In 2018, only 22 Fortune 100 boards had sustainability/ESG committees. Today, 89 do.
In the same year, only 29% of Fortune 100 board members had ESG credentials. Today, 43% do.
This demonstrates a greater focus on sustainability by boards as a strategically important issue for their companies.
In fact, sustainability topics like climate change, worker welfare, water scarcity, cybersecurity, customer safety and corruption continue to grow in financial materiality for corporations, and regulators are asking for clarity into board oversight (e.g., the recent SEC climate regulations).
According to research into Fortune 100 board credentials conducted by NYU Stern Center for Sustainable Business, in 2018, only 6% of board members had environmental or social credentials. In 2023, 12% have environmental credentials and 15% have governance credentials. Only .002% (3 individuals) had climate credentials in 2018; .02% (22 individuals) of 1161 do today. In 2018, only .07% (8 board members) had cybersecurity credentials; .04% (50) do today. Improvement, clearly, but not enough given how material both climate and cybersecurity are to most companies. Investors with a sustainable finance focus (counted as both E- and S-related credentials) grew from 5% to 15% — a percentage we expect to grow. For social credentials, we saw the category remain stable at 22%, but there was continued growth in directors with DEI expertise, growing from 60 directors to 108.
Unfortunately, certain industries and companies continue to underperform in terms of ESG board credentials. The utility sector, for example, which has huge environmental risks ranging from extreme weather destroying infrastructure to regulatory frameworks calling for decarbonization, has one of the lowest percentages of board members with ESG credentials and zero board members with environmental credentials.
Taking another deep dive, in the category “health care: pharmaceuticals, biotechnology & life sciences,” 13 of 139 directors have “E” credentials, with five enjoying sustainable business credentials. However, this industry is energy- and water-intensive (health care is responsible for 8.5% of greenhouse gas emissions in the United States), and yet zero board members have climate expertise, though two have renewable energy expertise and one has water expertise. On the social side, 41 of 139 directors have “S” credentials, with 12 in diversity and 14 in health challenges/advocacy — both topics that are material for this sector. Zero board members have expertise in labor relations or workplace safety, despite the fact that this industry is challenged to find sufficient labor and also has workplace safety challenges. Finally, 30 have “G” credentials, with 13 in accounting oversight and eight in cybersecurity — again both material for the sector.
Our report has more detail on different sectors, but the bottom line is that boards of directors should ensure that they have the training and expertise needed to understand and provide oversight on the material sustainability issues for their company.
In terms of best practices for boards, we recommend the following approach based on our research and work with corporate sustainability strategy and value creation:
- Board leadership should work with the executive team to understand the material ESG topics for the company and review and map current board expertise. This includes identifying weak areas.
- For weak areas, determine if training is sufficient (and, if so, provide it to directors) or add expertise where necessary.
- Incorporate sustainability into existing committees as follows:
- Audit. Review ESG reporting and disclosure.
- Nominating. Oversee training requirements for directors as well as recruiting of directors with desired sustainability credentials.
- Compensation. Determine how much compensation should be tied to sustainability targets. Ensure the targets are meaningful.
- Sustainability. Because material sustainability issues have a direct impact on a company's risks and opportunities, we recommend a sustainability committee be set up to work with the executive team on how sustainability is embedded in the business strategy. The committee should also track the financial returns on those sustainability investments. The chair of this committee should have a strong sustainability background, but other directors could join the committee as a learning opportunity.
Sustainability risks and opportunities are material to a company's financial performance. Directors need to be conversant with the issues and provide adequate oversight. A growing number of lawsuits on topics such as climate (1,500 in the United States alone) require boards to be on top of their games, as do the upside opportunities for companies to drive innovation and sales, reduce operational inefficiencies, and engage and recruit employees through embedded sustainability.