Why Today’s Boards Need Sustainability Expertise

Incorporating sustainability-driven targets and initiatives into strategy and recruiting sustainability experts at the C-Suite level are some of the most prominently observed responses to these trends in recent years, but a seemingly lacking critical area in need of more initiative and education remains: boards of directors.

Troublesome Numbers Show a Lack of Sustainability Importance and Expertise on Boards and Slow Progress in Board Diversity

Considering the role that boards of directors play in providing critical guidance to businesses to mitigate risk and ensure compliance with applicable laws and regulations, having sustainability experts sit on boards might sound like a logical and timely measure to address demands and rapidly evolving regulatory developments. Concerningly, board members today may not be so convinced. A 2022 survey from PwC found that 31% of board directors considered having environmental and sustainability expertise represented on their boards “Not Very Important,” and only 11% believed it’s “Very Important.” Further, less than half of board directors see a link between ESG issues and the bottom line, with only 45% stating they believe ESG issues financially impact company performance.

In addition to the lack of recognition of the impact of ESG issues, insufficient expertise is even more apparent in boardrooms. The same quoted survey also reports that less than two-thirds of board directors felt their board understood the company's climate risk and strategy, only slightly more than half felt their board understood the company’s carbon emissions, and only one quarter felt their board is sufficiently prepared to oversee imminent ESG disclosures. A 2018 report that analyzed 475 of the world’s largest companies further highlights this lack of expertise and found that only 17% of the companies had at least one board director with “demonstrated expertise or experience in sustainability issues.”

Along with environmental sustainability, data on social and governance sustainability aspects of ESG on boards are also a cause for concern. Despite increasing efforts to appoint more board members from underrepresented groups and more female board directors to address growing investor demands, overall progress is still lagging as a result of low boardroom turnover. In 2022, only 32% of S&P 500 board directors were women, and only 21% were from historically underrepresented racial or ethnic groups. Governance of board diversity is evidently interrelated with environmental sustainability strategies on boards, as the same PwC board survey cited above discovered that 66% of female board directors prioritize climate change compared with just 45% of male directors. The survey also found that over the past 12 months, only 39% and 32% of board directors discussed company stances on social issues and human rights, respectively.

While these areas may not seem to be strongly linked to company strategy, they are still areas in which stakeholders often expect companies to take positions on and remain key areas of board oversight. While these referenced reports, among others, reveal some increased awareness and discussion surrounding sustainability in boardrooms, the gap between sustainability awareness and perceived importance and the gap between board strategy and sustainability competence poses varying risks and implications for boards and their companies.

Pressure On Boards to Understand Sustainability Risk Continues to Grow

Risk oversight is a significant component of the fiduciary responsibility of boards of directors. With geopolitical and economic fallout from the COVID-19 pandemic, the war in Ukraine, inflation, and social unrest, the global business environment and boards of directors have navigated tremendous risks over the last few years.

Across the categories of economic, environmental, geopolitical, societal, and technological risks humans face, environmental risks dominate the list of the World Economic Forum’s Top 10 Global Risks for the next 10-year period, holding 6 out of the 10 spots. Consider the global insurance industry, which saw insured economic losses driven by natural disasters increase by over 250% during the past 30 years. Billion-dollar natural catastrophes have greatly increased in frequency over the last decade, with climate change continually cited as a critical reason for the intense changes. These catastrophic events also impact the complex interdependent global supply chain, leaving almost no sector safe from environmental risk.

Increasing pressure on boards is also mounting from financial institutions and global regulations. The UN-convened Net-Zero Banking Alliance, founded just recently in 2021, already represents over 40% of global banking assets, with 129 bank members committed to reducing financed emissions and aligning portfolios with net-zero emissions by 2050. In the regulatory world, Net Zero Tracker reports that 92% of the global economy is committed to a net-zero pledge. As more countries continue to make 2050 Net Zero pledges, the EU was the first region to put the target into law, with an intermediate target of a 55% reduction in greenhouse gas emissions by 2030. Further, the EU expanded its ESG reporting requirements under the new Corporate Sustainability Reporting Directive which entered into force in January 2023, requiring more companies to provide expanded sustainability disclosures, impacting thousands of American and Canadian businesses. In the United States, analysis shows that investors strongly favor the SEC's proposed climate disclosure rules, which are expected to be finalized later in 2023.

Boards must also take into consideration that disclosure rules and sustainability-driven legislation are not limited to climate-related issues and are beginning to entail governance and social sustainability aspects of ESG as well. In 2018, California was the first state to introduce a board gender diversity mandate, requiring that all publicly traded companies include women on their boards. Other states have enacted similar board gender diversity legislation, including New York, Colorado, and Illinois, with several other states currently considering similar legislation. The EU’s Corporate Sustainability Reporting Directive referenced above includes reporting directives related to social and governance metrics in addition to environmental metrics, such as social responsibility, employee treatment, human rights, and board diversity.

The ESG regulatory landscape and disclosure rules continue to evolve swiftly, underscoring the pressing need for boards to build the competence to fully understand which regulations will impact their strategy the most and to ensure their oversight is effectively meeting stakeholder expectations.

Boards Must Revitalize and Build Sustainability Expertise Today

The message is clear: boards that fail to acquire the necessary skills and expertise face considerable risk in light of environmental threats, growing pressure from stakeholders, and the rapidly evolving regulatory landscape. Boards can no longer rely on external consultants to discharge their fiduciary responsibility to be adequately educated on sustainability risks and opportunities before making business decisions. Public companies must reassess their boards' competence and skill set, focus on integrating sustainability into the nomination process for board directors, and adequately educate the board as a whole.

Incorporating sustainability into the nomination process is a multi-faceted approach; a 2017 report from Ceres, Inc. highlights a handful of ways that board nomination committees can achieve this. One of the recommendations is to create recurring opportunities for board members with relevant sustainability expertise to join, with periodic board refreshes and evaluations. Taking this idea a step further, implementing sustainability expertise into board candidate qualifications and finding potential candidates that are able to see the connection between ESG issues and business risk and provide that context to the board is another essential piece. An additional approach to consider when recruiting board directors is to seek out candidates with relevant experience in engaging with important stakeholder groups that can provide further insights. 

Outside the nomination process, empowering current board members is integral for a board fully equipped to integrate sustainability and strategy. Mandating regular education or training and engagement with stakeholders for all board directors can help to strengthen the board’s overall sustainability expertise. The Ross School of Business and Ceres, Inc. recently announced a new executive education online program to provide board members with the necessary climate and sustainability skills to address sustainability risks and opportunities effectively. Requiring that an entire board regularly participate in such sustainability educational programs is just one example of a low-investment, high-return action boards can take right now to maintain a competitive edge in the emerging era of ESG risks and opportunities.

While everyone can be a champion of sustainability, effective businesses know that leadership starts at the top. Therefore, it’s imperative that modern corporate boards be well equipped to not only assess ESG risks most material to their organizations but also to make informed decisions to ensure shareholder value and long-term success. Without fundamental sustainability expertise, boards will find it increasingly difficult to adhere to their fiduciary responsibilities, and the consequences could be far-reaching for their organizations, stakeholders, and resources for future generations.