Center On Executive Compensation

ESG and Board Oversight: An Evolving Process

As sustainability becomes a mainstream issue for companies, Boards are playing a central role in providing oversight of ESG efforts and insight into the integration of ESG issues into business strategy. A recent report by Spencer Stuart and the Diligent Institute found that boards are taking different approaches to how they organize and equip themselves to fulfill this important role. The authors conclude that, despite rising interest in the topic, “boards often lack the experience and skillsets to address these issues head on.”

Based on a survey of 590 corporate directors representing companies around the world, the report noted five key findings:

  • Primary oversight of ESG is split between the full board and a board committee. While 43% of respondents indicated that the full Board has primary oversight of ESG issues, just over 50% reported that oversight was delegated to a board committee. Of those delegating to a board committee, the Nominating and Governance committee was the most common. Interestingly, privately held companies (63%) and non-US companies (50%) were significantly more likely to assign oversight to the full board.

  • Boards are not rushing to revamp their structures and practices to address ESG oversight. Only one-third of respondents indicated that their boards were rethinking ESG structures and practices, due in large part to a lack of clarity about how regulations will evolve in the next few years.

  • Directors are discussing ESG issues much more frequently than they did prior to the COVID-19 pandemic. Before the pandemic, one-fifth of respondents said their boards rarely or never discussed ESG. Since the pandemic began in March 2020, this number has declined to 4%. Those reporting discussing ESG at nearly every meeting has increased from 10% to 20%.

  • Companies are incorporating ESG metrics and goals into a broad array of business processes. A strong majority of directors (71%) reported incorporating ESG into their business strategy, with risk management processed next at 52%. Notably, 46% reported incorporating ESG goals and metrics into executive compensation.

  • Boards are relying on external experts while they work to educate and upskill individual board members on ESG issues. Respondents ranked their level of confidence in their board’s ESG capabilities at 7 on a 10-point scale and indicated that companies are employing a variety of methods to increase their skills in this area. Most common is the use of outside consultants (42%) and the use of training programs for board members (38%).

This report provides useful insight into how boards are working to understand the impact of ESG issues on their organizations. As the authors state in their concluding paragraph, boards are still in the very early stages of addressing this rapidly growing challenge.

Michele A. Carlin

Executive Vice President, HR Policy Association and Center On Executive Compensation

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