Corporate directors are increasingly paying attention to environmental, social, and governance (ESG) metrics, though some acknowledge that more needs to be done when it comes to diversity and inclusion.
According to a recent PwC survey of 851 directors, 64% of corporate directors say ESG is tied to company strategy, up 15% from 2020. At the same time, however, only 25% said they have a very good understanding of ESG risks.
While the growing awareness of ESG factors among publicly traded companies is encouraging, “directors recognize that they personally need to do more to better understand how the company is going to drive ESG type goals, including diversity,” Maria Moats, Governance Insight Center leader at PwC, said on Yahoo Finance Live (video above). “And so, they want to get better.”
In addition to the increased integration of ESG factors into company strategy, 62% of directors said that ESG was a part of their companies’ risk management discussions, and 54% said that ESG was linked to company performance.
As ESG issues tend to play out over longer time horizons, directors cited a number of macro issues of concern over the long run. These were political polarization, technological disruption, waning confidence in institutions, income inequality, and the climate crisis.
Board diversity is a top ESG concern
Under the umbrella of ESG concerns, directors especially zeroed in on the need for more diverse boardrooms. Making progress on that front has become more crucial than in years past.
In 2020, 71% of corporate directors said that boardroom diversity was an issue that would work itself out. That number dropped to 33% this year, according to the survey.
“To me, what it means is awareness is up, and it’s time to really act,” Moats said, highlighting that directors must now take a more active role in addressing representation on boards. “What are you personally going to do to make sure that you bring in diverse perspectives into your boardroom, particularly when we think about racial and ethnic diversity?”
Currently, for S&P 500 companies, 30% of board directors are female, 11% are Black, 5% are Latinx, and 5% are Asian, according to a Spencer Stuart report.
The PwC survey also found growing support for shaking up board composition by replacing or adding board members, with nearly half of directors (47%) saying they would replace a fellow board member. Notably, racial and ethnic diversity were the most important attributes in determining new board appointments, followed by industry expertise, operational expertise, and gender diversity.
Recent Nasdaq listing rules and a California law passed in 2020 — which requires companies headquartered in the state to have board members from underrepresented groups — are putting pressure on boards to make diversity a top priority. However, Moats explained that the shift also stems from investor and stakeholder interest.
ESG matters topped the list of issues that shareholders raised when engaging directly with corporate directors, and an increasing number of ESG-focused proposals were introduced this year.
“Customers really care about that diversity on the boardroom,” Moats said. “And it matters.”
Companies should ‘start now’ on ESG accountability
While there has been a shift in sentiment, a large part of the ESG story revolves around how corporations will hold themselves accountable — or else be held accountable by regulatory bodies or other interested parties.
As ESG has become embedded in companies’ strategies, “directors still feel like more needs to be done,” Moats said. “So what does that more look like? … A lot more data-driven questioning around the strategy to make sure that things are actually working.”
But oversight — the primary function of corporate boards — still remains a challenge, particularly when it comes to ESG and sustainability messaging.
Sixty-seven percent of directors said that the current practice of voluntary ESG disclosures is preferable to mandatory disclosures, such as the Sustainable Finance Disclosure Regulation (SFDR) requirements being implemented by the European Union or the mandatory requirements being considered by the SEC that enjoy support from Secretary of the Treasury Janet Yellen.
But although corporate directors showed lackluster support for mandatory disclosures of ESG indicators overall, nearly two-thirds (64%) of corporate directors said they did support mandatory disclosure of board diversity metrics.
Moreover, half of the corporate directors surveyed supported tying executive pay to diversity and inclusion goals, which is up from 39% in 2020.
And because of the way things are going, with investors clamoring for more transparency around ESG metrics, Moats said she expects that mandatory requirements in some form will eventually come to pass.
“I believe the accountability will come in the requirement for there to be at least investor grade reporting of ESG metrics,” Moats said. “And so I would tell companies to start now. Start now getting behind the numbers. Where are they coming from? What system? What process? What controls?”
Grace is an assistant editor for Yahoo Finance.
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