Most corporate boards lack a strong grasp of the ESG risks facing their companies or an understanding of company ESG strategy, according to PwC’s latest annual Corporate Directors Survey, and while ESG is working its way into key risk management practices, board discussions rarely include key topics such as human rights and climate change.
For the survey, PwC surveyed 704 board directors from companies across more than 12 industries. 72% of those surveyed represented companies with annual revenues over $1 billion, and 64% have served on their boards for more than 5 years.
The survey found that boards continue to increase their focus on ESG issues, with 55% of directors reporting that ESG issues are regularly a part of their boards’ agendas, up slightly from 52% last year, and from only 34% in 2019. Importantly, company-wide risk calculations appear to be integrating ESG considerations, with 65% of directors saying that ESG is part of the board’s enterprise risk management discussions.
Despite the increasing focus on ESG risk, however, boards appear to lack a strong grasp on key related issues. Only 27% reported that their boards understand ESG risks “very well,” 42% reported this level of understanding for their company’s overall ESG strategy, and 24% for ESG opportunities. While nearly half reported a strong understanding of company diversity and inclusion efforts, only 16% reported this for climate risk and strategy. Only 15% reported strong understanding of internal controls and processes around ESG data collection.
The report found that ESG-related topics that get the most boardroom attention include data security and talent management, with more than 90% of directors reporting that their boards have discussed each “substantially” or “somewhat” over the past 12 months, as well as board composition, at 86%. Key emerging topics have received less focus, however, with only around half having discussed climate change or carbon emissions at this frequency over the past 12 months, fewer than a third discussing human rights, and only 30% discussing corporate political activity.
Interestingly, one of the key topics of discussion, reported by nearly 75% at the ‘substantial’ or ‘somewhat’ level, was the use of non-financial metrics in executive compensation plans, and 92% of directors agreed that some type of non-financial metrics are appropriate. Female respondents were more likely to support ESG metrics in compensation plans, including diversity and inclusion – at 73% vs male respondents at 45% – and environmental goals, at 40% vs male respondents at 30%.
The report found a significant divergence on ESG focus between larger and smaller companies. While 72% of directors at companies with annual revenues over $10 billion reported having had board discussions on climate change over the past 12 months, only 27% at companies with under $1 billion revenues made similar claims. Similarly, while 73% of large-company directors said that ESG has been linked to company strategy, only 40% of small-company directors said that their boards had done so.
The PwC survey also revealed that market turmoil could cause investors to lose focus on key ESG topics. While most directors reported that an economic downturn would likely lead to increased investor attention on areas including capital allocation (81%), short-term stock performance (66%) and executive compensation (61%), 61% also said that topics including carbon emissions and climate change would receive less attention.
Click here to access PwC’s 2022 Annual Corporate Directors Survey.