CS ESG in the Boardroom
Risk oversight is a core responsibility for all boards and addressing ESG-related matters is rapidly becoming a core part of risk oversight. In today's...
<sub>Research Report</sub>
<h4>ESG in the Boardroom: Getting
oversight right
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Introduction
Governance professionals report on their board's structures and processes for overseeing ESG matters, and how well equipped they are for that role
Governance professionals report on their board's structures and processes for overseeing ESG matters, and how well equipped they are for that role
Risk oversight is a core responsibility for all boards and addressing ESG-related matters is rapidly becoming a core part of risk oversight. In today's changing political, legal and physical climates, companies and their boards face growing scrutiny from investors, customers, employees, regulators and others in terms of how they are monitoring and responding to ESG issues.
For boards to be able to oversee ESG matters effectively, they need to have the right committee structures and reporting processes. They need to have access to the right information and they need to have the right expertise and experience. They also need to be asking the right questions and having relevant discussions. For many, adapting to a more fully realized ESG oversight role presents a steep learning curve. As in other governance areas, however, much can often be learned by looking at how peers are addressing these challenges.
In this special report we present findings from a survey conducted among governance professionals such as general counsel and corporate secretaries.
Their responses give insight into, among other things, which part of the board is taking responsibility for ESG oversight, when ESG discussions happen and on what topics, how the board’s ESG oversight capabilities are viewed and how professionals think boards’ ESG oversight could be improved.
Key findings
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Almost half (43 percent) of respondents say their full board has primary oversight of ESG issues. The next-most common response is the nominating and governance committee, cited by 25 percent of respondents.
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Almost a third (30 percent) of respondents say committees with ESG oversight report to the main board on those issues on an ad hoc basis.
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Globally, 80 percent of respondents report an increase in the frequency of main-board discussions of ESG issues, compared with two years ago.
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Almost all respondents at mega-caps (94 percent) say board diversity has been discussed over the past year, compared with 76 percent of those at large-cap companies, 85 percent of those at mid-caps and 63 percent of those at small caps.
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More than half (55 percent) of respondents say that in the past 12 months, investors have asked questions about the board’s governance structure and processes around ESG issues.
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Respondents at mega-cap companies give the highest average rating of their board’s ability to oversee relevant ESG matters (8.3 out of 10).
Survey demographics
This report is based on the findings from an online survey conducted between December 2021 and February 2022.
Total number of respondents: 210
Who’s keeping watch?
Assigning ESG responsibilities within the board
Assigning ESG responsibilities
within the board
On your company’s board, which of the following has primary oversight of ESG issues?
ESG oversight is becoming an increasingly core mission for boards, and important decisions need to be made about where that responsibility lies. Governance professionals suggest there is no one-size-fits-all approach. Some believe it can be helpful to have ESG oversight co-ordinated across different committees where relevant. Others prefer to keep it primarily at the main board level.
In our research, almost half (43 percent) of respondents say their full board has primary oversight of ESG issues. The next-most common response is the nominating and governance committee, cited by 25 percent of respondents. Very few mention the audit (4 percent), compliance (1 percent) or risk (3 percent) committees, and no respondents cite the compensation or finance committee as having primary oversight of ESG issues. Among those who name another committee as having oversight, the most common response is a specific ESG or sustainability committee.
Small-cap company respondents are more likely (58 percent) to say primary ESG oversight is assigned to their main board than those at mid-caps (33 percent), large caps (35 percent) or mega-caps (37 percent). As a result, those at small caps are less likely (16 percent) to say their nominating and governance committee takes the lead than those at mid-caps (45 percent), large caps (30 percent) or mega-caps (26 percent).
On your company’s board, which of the following also has some oversight of ESG issues?
Globally, two thirds of respondents say their main board or the nominating and governance committee has primary ESG oversight. But the responsibilities are also shared among other committees. Among all respondents, 64 percent say the main board has at least some degree of oversight of ESG issues, followed by the audit committee (45 percent), nominating and governance committee (32 percent), compensation committee (28 percent), risk committee (22 percent), compliance committee (8 percent) and finance committee (6 percent).
In general, larger firms more frequently assign some ESG oversight to a range of their committees, according to respondents: 69 percent of those at mega-cap companies say their audit committee has some oversight, as do 50 percent of those at large caps, while only 38 percent of those at mid-caps and 32 percent of those at small-cap companies cite the involvement of their audit committee.
