Three ESG New Year’s Resolutions for Directors

December 11, 2017

Environmental, Social and Governance study finds key transparency and performance issues

By Thomas Singer

Gender diversity, climate risk and sustainability-tied compensation are three key environmental, social, and governance (ESG) issues that directors need to be thinking about next year.

Those are just some of the findings of a recently released Conference Board study examining the transparency and performance of S&P Global 1200 companies regarding ESG issues.

Here’s a rundown of the three topics:

#1: Gender diversity at the management and board levels

Only 12% of North American companies disclose the percentage of women who hold management positions. By comparison, European companies are almost four times more likely to report this information in their annual reports or sustainability reports.

The low levels of disclosure highlight an unflattering reality: Women hold just one in four management positions among North American companies. And in fact, while disclosure represents a step in the right direction, by no means will that alone move the diversity needle. Case in point: Among European companies, where more than half report on this metric, women represent only about one in five management positions – that marks an even smaller share compared to North American companies. 

Directors should pay particular attention to imbalances between the median percentage of women in the overall workforce and the median percentage of women in management positions. For instance, data from the financial sector show a significant imbalance. Despite women accounting for 52% of the workforce among financial companies, women represent only 27% of management positions at these companies, a gap of 25 percentage points.

#2: Climate risk reporting

Investors are recognizing the link between climate risks and shareholder value, and they are becoming increasingly impatient with companies that fail to disclose these material risks. Across the globe, companies are responding to this increased pressure by developing and articulating climate change strategies. Put simply, a growing number of companies are reporting to stakeholders about how they plan to tackle business risks and opportunities associated with climate change.

Stakeholders expect companies to be transparent about these strategies, yet this is an area where North American companies are significantly lagging. For instance, 68% of companies in Europe and 71% of companies in Asia-Pacific have publicly adopted a climate change strategy. This is well over twice the rate observed among companies in North America, where less than one-third of companies report having a climate change strategy.

Directors should take stock of their companies’ level of transparency in this area: Does the company report on its climate change strategy? Are material climate-related risks discussed in the company’s financial filings? This type of disclosure is quickly becoming expected of companies, and large institutional investors are devoting increased attention to this issue. For instance, during the 2017 proxy season, shareholder proposals requesting greater disclosure of climate risks passed at three large U.S. energy companies.

#3 Incentive compensation and sustainability performance

A small but growing number of companies are making explicit links between ESG performance and executive compensation.

In fact, 21% of companies in North America report linking compensation to sustainability performance, a practice already underway among more than one-quarter of companies in the European sample. Not surprisingly, companies in heavy industries apply this practice the most. For example, companies in energy, materials, and utilities sectors, which have long included safety metrics as part of compensation schemes.

While the data show an increase in the number of companies linking ESG performance to compensation, wide variation remains in the quality and breadth of disclosure. The lack of a standard methodology for linking compensation to ESG performance means companies that opt to make this link do so in different ways. Transparency on the details of these specific compensation schemes also falls short. Moreover, most companies offer little explanation on how their incentive compensation schemes incorporate sustainability issues.

Directors should consider what their companies’ priority ESG issues are, and whether it makes sense to adopt compensation incentives to improve performance against these issues. This is one way to send a clear message to stakeholders that the company is serious about embedding sustainability into the core business strategy.

Thomas Singer is Principal Researcher in the Sustainability Center at The Conference Board. He is the author of the new report, Sustainability Practices.