US Boards Suffer Inadequate Expertise in Material ESG Matters

Research Initiative

US Boards Suffer Inadequate Expertise in Material ESG Matters

While firms are familiarizing themselves with ESG issues, there is still work to do.

CSB analyzed the credentials of 1188 Fortune 100 board directors. We found 29% of directors had relevant ESG credentials in 2018.

The list of environmental, social, and governance (ESG) issues that can pose financial risks to corporations exploded in 2020: climate change, water scarcity, pollution, #metoo, #blacklivesmatter, worker welfare, employee diversity, corruption, human rights abuses, supply chain scandals, and the global pandemic COVID-19. Yet while many investors and chief executives now take ESG seriously in their decision-making, one powerful constituency is lagging: corporate boards.

Recent research — including studies conducted by NYU Stern CSB and former NYU Stern MBA students Jamie Friedland and Ellen Knuti at the NYU Stern School of Business — show that many boards have minimal ESG-related expertise and many do not even recognize the need to pay attention to material sustainability issues. CSB analyzed the individual credentials of the 1188 Fortune 100 board directors based on Bloomberg data and company biographies in 2018. Our findings show that 29% of directors had relevant ESG credentials. To read the full report, see which industries are most equipped for today's challenges and opportunities, and the way forward for corporate boards, click here. A shorter version of the report was also published in Harvard Business Review.

Board Credentials Table

Understanding Credentials by ESG Category

Social (21%)

"S” areas with material impact for companies—human rights, human resource development, benefits, and safety, for example-- had negligible board member representation. Across all ESG topics, the topical and urgent issue of workplace diversity had the largest number of directors with relevant credentials (5.0%). Mainly these directors were involved with boards or initiatives that focused on increasing minority leadership, such as Catalyst (supporting female leadership) and diversity councils.

Governance (6%)

An issue of growing materiality, cyber/telecom security, had just eight board members with expertise. There were very few directors who had experience with ethics, transparency, corruption, and other material good governance issues. The third-largest category across E, S & G and the largest in the G category was accounting oversight (G) at 2.6%. U.S. boards are required to have a least one board member with an audit/finance background and most boards have at least two with that background.

Environmental (6%)

Two areas of material importance to most companies and to investors, climate and water, had just five and two board members with relevant experience, respectively, across all 1188 Fortune 100 board members. In general, there is very little director expertise for the “E,” with all nine categories at approximately 1%. The largest showings, at 1.2% (or 14 individuals) each, were in energy and land/conservation.

What can firms do to become better equipped to deal with ESG issues?

As asset owners, asset managers, and many CEOs are now considering ESG issues essential for financial performance, companies can ensure they are equipped with the necessary expertise by:

Recruiting directors with ESG experience
Training board members in material ESG issues for the sector
Including ESG issues in the various committees (ESG metrics in remuneration, ESG credentials in nominating, ESG risk in risk and audit)
Setting up an ESG/sustainability committee to oversee the ESG risks and opportunities and how they are embedded in business strategy
Requiring executives to provide audited reports on ESG KPIs and the financial impact of ESG investments using tools like CSB's Return on Sustainable Investment (ROSI) Methodology, which allows companies to measure intangible metrics including risk avoidance, employee retention, and operational efficiency

To learn more about tactics firms can adopt, read the full report.

Center for Sustainable Business | US Boards Suffer Inadequate Expertise in Material ESG Matters