Survey: Majority of Corporate Directors See ESG Reporting as Essential; Many Take Steps Toward Board Diversity

By:
Ruth Singleton
Published Date:
Oct 15, 2021

GettyImages-1306922625-ESG

Almost two thirds of corporate board members endorse environmental, governance and social (ESG) reporting for their companies, according to PwC’s 2021 Annual Corporate Director’s Survey. Fully 64 percent say that ESG is linked to their company’s strategy, compared to only 49 percent last year. Yet only 25 percent say that their board understands ESG risks very well. In addition, an increasing number of directors say that diversity and inclusion (D&I) efforts are good for both their companies and boardrooms, and they recognize the need to build a culture of belonging. 

The survey reports that ESG is the topic that shareholders most want to discuss with directors, at 43 percent, followed by executive compensation (40 percent), strategy oversight and board composition (both 38 percent). Because many board members are not educated on the topic of ESG risks, some boards are forming committee to focus on the issue. While more directors are incorporating ESG into their companies’ strategy, relatively few are tying executive pay to such metrics.  

Fully 62 percent of directors say that ESG is a part of risk management discussions, up from 55 percent last year. And 54 percent of them believe that ESG issues have a financial impact on their companies’ performance. 

Directors at large companies (those with more than $5 billion in revenue) are more likely to link ESG to company strategy than those at smaller companies (74 percent vs. 54 percent.) and 62 percent of directors at large companies report that ESG issues are regularly on their boards’ agenda, compared to 38 percent at smaller companies. 

On the other hand, directors are not in favor of ESG regulations. Only 18 percent of directors say they support mandatory reporting or disclosure, while 67 percent support the current, voluntary approach. Fully 94 percent said they are offering some voluntary disclosure already. 

Additional findings of the survey addressed D&I issues. One half of the directors survey support tying pay to D&I goals. Only 33 percent of directors believe that board diversity can “happen naturally,” compared to 71 percent last year, a 38-point drop. Directors are pushing boards to promote diversity by planning ahead. “While directors aren’t ready to embrace diversity mandates, they can make significant improvements by setting goals and creating an internal succession plan,” the report says. 

Among the directors surveyed, 69 percent say their companies have replaced a retiring director with a director who increased the board’s diversity. In addition, 54 say their companies have disclosed information about board diversity in proxy statements, 33 say their companies have increased board size to add a diverse director, and 31 percent have engaged with shareholders on the topic of board diversity. 

While in the past three to five years, board diversity discussions have centered on gender, they have more recently turned to racial/ethnic diversity. Twenty-five percent said the single most important attribute their boards will prioritize in searching for a new director is racial/ethnic diversity. 

Most of the directors surveyed said that diversity brings unique perspectives to the boardroom (93 percent), and that diversity improves relationships  with shareholders (90 percent). Eighty-fie percent say say that it enhances board  performance, and 76 percent say that it improves strategy/risk oversight. 

Yet not all directors view the push toward diversity in a positive light. Fifty-eight percent say that diversity is driven by political  correctness—up six points from 2020. Directors are more likely this year than last to say that board diversity results in the nomination of additional unneeded candidates (31 percent, compared to 26 percent last year). In addition, 27 percent say that the push for diversity can result in boards nominating unqualified candidates to address these issues. 

Still, directors are generally more in favor of taking steps to increase diversity, such as following the “Rooney Rule” of always interviewing a diverse slate of candidates (88 percent  this year, compared to 82 percent last year). They also favor search firm policies of always offering diverse slates of candidates (85 percent vs. 81 percent). 

And when asked which steps their companies/boards have taken, or plan to take to address human capital and D&I issues, 74 percent said increased discussion of human capital or DE& strategy at the board level; 47 percent said investment in upskilling/retraining; 47 percent said providing additional metrics to the board; 46 percent said changing their approach to recruiting and hiring; and 39 percent said enhanced public disclosure of human capital or D&I metrics. 

 

 

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