What do company board directors really think about investor ESG concerns?

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.

Our working group found that few companies provide board members with training on climate change and other sustainability topics, or encourage directors to get it outside of the company. There are many market offerings such as conferences, online MOOC courses or university programs, for example. Many companies could leverage their in-house expertise and provide directors with customized training programs on critical ESG topics for their company. This offers the added advantage to have board members hear from a wider group of executives, better assess the company’s commitment and accelerate their ability to understand the impact of ESG topics on strategy, risk management and operations as well as collectively improve management oversight.
The second major finding was that while sustainability appears more frequently on the agenda of certain board committees it is rarely on the agenda of the full board.
Some boards don’t see ESG as critical to the business and its strategy; it’s a nice to have but not a need to have according to them. Others don’t understand that these issues matter to investors. Environmental and social issues, in particular, were traditionally on the radar screen of SRI investors, but not mainstream investors. The shift to the mainstream is more recent. Moreover, as mentioned earlier, discussions that are taking place between directors and investors generally cover executive pay and governance matters and rarely climate change and sustainability more broadly.
ESG topics are more and more often discussed at the committee level such as CSR (Corporate Social Responsibility), risk and compensation that can dive deeply into these topics. However, putting them on the board’s agenda demonstrates their strategic importance to management.
Third: investors do not find traditional CSR roadshows very effective. The group observed companies may have different expectations of the roadshow than investors and recommended that these meetings’ objectives be clearly defined prior to the event so expectations are aligned.If a company would like investors to learn more about a specific ESG issue (e.g. a complex and technical topic such as shale gas and how company is managing risks around that specific issue) than a thematic session or even an on-site visit could be very effective. If they want mainstream investors to learn more about how ESG factors are integrated in a company’s strategy and business model and how it is managing its material ESG risks, then a CEO/CFO presentation is more effective than a presentation by the head of CSR. Moreover, if the company believes they have a clear competitive advantage in a specific ESG area, they need to explain it and try to quantify it. Investors would applaud more engagement opportunities with boards. The willingness of boards to engage with investors is regarded by investors as a very positive signal and a proxy for board effectiveness and strong board culture. It shows that boards operate in an open and transparent way and take their oversight role seriously.
Fourth: CFO leadership in sustainability is crucial for long term value creation. We found that CEOs and heads of sustainability most frequently raised climate change and other sustainability matters with the board, while CFOs and investor relations discussed it least. This suggests that climate change and sustainability in general have yet to make their way to the financial gatekeepers of a company’s performance, suggesting that these extra-financial topics are not fully perceived as value drivers with a financial impact. Instead, sustainability risks being credited a marketing exercise. Taking into account the increased importance investors place on integrated thinking and reporting by their portfolio companies, CFOs need to step up. The working group’s upcoming roadmap aims to help Investors and directors work together to leverage the new regulatory environment, unprecedented environmental and social challenges and disruptive technological innovation to strengthen business models and to improve performance. This is critical for investors who manage the savings and pensions of citizens around the world and for directors who serve on boards of companies with new risks to control and opportunities to grow.

Sophie L’Hélias is Founder & President and Nina Hodzic is Member of the Advisory Board at LeaderXXchange