The ESG expertise gap on boards

Our key takeaway: Having ESG expertise on boards is becoming increasingly imperative. New regulations in Europe, North America, and beyond are requiring companies to disclose more robust information on their ESG practices, with expectations for board members to play a guiding role. It is harder than ever to argue that fiduciary duty is confined to traditional indicators of business success. This is where the expertise of boards comes in. But not all ESG expertise is built the same: Tensie Whelan’s research finds that more and more board members are gaining credentials in environmental and governance topics while credentials in social topics are stagnating. Beyond this, particular weaknesses in board expertise are shown in climate change and worker welfare, suggesting a need for board members to gain an understanding of these areas and for nominating committees to actively seek out individuals with these areas of expertise. There are five steps that boards can take to build the right credentials to meet the growing regulatory and practical challenges now posed to businesses: (1) Having the right credentials and experience to tackle the material issues for their sector, whether through bringing on new board members or receiving training; (2) Understanding both the upside opportunities of sustainability practices and the downside risks of business as usual; (3) Having a stand-alone sustainability or ESG committee; (4) Including relevant topics in other board committees, like nominating, audit/risk and compensation; and (5) Using return on sustainability investment (ROSI) KPIs in addition to focusing on reporting and compliance. 

Tensie Whelan published Research: Boards Still Have an ESG Expertise Gap — But They’re Improving (April 2024) in the Harvard Business Review:

• Expertise in the ‘E’ and ‘G’ is growing, but ’S’ is remaining flat: In 2018, research by the NYU Stern Center for Sustainable Business found that U.S. boards of directors for public companies were not “fit for purpose” to adequately oversee company performance on ESG. Few board directors had the background and expertise then, but there has been some progress  over the last five years. Between 2018 and 2023, there was an increase in the presence of ESG credentials among board members of Fortune 100 companies. In 2018, 29% of the 1,188 board members held one or more relevant ESG credentials. By 2023, this percentage had risen to 43% among the 1,161 board members currently serving on Fortune 100 boards. Particular growth came from environmental credentials, which nearly doubled (to 153 members), and governance credentials, which nearly tripled (to 180 members). However, social credentials—which was the best-represented category in 2018—has remained almost the same (253 members in 2023). There has in parallel been growth in the number of boards with sustainability or ESG committees—from 22 in 2018 to 89 in 2023.
  

• Particular weaknesses in climate and worker welfare expertise: The research demonstrated “major weaknesses” in certain areas, notably climate change expertise and worker welfare expertise. From 2018 to 2023, board members with climate credentials increased from 3 to 22; by contrast, board members with cybersecurity credentials increased from 8 to 50. The author believes that, while both areas “represent material and systemic risks and opportunities, yet climate is not being considered as seriously as cybersecurity at the board level.” In terms of social credentials, diversity credentials have increased “substantially” from 60 to 108, only 7 board members had credentials in labour relations—suggesting potential gaps in knowledge of human rights of workers.
  

• Steps to improve ESG governance: The research highlights five areas that can help boards strengthen their ESG governance. First, the board needs to have the right credentials and training to understand the most material issues facing their particular sector. Second, the board must understand both “upside opportunities and downside risks” of ESG issues. This means understanding both the business opportunities of attention to sustainability and the potential risks and costs of “business as usual.” Third, having a sustainability or ESG committee is essential: this can help carve out the mandate and time for the board to focus on these issues. Fourth, other committees like nominating, audit/risk and compensation should also be responsible for relevant ESG topics. For example, nominating committees could focus on recruiting board members with ESG expertise and bringing training on core ESG issues. Likewise, the compensation committee could integrate sustainability KPIs into compensation decisions, and the audit/risk committees could provide quality assurance of ESG reporting data. Finally, KPIs for return on sustainability investment (ROSI) should be used alongside reporting and compliance. According to research, ESG reporting metrics “measure whether a company has a policy, but not the outcomes of the policy.” At the same time, research into ROSI shows that “sustainability practices can drive operational efficiency, sales and marketing, risk mitigation, employee productivity and retention, supplier resiliency, and other benefits”—making this a key area of focus for board members.