Board oversight key to sustainability performance, say researchers

New study is described as the first to focus on “the black box of board processes”

Boards that demonstrate good risk oversight practices and policies are associated with better environmental and social performance (E&S), according to a joint study by INSEAD and the University of Pennsylvania.

Researchers found that boards with robust risk oversight practices were more likely to incorporate E&S considerations into corporate strategy and executive pay design, resulting in better E&S performance and outcomes – based on sustainability data provided by Thomson Reuters and Truvalue Labs.

However, as the study points out, recent surveys indicate that the majority of directors question whether E&S issues actually represent significant risks and report that corporate boards do not have a strong understanding of the impact of E&S issues on their companies.

The study is billed as first to delve into “the black box of board processes” by measuring the extent of board-level risk reporting, understanding and communication; and examining how these practices are associated with E&S practices. In contrast, existing literature on the topic has predominantly focused on the consequences of “observable board characteristics” such as board size, independence and diversity, the authors said.

To assess board-level practices, researchers were given access to data from Aon’s Risk Maturity Index survey, an annual assessment of enterprise risk management capabilities aimed at high-level risk management and C-suite executives. Researchers assessed responses from a total of 249 global firms across eight years.

Commenting on the study’s findings, the UK’s Institute of Directors told RI: “ESG is increasingly becoming an area of focus for boards, not just because of responsibilities to stakeholders but also due to the knock-on impact on business success and profitability.

“Businesses of all sizes will need to increasingly boost their horizon scanning and embed ESG considerations not just at board level, but across their organisations to ensure effective risk oversight.”

Bonnie Saynay, the Head of Research for ISS ESG, the responsible investment arm of proxy advisor ISS, said: “Effective boards have long included extra-financial matters as part of a thoughtful approach to risk oversight, so these findings and the notable association with superior ESG ratings are not surprising.”

According to Saynay, effective board oversight is also dependent on directors being sufficiently appraised of data and information relevant to decision-making. Studies by ISS ESG have shown that companies which do so score 18% more favourably on ISS ESG ratings than those which do not.