Consulting and advisory firm Boston Consulting Group (BCG) and leading business school INSEAD announced the release of ‘The BCG-INSEAD Board ESG Pulse Check,’ a study examining the role corporate boards are playing in overseeing ESG. While the report found that approaches for this rapidly emerging area are still developing, and while directors recognize the need to prioritize and increase focus on sustainability topics, it also revealed that most directors report not being highly effective at integrating ESG into strategy, and many lack the tools for ESG oversight.
The report was a product of a multi-year initiative by BCG and INSEAD, which included pulse check surveys and interviews to study the role boards play in overseeing ESG. The survey included responses from over 120 respondents with an average of 7 years of board experience, and serving on an average of two boards. Respondents spanned multiple regions, including Europe, Asia Pacific and the Americas, and represented a broad range of company sizes, with over half under $1 billion revenues, and 11% over $10 billion.
According to BCG and INSEAD, the study found that ESG issues are moving higher on boards’ agendas, as directors recognize the materiality of these risks to company performance and value, and increasingly, the opportunities created by an emerging and dynamic ESG landscape for organizations to build a competitive advantage. Stakeholders are also driving increased ESG awareness at the board level, with around three quarters of directors reporting that engagement with shareholders on ESG has intensified, nearly two thirds expect to see institutional investors put forward ESG-related proposals at the next AGM, and over half also cited regulators, customers and employees as driving ESG concerns.
Despite the increased ESG focus, many respondents indicated that boards often lack the necessary tools for effective ESG oversight, with around 70% of directors reporting being only moderately or not at all effective at integrating ESG into company strategy and governance. Similarly, while over 90% of directors identified ‘strategic reflection’ as the appropriate board approach to aligning company strategy with ESG, less than half reported being effective at that role.
Report co-author David Young, a BCG Managing Director and Senior Partner, said:
“Directors have significant skepticism about whether companies they oversee can deliver on ambitious ESG targets. That makes it more critical than ever that boards enhance their governance of ESG issues, focusing on the matters that are truly material and connected to advantage and value creation for the company.”
Asked to identify the major roadblocks to effective board oversight of ESG, the directors’ top response was ‘lack of knowledge, data or capabilities, cited by 44% of respondents. Other top responses included complexity and ambiguity management (43%), lack of board commitment (30%), and inability to translate ideas into action (26%). In terms of the key threats to companies’ achieving ESG goals, the ability of the organization to execute took top spot at 43%, followed by costs increases, organizational culture, and management commitment, each cited by at least 30% of respondents.
Ron Soonieus, a senior BCG advisor, Director in Residence at the INSEAD Corporate Governance Centre, and a coauthor of the report, said:
“It is critical for boards to move from a compliance mindset when it comes to ESG to bringing a true strategic lens to those issues. However, many have not yet remade the board agenda to make time for that critical strategic thinking.”
The study also took a deeper look into boards’ management and oversight of climate-related issues, which was cited by boards across multiple sectors as a top area of ESG concern. While 42% or respondents said that their companies have made net zero commitments, only slightly over half of these have published a plan too hit that target, and even fewer have included climate change implications in their financial statements.
Report co-author Sonia Tatar, Executive Director of the INSEAD Corporate Governance Centre, said:
“More and more companies are making net zero commitments. And directors have a critical part to play in ensuring those pledges come with concrete plans and execution as they steward businesses for a sustainable economic performance that drives greater good for society and the environment.”
Click here to access the BCG and INSEAD report.