Is ESG Receiving Sufficient Attention in North America?
The results of a recent global survey conducted by the University of Oxford and Protiviti suggest that North American companies not only lag their counterparts in Europe and Asia-Pacific on Environmental, Social, and Governance (ESG) matters but do so significantly. What does this “enthusiasm gap” mean, and should boards care?
In the survey, the 250 director and C-suite executive respondents widely dispersed across countries and business sectors overwhelmingly acknowledged ESG’s growing importance to their companies’ success over the next decade. But for every ESG factor addressed in the survey, North American respondents indicated less engagement with and commitment to ESG. For example:
Only one in four North American business leaders surveyed holds the view that ESG strategy will be extremely important by 2032, compared to nearly six in ten in Europe and seven in ten in Asia-Pacific.
Less than 40 percent of North American leaders expect greenhouse gas (GHG) emissions to decline over the next 10 years, whereas 81 percent and 88 percent of leaders in Europe and the Asia-Pacific region, respectively, have such expectations.
Similar gaps appear in other areas as well. The data raises two essential questions with implications for the future: What is driving the North American findings? And what are the implications for leaders and their boards?
What Is Driving the North American Findings?
The Oxford-Protiviti survey findings suggest that either North American companies are at a lower stage of ESG maturity than their European and Asia-Pacific counterparts or they underestimate the importance of external pressures, such as stakeholder engagement and government and regulator commitment, that appear to be key drivers for companies in other parts of the world.
Two findings in particular offer insights that help explain the disparity:
Slightly more than half of North American participants said that they believe ESG reporting will not be mandatory in 10 years, whereas almost all the European and Asia-Pacific respondents believe it will. North American business leaders may be influenced by a belief that ESG disclosures will continue to be largely voluntary.
Stakeholder engagement is widely expected by European (67 percent) and Asia-Pacific (79 percent) companies to increase in 10 years’ time. By contrast, 57 percent of the North American respondents expect their level of stakeholder engagement to remain about the same as today or even decline.
Whether one or both of the premises noted above is true, the outcome is the same: many North American companies are laggards. Companies focused on ESG with a regulatory compliance mindset are driven primarily by a risk and compliance perspective—a check-the-box approach that often lacks genuine commitment. By contrast, companies in Europe and Asia-Pacific may be thinking more strategically about environmental and social objectives as an imperative for building reputation and brand image and creating competitive advantage.
What Are the Implications for Leaders and Their Boards?
With the economic and geopolitical turbulence in the marketplace, the agenda is most certainly crowded in the C-suite and boardroom. That said, there are several questions directors should ask to ensure that the CEO and management team are taking the long view in leading the way to a sustainable business in a changing world.
Are we waiting for regulators and stakeholders to tell us what to do?
The fundamental issue for boards: What’s the right answer for the company over the long term, irrespective of the regulatory environment or stakeholder engagement?
Are we prepared to invest in GHG emissions reductions—or not?
The disparity above suggests European and Asia-Pacific companies are prepared to invest more in addressing environmental issues than companies in North America. How will that play out with respect to attracting and retaining younger generational talent, responding to customers’ sustainability information requests, and addressing the transparency that regulators are almost certain to demand with mandatory disclosure requirements? Directors should engage management in candid strategic conversations regarding corporate purpose and values relating to environmental and social matters. Those discussions should segue into discussions around goal setting and accountability.
Are inertia, indifference, or short-term thinking limiting our ability to move beyond past conventions and the status quo?
Are North American companies constrained by short-termism with a focus on “making the numbers?” The survey noted that 60 percent of business leaders under the age of 50 believe ESG will be extremely important to business success in 10 years, whereas only 42 percent of those over 50 share that view. The question arises: Are short-term thinking and generational distinctions impeding broader strategic thinking? To that end, boards should encourage more diversity of critical thinking in the C-suite and boardroom.
Have we given sufficient attention to ESG’s implications for the future?
For sure, ESG has its share of critics and naysayers. While the contrarian points merit consideration, ESG strategy and reporting should be about competitive position and sustaining relevance of the business over the long term.
Is ESG integrated with the business, or is it window dressing?
Companies should integrate relevant ESG priorities with the overall corporate strategy and put in place appropriate people, processes, and systems to address appropriate objectives, metrics, and targets. ESG initiatives should be integrated with performance expectations, monitoring, and reward systems. If they aren’t, ESG is relegated to a peripheral check-the-box add-on that will likely be under-resourced. With over 80 percent of American consumers concerned about the environmental impact of the products they buy, 53 percent sometimes or never believe companies’ environmental claims. Vague slogans, fluffy language, pretty pictures, lack of proof, and over-the-top claims are signs of potential greenwashing, not to mention ineffective investor relations.
Is the board organized appropriately to engage in strategic conversations regarding ESG strategy, execution, and reporting?
Research in the United States of S&P 100 board committee charters noted that 93 companies incorporated ESG oversight into one or more committee charters, with 67 percent of those companies spreading oversight responsibility across two or more committees. As ESG reporting increases in importance, directors should ensure that the board’s structure brings together the reporting and operational elements into a coherent overall message to achieve a complete board view. This may entail establishing a new committee, altering board composition, and educating existing members to sharpen the board’s focus.
In summary, this is a data-driven call to action. Boards have a duty of care and a duty of loyalty to ask the tough questions. The seven questions posed above demand the most attention from boards that recognize that there is a critical link between ESG and resilience, innovation, and growth.
Jim DeLoach is managing director of Protiviti. DeLoach is the author of several books and a frequent contributor to NACD BoardTalk.