Similarly, 54 percent of respondents at mega-caps say their nominating and governance committee has some ESG oversight, far more than do those at large caps (39 percent), mid-caps (27 percent) or small caps (23 percent). Around 40 percent of mid, large and mega-cap companies say their compensation committee has some ESG oversight, compared with just 16 percent of those at small caps.
There are broad similarities between regions in terms of distributing ESG oversight among board committees. That said, 19 percent of respondents in North America say their board assigns some ESG oversight to the risk committee, compared with 30 percent in Europe and 33 percent of those in Asia.
Around half of respondents in North America and Asia say their nominating and governance committee has some ESG oversight, compared with just 15 percent of those in Europe.
ESG reporting
When boards discuss and report on ESG matters
When boards discuss and report on ESG matters
How often do committees with ESG oversight report to the main board on those issues?
Almost a third (30 percent) of respondents say committees with ESG oversight report to the main board on those issues on an ad hoc basis. The next-most frequently mentioned cadence (24 percent of respondents) is that those committees report at every board meeting, while 13 percent of respondents say they do so at every other board meeting. One in 10 do so just once a year and 9 percent say they do not make such reports.
Thirty-four percent of respondents at mega-cap companies say relevant committees report at every board meeting, compared with 25 percent of those at large caps, 23 percent of those at mid-caps and 24 percent of those at small caps. Reporting on an ad hoc basis takes place at 35 percent of small-cap companies, 34 percent of large caps, 30 percent of mid-cap companies and 20 percent of mega-caps.
Seventeen percent of respondents at small-cap firms say their committees don’t report to the full board on ESG matters, compared with just 2 percent of those at large-cap companies and none of those at mega-caps.
Twenty-nine percent of respondents in North America say their committees report on ESG issues at every board meeting, while 20 percent of those in Europe cite the same frequency. Almost a third of North American respondents say reporting is done on an ad hoc basis, compared with 22 percent of those in Europe.
Perhaps not surprisingly, the frequencies with which respondents say the main board has discussed ESG issues over the past year follow a similar pattern to that of committee reports. Globally, 29 percent say main-board discussions took place at every meeting, while the same number say they occurred on an ad hoc basis. Eighteen percent say discussions took place at every other board meeting, 11 percent say they took place once during the past 12 months and 3 percent say they didn’t happen at all.
In the past 12 months, how frequently has the main board discussed ESG issues?
More respondents at mega-cap companies (43 percent) say their board has discussed ESG issues at every meeting over the past year than do those at large caps (30 percent), mid-cap firms (30 percent) or small-cap companies (22 percent).
Approaching half (45 percent) of respondents at small-cap companies say that during the past year their board discussed ESG matters on an ad hoc basis, compared with a quarter of those at mid-cap companies, 27 percent of those at large-cap companies and just 11 percent of those at mega-caps.
How has the frequency with which the main board discusses ESG issues changed compared with…
ESG topics are featuring on board meeting agendas more frequently at a large majority of companies. Globally, 80 percent of respondents report a slight or large increase in the frequency of main-board discussions of ESG issues compared with two years ago, while 60 percent say there has been a large increase compared with three years ago. Thirteen percent say there has been no change in the frequency of these discussions over the past two years and just 1 percent have seen any kind of decrease.
Almost half of respondents at mid-cap companies say there has been a large increase in the frequency of board-level ESG discussions over the past two years. This figure is lower at large caps (43 percent), small caps (35 percent) and mega-caps (27 percent).
For the latter category, this may be due to mega-caps beginning their ESG discussions relatively early, although 79 percent still report a slight or large increase in the frequency of discussions at board level. All respondents at large-cap companies say there has been an uptick to some degree, compared with 71 percent of those at small caps.
There are broad regional similarities here: 79 percent of those in North America and 84 percent of those in Europe say there has been a slight or large increase in the frequency of main-board ESG discussions compared with two years ago. Sixty-one percent of those in North America and 62 percent of those in Europe say there has been a large increase compared with three years ago.
Which of the following issues has your board discussed over the past year?
Globally, board diversity is the ESG issue most frequently cited by respondents as having been discussed by their board over the past year. This varies significantly between the smallest and largest issuers, however: almost all respondents at mega-caps (94 percent) say the topic has been discussed, compared with 76 percent of those at large caps, 85 percent at mid-caps and just 63 percent of small caps.
