Directors Can Up Their Game on Environmental, Social and Governance Issues: The BCG-INSEAD Board ESG Pulse Check

Summary

While corporate management is under constant pressure to deliver strong financial performance over the short and medium term, board members have a different time horizon; though directors certainly do focus on short- and medium-term performance, they play a critical role in steering companies over the long term. The ESG challenges confronting companies today—including climate, income inequality, diversity, equity, and inclusion, and geopolitical tensions, most recently the war in Ukraine— will require sustained, long-term action. Consequently, such matters sit squarely in the purview of the board.

However, there is no one-size-fits-all solution for boards when it comes to understanding, overseeing, and engaging with management on ESG issues. To assess how boards are engaging with ESG matters today and to what extent existing board practices can deal with these complex and systemic challenges, the INSEAD Corporate Governance Centre and BCG have teamed up on a multiyear initiative, including regular pulse check surveys and interviews, to study the role boards play in overseeing ESG. In each survey we will take an in-depth look at a critical ESG matter facing boards; in this report we focus on climate. Our goal in this collaboration is to help identify the most effective ways boards can integrate ESG considerations into their oversight and governance.

Overall, the results of our survey revealed board members are concerned that companies will not deliver on environmental, social, and governance goals. More than 40% of directors cited the ability of companies to execute as one of the biggest threats to improving ESG performance

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What the report revealed about boards' readiness in addressing ESG issues

Critical gaps
Climate governance insights
Roadblocks to ESG oversight
Board ESG governance models

Critical gaps

The survey revealed some critical gaps in board oversight of ESG.

70%

The board is only moderately - or not at all - effective at integrating ESG into company strategy and governance.

47%

The board has sufficient ESG competence and experience to challenge management on ESG plans and exercise board oversight on execution.

43%

Directors cited the ability of the company to execute as one of the biggest threats to delivering on
ESG goals.

Climate governance insights

What the survey data shows about how directors are approaching the topic of climate change in their board oversight.

42%

Respondents reported that the companies for which they serve as directors have made net-zero pledges.

55%

Among companies that have made a net-zero commitment, only 55% of directors reported that their company has prepared and published a plan for hitting that target.

43%

Among those same companies, only 43% of directors said their company has published financial statements account for the implications of climate change.

Roadblocks to ESG oversight

Top 4 reasons cited by directors on the roadblock to effective board oversight of ESG.

44%

Lack of knowledge, data, or capabilities.

43%

Complexity and ambiguity management.

30%

Lack of board commitment.

26%

Inability to translate ideas into action.

Board ESG governance models

The INSEAD Corporate Governance Centre (ICGC) has published new study that describe the six core models for integrating ESG into board governance. The infographic below revealed the extend to which companies are deploying these models. To find out more about the pros and cons of each model and the six complementary practices, please click on the link below to download the report.

Download ICGC Report on "Designing Sustainability Governance - Board structures and practices for better ESG performance"

Questions that boards should consider

Does the board regularly assess its composition, skills matrix, committee charters, use of experts, and cadence for effective ESG governance, informed by deep insights on ESG trends in the industry and among its stakeholder?
Does the board integrate ESG fully into its corporate strategy discussions?
Does it commit to an annual in-depth review of current and future materiality, company ESG performance, and targets?
Does the board include ESG factors in enterprise risk management and risk tolerance discussions?
Does the board consider ESG factors in all major capital allocation and investment decisions, business planning, target setting, performance assessment, compensation?
Has the board approved a company statement of purpose and understood its link to the company's ESG agenda?
Has the board approved an integrated reports?

The answers to these questions can help directors understand where the board and the company stand in terms of ESG maturity and where they need to push for greater focus and action. Boards that expand and enhance their focus on ESG will be positioned to help the companies they oversee build sustainable business models - and sustained value creation.

This research study is jointly developed by: