Global professional services firm PwC announced the release of its annual Corporate Directors Survey, indicating that ESG issues are becoming top of mind for corporate boards, yet revealing that a lack of understanding of these factors may be a barrier to overseeing sustainability issues and implementing effective ESG strategies. PwC surveyed over 850 public company board directors for the study from a broad range of industries and various company sizes.

The survey revealed that boards are increasingly cognizant of ESG issues, with 52% of respondents reporting that ESG is regularly on their boards’ agenda, up from 45% last year, and only 34% in 2019. The increased attention to sustainability issues appears to be making its way into company strategy, with almost two thirds of directors saying that strategy is now tied to ESG issues, up from 49% last year.

The trend of increased ESG awareness and integration was particularly strong among large companies, with 62% reporting that ESG is frequently on the board agenda (38% last year), and 74% linking ESG to strategy (vs 54%).

The growing attention to ESG comes as shareholders appear to be increasingly engaged on these issues. According to the survey, ESG issues are increasingly dominating directors’ discussions with shareholders, rising to the number 1 topic for direct communication with shareholders, above other issues such as executive compensation or strategy oversight. Similarly, directors appear increasingly aware of the impact of ESG on company performance, with 54% agreeing that ESG can have a financial impact on performance, compared to only 38% last year.

Despite the increased awareness of the connection between ESG, strategy and financial performance, the survey revealed some of the key challenges that may impact ESG oversights and integration. Many directors do not believe they have a strong grasp of ESG risk, with only 25% responding that their boards “very much” understand material ESG risks. Similarly, only 28% reported that their board has a strong understanding of the company’s ESG/sustainability messaging.

ESG disclosure will likely take center stage in board discussions going forward, as more jurisdictions around the world look to implement mandatory reporting on issues such as climate, while the survey revealed that only 18% of directors are in favor of mandatory ESG disclosure.

One of the key issues studied in the survey was the directors’ views on board diversity. The survey found that while some progress has been made on gender diversity, with female representation on boards rising to 28% from only 16% ten years ago, racial diversity has hardly budged, as only 5% of directors are Black and 3% Latinx, according to the report. Attitudes towards diversity appear to be shifting, with over half of respondents supporting tying compensation to diversity and inclusion goals (up from 39% last year), and only a third of directors saying that no measures are necessary in order to foster greater diversity, a sharp drop from 71% last year.

Maria Moats, leader of PwC’s Governance Insights Center, said:

“Regardless of the motivations behind it, directors are supportive of many methods for achieving diversity. But in order for new board members to provide the most value, deliberate inclusion efforts must be made. Each voice in the boardroom needs to be heard. And boards that are prioritizing an inclusive board culture will be better poised to face whatever comes next.”

Click here to access PwC’s 2021 Annual Corporate Directors Survey.