Board members at companies across geographies and industries understand that competitive advantage increasingly demands sustainability. And that is rapidly pushing environmental, social, and governance (ESG) issues higher on board agendas.
How well are boards positioned to provide oversight of ESG? BCG and the INSEAD Corporate Governance Centre have teamed up on a multiyear initiative, including regular pulse check surveys and interviews, to help answer that question. We will assess how boards are engaging with ESG issues today and to what extent existing board practices can deal with these complex and systemic challenges. For this inaugural report, we have interviewed more than 50 directors who have at least 10 years’ experience as a board member and who serve on more than 150 corporate boards combined. Our survey captured insights from 122 respondents who have an average of 7 years of experience as a board member and who are affiliated with 2 boards on average.
Our initial survey and interviews reveal a number of insights:
- Roughly 70% of directors reported that they are only moderately or not at all effective at integrating ESG into company strategy and governance.
- Although directors think their boards should devote more time to strategic reflection when it comes to ESG issues, more than half (53%) said they are not effective at doing that.
- Boards clearly see addressing climate change as a top priority; still, among companies with a net-zero commitment, only 55% of directors reported that their organizations have prepared and published a plan for hitting that target.
- A full 43% of directors cited the ability of their companies to execute as one of the biggest threats to delivering on ESG goals.
Certainly, there is no simple solution for boards when it comes to understanding, overseeing, and engaging with management on ESG issues. The topics that are material will vary by industry and are themselves dynamic by nature. And a board’s actions will also depend in part on the company’s maturity level with respect to ESG management.
But there is no question that directors must up their game in this area. The capacity and effectiveness of the board when it comes to ESG is vitally important for companies aiming to improve the sustainability of their operations. After all, while corporate management is under constant pressure to deliver strong financial performance over the short and medium term, board members play a critical role in steering companies over the long term. And the ESG issues confronting companies today—including climate, income inequality, diversity, equity, and inclusion, and geopolitical tensions, most recently the war in Ukraine—will require sustained, long-term action. Consequently, such matters sit squarely in the purview of the board.
To fully meet the new demands stemming from ESG, boards must pay attention to three critical areas:
- Board Approach to ESG Governance. Boards must make critical decisions about how to structure the ESG work and oversight they do. The most common approach (31%) for anchoring ESG into board governance is assigning oversight of these issues to the full board. In such cases, ESG issues can be discussed or worked on within committees, but the decisions related to these matters are made by the full board. Although this approach is prevalent, the risk is that ESG issues do not get sufficient time and attention given all the demands on the full board. The second most common structure (20%) is to have the issues governed by a dedicated ESG committee of the board, while the third most common approach (15%) is to have one member of the board—with no separate committee—lead on ESG issues. The right structure will depend on factors such as the composition and ESG knowledge base of the board, its existing governance practices, and the maturity of both the company and the board when it comes to addressing ESG topics.
- Board Knowledge. Adding ESG education as part of regular board trainings can help establish a solid baseline of understanding among directors. However, boards should push for greater competency, systematically assessing what expertise they need in order to be effective at oversight of ESG issues. Certainly, the list of potential ESG topics is long and the materiality of such issues can change over time, making it impossible for boards to have experts on every relevant topic among their current directors. Consequently, boards must determine whether they need an expert on a specific ESG topic to be on the board—or if they should instead solve the knowledge gap by leveraging other experts.
- Board Agendas. Our survey revealed that 91% of directors believe that when it comes to aligning the company’s long-term business strategy with ESG challenges, the board should focus more on improving strategic reflection than on monitoring operations. However, less than half of that 91% think they are effective at driving that strategic reflection. But how do boards ensure they have insight on the forces—including those related to ESG—that will be shaping the world in the years and decades ahead? Scenario planning can be a powerful tool in gaining that requisite foresight, enabling the board to identify complex, long-term risks.
Boards that take thoughtful action in all three areas can expand and enhance their focus on ESG. In doing so, they ultimately help the companies they oversee build sustainable business models—and sustained value creation.