Calling all company boards: where are your ESG experts?

Anna Triponel

January 11, 2021

Responsible corporate boards seek to understand, measure and address material risks to the business, relying on the expertise of their members. But a new paper from the NYU Stern Center for Sustainable Business asks why this isn’t the case for environmental, social and governance (ESG) issues, which can pose significant material risks to a business. The big reason? Corporate boards lack people with practical expertise in ESG. Without that, the paper argues, companies will not be adequately prepared to meet the demands of shareholders and stakeholders—and the complex challenges and opportunities of our world today.

New research from the NYU Stern Center for Sustainable Business finds that most board directors at U.S. companies lack expertise on ESG issues, causing them to miss the material impacts of these issues on the business. Tensie Whelan, lead author of the study and Director of the Center for Sustainable Business, underscores that the current approach is lacking and is posing major risks to business (not to mention risks to people and planet). The researchers “analyzed the individual credentials of the 1188 Fortune 100 board directors based on Bloomberg and company bios in 2019” to come to the conclusion that ESG expertise is lacking, but that this “cavalier approach” is slowly changing.

Below are a few key takeaways from the study.

Key takeaways

  • The study reports that, according to PwC’s Annual Corporate Directors Survey, “only 38% of board members think ESG issues have a financial impact on the company.” What’s more, “[s]ome 56% of directors complain that investors are giving too much focus to ESG–nearly twice those with that viewpoint in 2018” and only 34% believe that there should be more racial and ethnic diversity on their boards.
  • 2020 may be a turning point for this attitude: “as societies have been slammed with the health and economic impacts of COVID and the mass protests associated with racism, corporate boards are rethinking this cavalier approach. Six in 10 directors now believe that environmental/sustainability expertise is important for a board (PWC 2020).”
  • Further, more and more corporate boards are disclosing on issues of key importance to investors, like climate change, energy efficiency and water, while others are placing more focus on board diversity.
  • Yet, the study points out that very few board directors have the relevant expertise in the ESG topics now rising in importance for companies, their shareholders and their stakeholders: 29% of (1188) directors had relevant ESG credentials.” Most of this experience is “under the ‘S’; 21% of board members have relevant S experience, against 6% each for E and G,” and the majority of that 21% have experience “clustered around health and diversity issues.”
  • The below table summarises the distribution of ESG experience on boards for the companies sampled:

Source: Tensie Whelan et al., NYU Stern Center for Sustainable Business, U.S. Corporate Boards Suffer From Inadequate Expertise in Financially Material ESG Matters (January 2021)

  • The authors highlight two examples of what this spectrum of expertise looks like in practice. On one hand, “Dow Chemical stands out as a company that has aligned its board member expertise with its ESG exposure” by including on its board of directors members with deep knowledge and practical experience in environmental topics (e.g. someone from the Climate Action partnership, a former U.S. Environmental Protection Agency Administrator and the Chair of the World Business Council for Sustainable Development).
  • On the opposite end is Amazon, which faces material governance risks in cybersecurity and privacy issues; social risks in labor practices, employee health and safety, retention and diversity; and environmental risks in packaging waste, and climate and energy through shipping. However, according to the study, it lacks board members in the majority of these topics, with the exception of a few individuals. Likewise, healthcare company McKesson “has no board members with any relevant ESG credentials on their board” despite having been sued by state governments in relation to the opioid crisis and despite its other material risks relating to access to medicine, clinical trial ethics, energy use, water and more.
  • The study also examines the particular issue of diversity on boards, in light of ongoing movements for racial justice. The authors suggest that companies continue to fall short on racial issues (even those who issued statements in support of “Black Lives Matter” and other social equality movements) because they lack the diverse board members and leadership teams who can push past existing blind spots.

The key question: “So what is a Board to do?”

In answer to this question, the authors point to a few recommendations for companies and their boards:

  • “Understand the material ESG issues for the company, today and tomorrow” and “[d]iversify the board to include people with expertise in those material issues.” Including those with a “strategic understanding of the issues” will help the board ask the right questions and identify potential risks.
  • “Make sure that the board understands the perspective of critical stakeholders such as workers, civil society and long-term investors on those ESG issues. Ensure their concerns are built into the culture and business strategy of the company, both in terms of risks to be managed as well as opportunities to be developed.”
  • “In addition, board members should ensure that the company has a sustainability strategy that is embedded in the company’s business strategy and that KPIs are developed that are aligned with key reporting standards, that are built into work plans and compensation, and that are third-party assured.”
  • “Board members should also ask the executive team to report on the financial impact of their ESG investments in a comprehensive way, including intangible and tangible benefits such as risk avoidance, employee retention and operational efficiency as per models such as the NYU Stern Center for Sustainable Business Return on Sustainability Investment (ROSI™).”

Read the full paper here: Tensie Whelan et al., NYU Stern Center for Sustainable Business, U.S. Corporate Boards Suffer From Inadequate Expertise in Financially Material ESG Matters (January 2021)

“To be competitive, to manage risk, to ensure good financial performance and to meet societal expectations, directors should reflect this new reality in the board culture, their own expertise and through proactive engagement with management on its sustainability strategy and with key stakeholders. The Business Roundtable Statement of Corporate Purpose needs to be backed up by boards who understand their responsibilities. Bringing a more considered diversity of board member experience to ESG and stakeholder management will be critical to the success of the 21st century corporation.”                      

Tensie Whelan, Jamie Friedland and Ellen Knuti, NYU Stern Center for Sustainable Business, U.S. Corporate Boards Suffer From Inadequate Expertise in Financially Material ESG Matters (January 2021)

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