Infusing ESG into a company’s culture and operations requires a sound system of corporate governance as well as an engaged and informed board. Yet according to a 2022 report from EY, European senior leaders feel their boards have not fully embraced a commitment to integrate ESG considerations into their decision-making.
The annual EY Long-Term Value and Corporate Governance Survey also highlighted how to improve corporate governance among boards and meet investor expectations for a more ESG-fluent board. These and other takeaways offer valuable information for investors seeking to enhance their impact on corporate governance issues.
Lack of Commitment
The survey found a significant gap between how consumers, employees, and others expect companies to prioritize ESG issues and board commitment to champion those matters. Polling 200 senior leaders from 15 European countries and 25 industries, the report uncovered a substantial increase—from 66% to 84%—in the number of board members and C-Suite executives asserting that the pandemic has impacted expectations for businesses to drive social, environmental, and inclusive growth efforts. Yet 43% of respondents, compared with 28% the year before, felt their board lacked a commitment to bringing ESG factors into their decisions, thereby forgoing the long-term gains of such a commitment.
The findings highlight a variety of concerns and challenges facing ESG at the corporate level and, more specifically, among boards. First, although boards play a critical role in shaping a company’s direction, the report raises questions about boards’ interest in adopting a long-term ESG view. Take the matter of balancing short-term issues with long-term growth: slightly more than half of respondents cited substantial differences of opinion on the topic among leaders. Although that’s a small decline from the 60% in the previous year’s survey, the lack of agreement remains a significant problem. What’s more, the number reached 68% among board chairs and nonexecutive directors.
Such disagreements underscore challenges that affect how boards can take part in a robust ESG corporate governance process. They also point to larger questions about how deeply such matters have—or have not—become a significant part of boards’ responsibilities.
Need for Renewed Focus
Another challenge suggested by the report is the relative lack of focus on corporate governance efforts compared with the environmental and social factors of ESG. Critics argue for approaching that ESG corporate governance element not as one isolated component but as a way to address environmental and social issues essential to the successful realization of ESG goals.
Board diversity presents another ongoing concern for many ESG investors. A 2021 report on corporate governance analyzed board diversity data in Russell 3000, S&P 500, and S&P MidCap 400 companies, finding that boards still largely comprise white directors. That’s even true for newly elected board members: less then a quarter of such directors are nonwhite. However, gender diversity among Russell 3000 firms did at least rise to 24.4% from 15%, continuing ongoing improvements in gender diversity on boards.
How to Improve Corporate Governance
For companies looking to improve corporate governance as it relates to ESG issues, the report offers suggestions. It recommends improving the board’s ESG skills and understanding as well as building a board that is diverse in terms of experience and expertise as well as gender and race. Investors can also play a role by rewarding companies that do make strides and pushing others to follow suit.
Ultimately, the pieces are in place for boards and the entire field of ESG alike to continue evolving in that direction. For now, boards can work to meet investor expectations and seize the responsibility for ESG risks, opportunities, and outcomes.