companies to execute, roughly 70 percent of directors reported they are only moderately—or not at all—effective at integrating ESG into company strategy and governance
“Directors have significant skepticism about whether companies they oversee can deliver on ambitious ESG targets,” said David Young, a BCG managing director and senior partner who coauthored the report, in a news release. “That makes it more critical than ever that boards enhance their governance of ESG issues, focusing on the matters that are truly material and connected to advantage and value creation for the company.”
A capabilities gap
Directors identify the board’s lack of knowledge, data, and capabilities as the top barrier to providing effective ESG oversight. And less than half of the directors surveyed (47 percent) believe their board has sufficient ESG competence and experience to challenge management on ESG plans and exercise board oversight on execution. Boards are taking action to address those gaps: the most common approaches to supplementing board knowledge are regular updates from an internal executive with responsibility for ESG (48 percent) and intermittent updates from external experts (40 percent).
The survey also revealed challenges related to how boards are using the time they devote to ESG matters. When it comes to aligning a company’s long-term business strategy with ESG challenges, 9 percent of directors said that boards should focus more on improving strategic reflection than on monitoring operations. Still, less than half of that 91 percent felt they are effective at driving such strategic reflection.
“It is critical for boards to move from a compliance mindset when it comes to ESG to bringing a true strategic lens to those issues,” said Ron Soonieus, a senior BCG advisor, director in residence at the INSEAD Corporate Governance Centre, and a coauthor of the report, in the release. “However, many have not yet remade the board agenda to make time for that critical strategic thinking.”
Climate is the top ESG issue
Climate change is among the top three ESG issues in terms of expected financial impact for all eight industries captured in the survey except one (health care) and it holds the number one slot for consumer, industrial goods, energy, and utilities.
Yet among companies that have set a net-zero commitment, only 55 percent of directors reported that their company has prepared and published a plan for hitting that target. And an even smaller share (43 percent) said their company has published financial statements accounting for the implications of climate change.
“More and more companies are making net zero commitments,” said Sonia Tatar, executive director of the INSEAD Corporate Governance Centre and a coauthor of the report, in the report. “And directors have a critical part to play in ensuring those pledges come with concrete plans and execution as they steward businesses for a sustainable economic performance that drives greater good for society and the environment.”