ESG expertise is not a board priority, but it needs to be.
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Nothing beats an in-person meeting to build trust. When it comes to board engagement, an investor-director meeting lets investors get a sense of the culture of the board, its understanding of the issues and its capacity to oversee management on topics that matter to investors. While investor-director engagement is widespread in the UK, it is less frequent in other markets. To break the silos that separate investors from directors and build a bridge of knowledge and trust on major ESG topics, LeaderXXchange, an organization that advises and promotes diversity and sustainability in governance, leadership and investment, launched The Investor Director Dialogue on Climate-related Risk Management series in 2016 together with Spencer Stuart’s European Board Practice group. Partnering with a leading executive search firm retained to identify board candidates aims to let them hear first-hand the evolving profiles and skills investors expect boards to have and new behaviors they want companies to adopt.
We are constantly reminded of the urgency to act and witness the impact of climate- and sustainability-related events on peoples’ lives and their communities around the world.
For companies that have not already done so, tying company sustainability strategy and boardroom oversight to investor disclosure is a logical step to get investors to focus on the long term. Who better than directors elected by shareholders to ensure that management integrates climate change and sustainability in a company’s long-term strategy and place it on the board’s agenda for discussion and a vote? These developments trigger investor demand for meaningful discussions with board directors on climate change and sustainability, and present a radical change for boards. Of those that authorize directors to engage with investors, discussions rarely include climate change and sustainability: they generally cover executive pay and governance matters.
Though PwC only surveyed directors of companies in the United States, its 2017 Annual Corporate Directors Survey based on views of public company directors from across the United States (886 directors participated in the survey: 84% men and 16% women) illustrates the gap boards need to close to adapt to this new investor paradigm: 42% of the directors surveyed felt that environmental concerns would not impact company strategy over the next three years, while 40% felt that climate change should have no impact at all. The same survey shows that almost 25% of directors think that board members should not meet with shareholders. It also reveals that ESG expertise is not a board priority, at least not in the US. Coupled with directors’ lack of knowledge on these topics (discussed below) it is not surprising that engagement between investors and directors on ESG is not yet common practice. When the awareness-building of our annual Investor-Director Dialogue series showed its limits, an Investor-Director ESG Working Group was formed in 2017. Comprised of six directors and six investors, participating in their personal capacity and operating under Chatham House rule, the Group uses a collaborative and systematic approach to create a roadmap to help boards rapidly adapt to the “new normal”.
Our working group made several key findings and recommendations.
First, board directors lack a common knowledge on climate change, and sustainability issues more broadly. Some directors have extensive knowledge, while a large majority has little knowledge on the impact of climate change and other environmental and social issues on their company’s operations, strategy or business model – to say nothing of risks. Of those that have significant knowledge, it often comes from personal interest. This lack of a common understanding is a serious impediment to effective board oversight on these topics.
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