Although boardrooms have increased their focus on sustainability, knowledge gaps remain, revealed a new study.
There is a gap between intentions and prioritisation of the environmental, social and governance (ESG) agenda, according to a new global survey of board directors published by Heidrick & Struggles, Boston Consulting Group (BCG), and the INSEAD Corporate Governance Centre.
The global survey, entitled The Role of the Board in the Sustainability Era 2023, examines the perceptions of boards towards a full spectrum of ESG issues, as well as how the drive for sustainability is influencing and reorganising the efforts of boards. The findings reveal how boards are adapting their own composition, governance, and process considerations with varying degrees of success to better meet their organisations’ ambitions and stakeholders’ expectations for sustainability.
SUSTAINABILITY ISSUES
The report found that despite greater societal expectations on businesses in terms of ESG, most boards do not feel financial pressure to act on sustainability issues. In fact, almost seven out of 10 (68%) of those surveyed said that sustainability considerations have ‘no effect’ or a ‘slight effect’ on financial performance today. However, 52% said they are acting on sustainability because it’s the ‘right thing to do’, with a similar number (51%) citing legislative requirements.
This tension between the importance of sustainability, and the time and effort required to consistently give it the attention needed to prioritize it is a persistent theme, according to the report. Although a significant majority (79%) of board members surveyed said their board had a very clear understanding of the strategic opportunities and risks sustainability presents, only 29% completely agreed they had sufficient knowledge to effectively challenge management on sustainability plans and ambitions and exercise oversight on their execution.
The survey highlights that these challenges are a global phenomenon, with very few differences evident across regions and sectors, despite very different traditions of corporate governance and responsibility. “The job of the board today is more challenging than in recent history. Against the backdrop of economic uncertainty, rising social activism, and critical climate targets that are slipping from reach, boards require a new breadth of expertise that far extends beyond the traditional, operational, and financial health of a business,” stated Alice Breeden, Co-Leader of the European CEO & Board at Heidrick & Struggles. “If progress on sustainability is to improve, it is clear that further education, broader director diversity, and greater prioritisation of ESG in the boardroom must be standardised to meet the challenges of the current environment.”
STAKEHOLDER PRESSURE FOR ACTION
Directors cited increasing expectations from capital providers including investors and the importance of sustainability in attracting and retaining talent as major motivators of action. A smaller share – about one-quarter –see a longer-term financial risk from not integrating sustainability into the business. Around 10% expect a negative impact on medium to long term financial results and 13% see a threat to survival in the medium to long term.
“Today, organisations, including their boards, are completely occupied with the upcoming legislative and reporting requirements. Action on sustainability is mostly driven by stakeholder pressure. This triggers risk averse and defensive behaviour, leading to organisations that only do the bare minimum,” said Ron Soonieus, a Senior Advisor at BCG, a Director in Residence at INSEAD, and co-author of the report.
“While the new rules and regulations serve a clear purpose, compliance does not guarantee the long-term success of the company. Boards struggle to see that, and a fair share believe that if they comply, sustainability is covered. Only 34% of respondents say they have a clear understanding of how long-term trends impact the future value of the company. Boards have a key role to play in ensuring sufficient weight is put on making sustainability an integral part of the long-term strategy, and to start seeing it as a source of competitive advantage.”
GAPS REMAIN DESPITE INCREASED FOCUS ON SUSTAINABILITY
There has been an undeniable shift in the expectations for the role of business in society which has created new challenges and competency requirements for board members. These heightened expectations have added to boards’ traditional responsibilities to oversee finances, manage risk, and select company leadership; all at a time when boards must rapidly upskill on the implications of AI, new geopolitical risk, and a changing world of working models.
More than two-thirds of respondents (69%) reported that boards’ expanding remit is increasing time requirements for directors. The share was higher for directors in the energy (77%) and finance and insurance (74%) sectors, two sectors in which balancing the world’s need for more energy with climate change is creating significant new risks and opportunities.
“Sustainability has become part of boards’ fiduciary duty and steadily gaining priority on boards’ agenda as its importance continues to permeate across the fabric of business and society,” noted Sonia Tatar, Executive Director of the INSEAD Corporate Governance Centre. “More than ever, the weighted responsibility on boards is pointing to the imperative for targeted education to bridge the knowledge gaps which are fundamental in driving governance transformation starting from non-conventional stewardship from the top to collective leadership across the various stakeholders and within the organisational spectrum that deliver sustainable impact and actions.”
SUSTAINABILITY EXPERIENCE
A combined 48% of respondents confirmed that knowledge or experience with sustainability is either ‘not at all’ or just ‘slightly’ part of the competency matrix for their board selection. Perhaps surprisingly, this rises to 24% of board members stating that sustainability experience is ‘not at all’ part of the assessment criteria for CEO hires.
Directors see room for improvement when it comes to integrating sustainability into decision-making across the whole business. 66% said that sustainability considerations should be fully integrated into business strategy. But just 38% said that that is the case today.
When asked what was preventing them from spending meaningful time on sustainability planning, more than 72% cited the need to devote time to non-sustainability-related, high-priority topics. While challenges remain with dedicating time and resources to prioritizing sustainability as a key focus area, leaders highlighted the value and importance of integrating sustainability into other strategic considerations as essential to driving greater sustainability outcomes.
GLOBAL REPORT
The Heidrick & Struggles, BCG and INSEAD Corporate Governance Centre survey captured insights from 879 respondents from more than 25 countries and 19 industries. A series of roundtables and discussions were also conducted with around 200 directors in cities around the world, alongside the survey.
The survey respondents, conducted in early 2023, have extensive board experience. Two thirds are board members had a tenure of at least six years, and one-third have served in their roles for more than 10 years. Click here to download the report.
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