ESG Issues Call for ESG Directors

By Tensie Whelan

ESG issues are growing in materiality and impact for all industries, with significant implications for board responsibilities. In the last weeks of January, for example, we saw a rapid set of announcements related to climate change and diversity and inequity, from both the federal government and the private sector. President Joe Biden announced plans for a net-zero economy for the U.S. by 2050 through various executive actions the same day BlackRock CEO Larry Fink released his letter to CEOs, asking them to make commitments to net-zero carbon emissions — also by 2050 — and to disclose diversity and inclusion data. General Motors announced a plan to electric vehicles and Unilever announced a commitment to a living wage for workers in its supply chain.

ESG is now a material financial issue that boards need to understand and review in terms of risk and business opportunity. Unfortunately, our research finds that most boards are not up for the task. We reviewed the credentials of the 1,188 Fortune 100 board members in 2018 as published on company websites and filings. We found that only 6% had experience in the “E” and the “G” and only 21% had experience in the “S.” Those numbers are worse than they look: only three directors had climate change experience (“E”), only eight had cybersecurity credentials (“G”) and only 18 had experience related to civil/human rights (“S”).

When we reviewed credentials by industry, we found that industries with significant ESG expertise often did not have board members with relevant credentials — for example, insurers will be heavily impacted by climate change (property, crops and human health) and yet only 6% of insurers (11 members of 149) had relevant “E” credentials. Transportation, another sector with significant climate change impacts, had only one of 66 directors with “E” experience. In retail, where employee turnover and productivity are material issues, only 10 of 69 had social credentials.

Dow Chemical stands out as a company that has aligned its board member expertise with its ESG exposure. To address its material environmental risks (e.g. materials, energy, water, climate), Dow has three board members with relevant “E” credentials: A member of the U.S. Climate Action partnership, a former EPA administrator and the chair of the World Business Council for Sustainable Development. It also has a board member who sits on the board of Catalyst (with experience in diversity issues) and a corporate senior internal auditor and a member of the B-Team, both “G” credentials.

On the other end of the spectrum, McKesson, which has been sued by various states as contributing to the opioid crisis, has material “E” (energy, materials, water), social (access to medicines, ethical clinical trials) and governance (misleading advertising, doctor “incentives”) issues, but has no board members with any relevant ESG credentials on their board.

Often these gaps occur because directors are former CEOs who ran their companies when ESG was less of an issue, traditional investors have a sole focus on the bottom line, a lack of board turnover or denial that having ESG-experienced directors is a need at all.

How Boards and Directors Can Become ESG Literate

  • Get training! NACD, Competent Boards and CERES offer director training in ESG.
  • Recruit board members with ESG credentials: chief sustainability or diversity officers, ESG/impact investors, leaders of respected nonprofit organizations active on ESG topics, CEOs who have led ESG transformation at their companies, leading business school academics active on ESG. There an increasing number of qualified board prospects.
  • Work with recruiters who have a defined ESG practice.
  • Create an ESG board committee to build engagement and accountability by all directors.
  • Work with the C-suite to embed ESG into the business strategy, create organization-wide KPIs and tie incentives to performance on the ESG indicators. The ESG indicators should tie to leading standards such as Sustainability Accounting Standards Board and Global Reporting Initiative.
  • Ask the CFO to track the returns on sustainability investments, including intangibles, through frameworks such as NYU Stern’s Return on Sustainability Investment.

Read the full NYU Stern CSB paper on ESG and board credentials.

Tensie Whelan is a professor and director of the NYU Stern Center for Sustainable Business.

Published date: February 11, 2021