Among all respondents, the next-most frequently discussed topics are corporate culture (75 percent), environmental issues (74 percent), staff retention, hiring and training (72 percent), employee diversity data and health and safety (both 65 percent) and board effectiveness on ESG oversight (61 percent). Respondents at mega-caps more frequently cite each of these areas – bar staff retention, hiring and training – than those at smaller firms. Similarly, 59 percent of respondents at mega-caps say their board has discussed racial equality, compared with 32 percent at large caps, 38 percent at mid-caps and 22 percent at small caps.
Another difference between the largest and smallest firms is that 44 percent of respondents at mega-caps say their board has talked about political lobbying and spending, compared with just 17 percent, 6 percent and 10 percent of those at large caps, mid-caps and small caps, respectively.
Setting the board
up for success
Current and future competence and composition
Setting the board up for success
Current and future competence and composition
In the past 12 months, have investors asked questions about the following?
The board’s governance structure and processes around ESG issues
The board’s skills in relation to ESG issues
According to our research, most companies are facing investor queries about how their boards are set up to address ESG matters. Overall, 55 percent of respondents say that in the past 12 months investors have asked questions about the board’s governance structure and processes around ESG issues. Among those at mega-caps, more than three quarters (77 percent) report investor inquiries, compared with 69 percent of those at mid-caps, 63 percent of those at large caps and less than half (40 percent) of those at small caps.
Board members’ experience and expertise – or lack thereof – in dealing with ESG issues has also become a topic of discussion among directors, governance professionals, investors and other stakeholders, increasingly featuring in proxy statements. Our research suggests investors are focusing more on this, at least at the very largest organizations, although companies of all sizes are having to face it – or may have to do so soon.
Overall, 37 percent of respondents say that in the past 12 months investors have asked about the board’s skills in relation to ESG issues, while almost the same proportion (38 percent) say investors have not. It should be noted, however, that a quarter of respondents don’t know whether those questions have been asked.
Almost two thirds (65 percent) of respondents at mega-cap companies say investors have asked about the board’s skills. This compares with just under half (47 percent) of those at mid-caps, just over a third (34 percent) at large caps and almost a quarter (24 percent) at small caps.
Respondents in Europe (42 percent) more frequently than those in North America (34 percent) say investors have asked about the board’s ESG skills.
How would you rate your board’s competence in being able to oversee the ESG issues that are relevant to the company?
Globally, respondents have a broadly positive view of their board’s abilities in the ESG field. Asked to rate their board’s competence in being able to oversee ESG issues that are relevant to the company, they give an average score of 6.9 out of 10, on a scale where one is ‘not at all competent’ and 10 is ‘extremely competent’.
Respondents at mega-cap companies give the highest average rating of their board’s competence (8.3), followed by those at large and mid-cap companies (both 6.9) and those at small caps (6.7). Respondents in North America give a higher average competence rating (7.0) to their boards than their peers in Europe (6.6).
Does your board currently include ESG skills in its consideration when recruiting new directors?
Does your board plan to start including ESG skills in its consideration of new directors over the next year?
If a board perceives itself to lack certain ESG skills, one obvious remedy is to bring in a new director with those missing abilities. Globally, more than four in 10 respondents (43 percent) say their board already takes into account ESG skills when recruiting directors. Around a quarter (26 percent) do not know whether this takes place.
As our research finds in other areas, there is a distinct gap between mega-cap companies and smaller firms in terms of board recruitment. Almost six in 10 respondents at mega-caps (58 percent) say their board takes ESG skills into account, compared with less than half (46 percent) of mid-caps, 41 percent of large caps and 38 percent of small caps.
There is much uncertainty as to whether board practices will shift in this area. Just 20 percent of respondents say their board intends to start including ESG skills in its consideration of new directors over the next year, with 37 percent saying there are no such plans. But 43 percent don’t know whether this change will happen.
As in other areas, there is broad alignment between North America and Europe with 43 percent and 44 percent of respondents, respectively, saying their board currently takes ESG skills into account.
From where does the board receive most of its information about ESG issues?
Our research finds that a sizable majority of boards rely on two key sources for most of their ESG information: the company’s sustainability team (37 percent of all respondents) and the corporate secretary/governance team (34 percent). A handful say their board receives most of its information on ESG issues from the finance team (4 percent), directors’ own research (4 percent) or outside advisers (6 percent).
