Boardrooms holding back progress towards ESG leadership, survey finds
A survey of 200 directors and senior managers at large business has revealed that four in 10 don't get the support they would like from their boardrooms in taking a holistic and ambitious approach to environmental, social and governance (ESG) challenges.
Conducted by EY, the Long-Term Value and Corporate Governance Survey polled professionals across 25 sectors and 15 nations in Europe, collecting opinions on ESG-related risks and opportunities
More than four in five of those surveyed (84%) say that their stakeholders are increasingly expecting their firms to be a force for good in terms of environmental and social sustainability. This was a considerable increase in proportion from last year’s survey (66%), adding to a growing body of evidence that Covid-19 has increased awareness of ESG-related issues.
Moreover, most of those surveyed could point to the economic advantages of ESG leadership, with the most commonly cited being the development of new sustainable products and services.
Yet the survey revealed that many professionals feel that board members are hampering progress towards a future in which ESG is properly embedded into corporate strategy. 43% of respondents said there is a lack of commitment from the board to fully integrate ESG factors – up from 28% in last year’s iteration of the survey. And more than half of respondents said there is a “significant” difference of opinion among leadership on how to balance short-term and long-term outcomes.
This, in practice, means many professionals believe their board is not planning properly for the necessary long-term changes in investment, business models and skills to thrive in the coming decades.
“We’ve reached a crossroads in the ESG agenda,” said EY’s area managing partner for the EMEIA region, Julie Teigland.
“The evolution in how businesses and their stakeholders consider this topic has been accelerated by the Covid-19 pandemic, as has industry engagement with COP26 and commitment to support climate goals.
“At the same time, inside companies, executives are coming through who are passionate about making a difference to the planet and people and about building their organizations’ resilience. Breaking the barriers companies face in establishing ESG as part of their corporate strategy is the next step. ESG agendas that unlock long-term value must be tied to governance initiatives that focus on collaboration.”
The report on the survey findings sets out several recommendations for boards looking to approach ESG not as a tick-box exercise but as something that must be embedded in business strategy. For example, it recommends that businesses link executive pay models to the company’s ESG strategy, going beyond one arbitrary link to multiple links with clear metrics and an acknowledgement of whether targets are ambitious in context.
The good news is that 33% of the professionals polled said their business is planning to establish ESG-linked executive pay frameworks this year.
Another recommendation is for businesses to properly scrutinize their current ESG reporting efforts and work with investors to understand what kind of disclosures they want now, and what they will be looking for in the future. The report highlights that climate risk disclosures will be a legal requirement for some firms in the UK from April, stating that businesses in other geographies and sectors should “improve disclosures now, rather than waiting for mandatory reporting standards to be introduced”. It also urges businesses to consider that investors and other stakeholders are likely to ask for more data, in the coming years, on some ESG issues which experience weak reporting now, such as biodiversity and ethical risks.
The third and final key recommendation in the report is considering a change in board operating model and composition – in terms of diversity and inclusion, skills on the board and vested interests. On the operating model, the report highlights the benefits of making ESG the responsibility of the board as a whole, rather than one member. An alternative is the creation of a properly supported committee.
The report comes against a backdrop of discussions around whether current approaches to ESG are sufficient, or whether claims and disclosures are merely greenwashing or purpose washing. One 2021 study, covering 4,600 investors, found that 90% of respondents said they find it hard to trust a business’s ESG claims at face value. There have since been several headlines concerning high ESG ratings for – or increased ESG investments in – sectors with a history of poor environmental performance, such as oil and gas and fast fashion.
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