Many boards lacking ESG expertise, study finds

Despite the growing pressure for companies to address material risks arising from ESG-related issues, there is a severe lack of relevant expertise on such topics among board members of large US companies, according to a new study.

The research finds that 29 percent of the 1,188 Fortune 100 board directors examined have relevant ESG credentials, but that this total is largely concentrated on the S (social) element of ESG. Twenty-one percent of directors have relevant S experience, but only 6 percent have governance (G) and 6 percent environmental (E) experience.

The study’s findings are based on an analysis by NYU Stern’s Center for Sustainable Business of the directors’ credentials using Bloomberg and company biographies from 2019.

Tensie Whelan, clinical professor for business and society and founder and director of the Center for Sustainable Business, tells Corporate Secretary that although investors are currently focused on improving board diversity, their next focus will be on ESG skills among directors.

Whelan’s research finds that across the Fortune 100 just five directors have relevant experience on climate change and two directors have relevant experience on water – both issues of material importance to most companies and to investors. Between 1.2 percent and 0.01 percent of directors have relevant expertise in each of the nine categories of environmental issues covered in the study.

Only small numbers of the directors have expertise to address specific areas of risk to companies within the ESG universe, according to the study. For example, one area of growing materiality under the G element is cyber-security, but only eight directors have expertise in that field. Very few directors have experience with ethics, transparency, corruption and other important good governance issues.

The area where directors most commonly have governance expertise is accounting oversight. US company boards are required to have at least one board member with an audit or finance background and most have at least two with such experience, but the study finds that only 2.6 percent have ‘exhibited leadership’ in this area, such as by being a member of the Federal Accounting Standards Advisory Board.

Across all ESG topics, workplace diversity has the largest number of directors with relevant credentials (5 percent). In the main, these directors are involved with boards or initiatives that focus on increasing minority leadership – such as Catalyst, which supports female leadership – and corporate diversity councils. Most are focused on women’s representation, with others focused on black and Latino representation.

The area with the second-most common expertise (3.5 percent) is healthcare, usually arising from board memberships with medical facilities or the directors being physicians, medical researchers or academics. Most of these directors are serving on healthcare company boards.

The levels of relevant ESG expertise vary across industries: healthcare (covering pharmaceuticals, biotechnology and life sciences) at 55 percent, utilities at 50 percent, consumer staples (covering household and personal products) at 46 percent and telecommunication services at 46 percent have the highest percentage of board members with relevant ESG credentials. But although 53 percent of boards of healthcare companies have S credentials, no directors have E credentials and just two have G expertise, according to the report.

The industries with the lowest ESG relevant representation are consumer discretionary (media) at 12 percent, consumer discretionary (retailing) at 13 percent and industrials (transportation) at 18 percent, the research finds.

Whelan says the lack of relevant ESG expertise can be attributed in large part to a lag between board recruitment and the growing focus on these issues. Most board members have been in place since a time when the main focus of recruitment was returns to shareholders. But Whelan notes that there is increasing recognition that a greater range of issues affect returns to shareholders and that dealing with these issues is more than a tick-the-box exercise.

She points out that some of the industries facing the most material environmental risks have few directors with the necessary experience. For example, none of the board members at companies in the consumer discretionary (consumer durables and apparel) sector have environmental credentials, despite the industry’s large energy, waste and water footprint.

Although recruitment of directors is needed to increase the level of expertise on boards, Whelan says in the meantime corporate secretaries and general counsel can help by arranging training for board members. They can also help set up stand-alone committees on ESG matters and partner members with executives who are leading efforts such as sustainability initiatives, she adds.