Larger companies are more likely to have the resources to support a specific sustainability function and this is reflected in the study’s findings. Fifty percent of respondents at mega-caps say their board gets the bulk of its ESG information from a sustainability team, compared with 41 percent of those at large caps, 46 percent at mid-cap firms and 24 percent at small caps.
Conversely, the number of respondents citing the corporate secretary/governance team as a primary source of ESG information falls from 43 percent at small-cap companies to 27 percent at mega-caps.
Among respondents in North America, more than four in 10 (46 percent) say the corporate secretary/governance team is the board’s main source of ESG information, with 30 percent citing the sustainability team as the main source.
By contrast, in Europe half of respondents point to the sustainability team and just 15 percent to the corporate secretary/governance team.
How frequently do members of your board take part in engagement with investors
when ESG issues are discussed?
Our research finds that, on average, directors at the smallest and largest companies talk to shareholders about ESG matters more frequently than those at issuers of other sizes. Respondents were asked how frequently members of their board take part in engagement with investors when ESG issues are discussed, on a scale of one to five where one is ‘never’ and five is ‘always’. The average score is 3.3 for respondents at mega-cap companies and 2.5 for those at small caps. The lowest score (1.9) is among those at mid-caps.
These scores translate, for example, to more than four in 10 respondents (42 percent) at mega-cap companies saying board members frequently take part in engagement when ESG matters are on the agenda. Globally, just 7 percent of respondents say board members are always involved in these discussions and almost a third (32 percent) say they are never involved.
On average, respondents in Europe report more frequent involvement by board members (2.6) than do those in North America (2.2).
Looking ahead
How boards could improve
Respondents were asked what changes – if any – to the way their board operates would enable it to oversee ESG more effectively. Their comments include the following:
- ‘A recent review of ESG reporting and other requirements will lead to minor changes in committee terms of reference. More complete assurance across ESG measures and more regular detailed reporting will be overseen by the audit committee and feed into the CEO report and annual integrated report’
- ‘Consult external experts to assess the proposals from the management. Become more acquainted with some more technical topics (through training sessions)’
- ‘More diverse directors’
- ‘Involve a higher number of experts in the ESG field’
- ‘None. We recently restructured so governance was the primary committee for ESG oversight (including strategy, prioritization, monitoring and external reporting), but other committees oversaw the oversight of ESG topics related to the underlying subject matters that those committees oversee’
- ‘Increased training in ESG. This is work in progress and has been captured in the directors' training plan for the new year’
- ‘The sustainability committee is currently an executive committee. The board would have more oversight if it became a formal board sub-committee’
- ‘Specify department in company to be ESG-responsible’
- ‘More clarity around corporate governance and oversight of ESG issues in committee charters’
- ‘ESG committee and knowledge as to what is required’
- ‘More regular updates on ESG landscape and company-specific ESG scores’
- ‘Creating a sustainability committee’
- ‘To have more board member involvement’
- ‘More deliberations at board level, including presentations from external experts to acquaint the board with the journey being undertaken’
- ‘Add more board members who are former general counsel. And supply legal training’
- ‘We would need to have leadership from the board level to do more than receive information that management chooses to report on with respect to operational matters and to amplify the board's ESG risk oversight capacity and responsibility. Unfortunately, the scope of active leadership does not currently extend to this at present’
- ‘Annual reviews’
- ‘More concrete rules on ESG disclosure and expectations. More guidance on the use of frameworks’
- ‘SEC guidance and clarity on ESG’
- ‘Better reporting and disclosure’
- ‘Dedicated ESG committee’
- ‘Now forming a new ESG executive oversight committee. It can help to consolidate and prioritize ESG issues for board discussion’
- ‘May have a separate committee’
- ‘Setting broad corporate goals for ESG improvement’
- ‘More knowledge of ESG topics’
- ‘The board is changing to establish a new committee to focus on ESG issues’
- ‘A better understanding of what ESG means and how it impacts our organization’
- ‘Take an active interest in the topic and learn about it’
- ‘Clear responsibility to the governance and human resources committee’
- ‘More focus on overall ESG strategy versus just the ESG report preparation process’
- ‘Shareholder pressure’
- ‘CSR committee of the board’
- ‘Better formalizing of the subject matters that fall under ESG’
- ‘Formalized ESG strategy oversight and periodic ESG reporting’
- ‘Establishing a fully independent sustainability committee’
- ‘Having a clear mission statement on ESG and setting well-researched ESG targets based on evolving industry standards’
- ‘New board members’
- ‘Viewing ESG as an across-the-board responsibility that is pertinent to all committees’
- ‘ESG is an evolving area and the board continues to evolve its approach’
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How to handle board-related ESG requests
How to handle board-related ESG requests
With a client count of more than 2,650 customers, including 58 percent of the S&P 100, and a 6 percent global penetration rate based on corporate issuers, spanning from our web services, virtual events and analytics to corporate access and investor conferences, Q4 is in a unique position to assess the pulse of corporate clients when it comes to a focus on ESG.
