ESG Engagement Wins More Boards' Buy-In, But Lags in U.S.

Boards are facing increasing pressure from stakeholders to engage on ESG (environmental, social and governance) challenges as a matter of long-term viability. But despite all this renewed focus, a new report finds that while 46 percent of boards globally discuss sustainability issues annually, North American boards of directors lag behind their counterparts in Europe and other regions in how often these issues land on the board agenda.

The Environmental Sustainability Governance Survey from the think tank Diligent Institute surveyed 447 respondents from directors, non-executive directions, executive directors and other c-suite executives across the globe. Diligent, which works with boards across 14,000 organizations in 90 countries, found that conversations and deliberations on sustainability in the boardroom will only increase: 43 percent of boards expect this discussion to occur quarterly, or even during every meeting. 

Societal impact is also becoming more important than investor pressure and profit margins – 40 percent of corporate directors said societal impact was the top reason for prioritizing environmental sustainability. Only 9 percent of the directors who took the survey found that investor pressure was a key motivator.

This is surprising, given rising investor demand for companies to focus on ESG issues, as frequently reported on 3p. The number rises slightly (12 percent) for public company directors, but even then, it pales in comparison to all of the other priorities that drive board action on this topic, Diligent found. It is possible, according to Diligent, that investors are not applying as much real pressure in this area as much as the commentary would suggest.

Profit and societal impact: win-win

For Brian Stafford, CEO of Diligent, this is actually an encouraging sign.

“It doesn’t have to be profit or societal impact; it can actually be both. It was refreshing to see that more than 40 percent of board members see societal impact as the top reason to prioritize these issues,” Stafford told TriplePundit. “What investors focus on might differ one year to the next. I think there’s comfort to be had in the number of board members who will make decisions based on what is good for society.”

Certainly, some investors are applying real pressure to companies on sustainability issues, as 3p reported last week with Arjuna Capital’s move to pressure top tech companies and banks to reveal their gender pay gaps.

Shareholders raise a big stick

Leslie Hosking, who spent fifteen years as a director and seven years as the chair of Australia’s largest cement manufacturing company, Adelaide Brighton, and ten years as an independent director at AGL Energy Limited, an Australian public electric and gas company, said in the survey that he has noticed investors “using a big stick to force environmental change” in Australia.

He noted “proxy advisory focus on environmental issues has been heightened in Australia, and our superannuation fund managers are very much focusing on ESG to the extent that they’re contemplating voting against reappointment or remuneration at the AGM if the company doesn’t perform well in ESG.”

U.S. boards are lagging behind

Pressure on boards, from investors or other stakeholders, or simply the board’s own recognition of the importance of environmental sustainability, isn’t evenly distributed across regions. The survey concluded that boards in North America lag behind those in Australia and New Zealand and Europe. For example, only 29 percent of U.S. boards formally oversee environmental and sustainability issues, compared to 55 percent globally, and 65 percent of U.S. boards had no established policies or practices around those issues, compared to 39 percent globally. Only one in four boards globally has a formal mandate for these issues (and that ratio drops to 11 percent in the U.S.).

 “Europe in general could be viewed as slightly further ahead the U.S. in governance generally and in ESG specifically,” Stafford told TriplePundit. “In Europe, we see, for instance, more quotas on the representation of women at board level, and larger pension funds, as in Norway or Sweden, which are huge proponents of sustainability.”

Stafford believes that U.S. boards will catch up “as long as they think about being stewards of their business for the next fifteen to twenty years.”

Movement towards long-termism

He noted a movement away from quarterly guidance towards the long-termism that sustainability requires. Here again, Europe, has been ahead, with one example being Unilever’s former CEO Paul Polman abandoning quarterly reporting in 2009, as 3p reported. In 2017, close to 40 percent of FTSE 100 companies in the United Kingdom reported no longer issuing quarterly reports to shareholders.

While he noted room for improvement, Stafford said, “We’re excited that forty percent of boards are focused on sustainability and ESG and not just because investors are asking about it but because they think it is essential for a company to have a positive societal impact. My takeaway is that there is good momentum in the boardroom, better than I might have thought, to push some of the ESG issues that investors are interested in.”

Power to influence change

Certainly, boards hold a lot of power to influence the winds of change. Fortune 500 boards oversee companies that together account for two-thirds of the U.S. GDP, with $12.8 trillion in revenues, $1.0 trillion in profits, $21.6 trillion in market value and 28.2 million employees worldwide. 

And while Diligent’s survey might not have found boards acknowledging the investor pressure, it’s there. BlackRock Inc., the world’s largest asset manager overseeing $5.1 trillion, told portfolio companies in the energy and real estate sectors in 2017 that it expects a company's "board to have demonstrable fluency in how climate risk affects the business" if these organizations want to count on BlackRock’s continued investment.

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