With regulators in the U.S. and around the world looking hard at the possibility of imposing sustainability disclosure requirements, and investors and other stakeholders continuing to focus on sustainability in their engagements with companies—according to a PwC survey, “ESG is the topic investors most want to discuss during engagements with shareholders”—one question that arises is just what corporate boards are doing to deal with sustainability—what are their attitudes and commitments? Are they even prepared to address sustainability issues? In an article reporting on a 2022 survey by consulting firm Russell Reynolds (published on the Harvard Law School Forum on Corporate Governance), the firm tried to answer these questions. One conclusion from the survey: “Rather than having a sole ‘ESG director’ or ‘sustainability director,’ expectations are increasing for the entire board to bring a minimum level of sustainability awareness—if not expertise—to their work, using it to identify both risks and new opportunities for value creation.”
In the survey, RR received responses from over 1,100 directors in 41 countries; 44% of respondents’ companies had annual revenue over $1 billion. The survey show that 73% of boards discussed sustainability strategy at least once each year, and that included about 5% that discussed it at every meeting and between 15% and 20% that discussed it at almost every meeting. Under 10% said that they did not review sustainability strategy. Sustainability disclosure was discussed at least annually by about the same percentage of directors, including almost 15% that discussed it at every meeting or almost every meeting.
When asked to characterize their boards’ attitudes toward sustainability, 65% responded that they had a “genuine commitment to make real progress and a willingness to invest time and money to get there.” Seven percent responded that there is “a great deal of talk, but a lack of willingness to take responsibility,” and only 5% said their boards were “more focused on appearing to act on sustainability than taking real action.” Fourteen percent said that it was not a board issue and 1% were “openly dismissive of environmental issues.”
RR contends that board commitment is “critical to meeting evolving sustainability disclosure and performance requirements,” especially commitments to achieve Net Zero targets. Only 32% of respondents said that their boards had even set a Net Zero target date and only 27% expected to be able to achieve that target; that means that 68% had not set a target. However, 20% expected to set a target within the next six months.
As noted above, RR suggests that investors tend to prefer that all directors have “a minimum level of sustainability awareness” across the board, rather than relying on a single director with technical ESG expertise. Not surprisingly, only 6% of respondents said that all directors on their boards “have the skills and experiences necessary to address the sustainability issues” in their businesses. Still, directors were apparently confident that, collectively, their boards had adequate sustainability expertise—a view not quite shared by boards in some other surveys (see the SideBar below). In the survey, 58% of respondents said that a majority of the directors on their boards did have the necessary skills and experience. But RR questioned whether that relatively high percentage was “perception or reality. Corporate governance analysts have reported a lower-than-desired level of directors with sustainability qualifications or relevant experience on major boards today. But, to the extent that skill or capability gap exists, it may be closing: Our recent research with nominations and governance committee chairs found that 63% say sustainability is now a critical leadership competency for prospective directors, and the majority surveyed said that the competency is more important now than ever before.”
RR advocates ten actions to help boards enhance their engagement with and oversight of sustainability:
- “Proactively engage with external stakeholders about sustainability to ensure you understand their priorities and concerns
- Embed sustainability into all discussions with the CEO and executive team
- Establish a purpose-driven culture at all levels that looks at issues through a sustainability lens
- Educate directors on sustainability
- Apply a sustainability lens to corporate strategy decision-making
- Identify key material factors based on the business, setting goals and establishing clear metrics for tracking progress toward them
- Structure the board to engage meaningfully on sustainability
- Change compensation models to account for sustainability targets
- Prioritize a sustainability mindset when hiring directors
- Prioritize a sustainability mindset when hiring CEOs”