What is not unique about what we see is that the focus on ESG-related activities within the investor relations (IR) space is moving at lightning speed. This speed and exposure has also contributed to an increase in board-related ESG requests and requirements from the IR team, including a need to better understand the stances that the largest shareholders may take at the AGM while also providing a rigorous process that stands up to the increased scrutiny being placed on ESG data, partially driven by increased efforts to combat greenwashing.
Our clients range from leaders in ESG disclosures to those that are only just beginning the (daunting) task of starting their program. One of the most frequent comments we have received from those ‘beginning their journey’ is that they do not know where to start. The lack of regulatory requirements – coupled with increasing requests from ratings entities, surveys and the buy side – makes the task of getting started even more formidable for them.
From those further along the journey, the focus shifts toward improving their disclosures, tracking the impact of their IR program and assessing how their data and narrative are being received by the street/market participants.
Five essential steps
Regardless of where a company’s IR program is along the ESG path, there are a number of recurring themes we have learned from our clients that we see as always important whether building, maintaining or improving an approach to ESG.
1. Keep your program company-centric
This does not mean ignoring the impact your company has on the wider world but rather focusing your program on data and actions that are relevant and material to your company and industry. Build your program so you can leverage your ESG data to respond to requests (surveys from the buy side, ratings, and so on) rather than building your ESG data as a result of actioning all requests.
2. Decide which framework and/or standard to follow
In addition to adhering to any current or future regulations, we recommend a focus on SASB (or future iterations under the International Sustainability Standards Board) and TCFD.
Whether you ultimately decide on voluntarily disclosing all guidance or requirements based on the framework and/or standard you choose to follow, leveraging a framework and/or standard will assist in keeping your focus on what is material.
3. Leverage what your company already has
Remember that many of the topics and metrics contained within the standard(s) you follow may already exist within your company (such as for finance, supply chain, HR, legal, and so on). This also applies to the process you build for the collection and storage of your data.
4. Think data quality
With or without requirements for assurance, to make your disclosures useful to investors, you want to have a process in place that supports the relevance, consistency and reliability of the data you collect. The focus should be on material topics and, to ensure your program efforts are more than just checking the box, you should treat the data as an opportunity for improved business operations.
5. Disclosures
Whether issuing a comprehensive sustainability report, an ESG-focused website or a ‘simple’ single ESG web page as you start, treat ESG-related disclosures in a similar way to financial disclosures. At minimum, this means avoiding simply posting whatever you have for the sake of saying you are ‘doing ESG’. Put thought behind what you ultimately disclose, even if not contained within regulatory disclosures.
As ESG continues further down the path of standard and framework consolidation and government-issued regulations continue to increase, the focus from the board level will continue to increase as the overarching world of investor-focused ESG becomes better defined. If IR teams are not already receiving requests or being asked ESG-related questions by the board, they should expect them soon – and be prepared to respond.
To make your disclosures useful to investors, you want to have a process in place that supports the relevance, consistency and reliability of the data you collect
Sponsor's statement
About Q4
About Q4
Q4 is a leading capital markets communications platform provider that is transforming the way publicly traded companies, investors and investment banks make decisions to efficiently discover, communicate and engage with each other. The Q4 end-to-end technology platform facilitates interactions across the capital markets through its IR website products, virtual events solutions, capital markets customer relationship management solution and shareholder and market analytics tools. The firm is a trusted partner to more than 2,650 public companies including 50 percent of the S&P 500. Q4 is based in Toronto, with offices in New York and London.
