About three or four years ago, Leslie Hosking, who had served on the boards of Australia's largest cement company and AGL Energy Limited, noticed something new in the governance landscape: 'The emphasis on environmental issues started to increase.'
While climate change played a large role, 'it was also driven by the heightened awareness of the media, communities, the public itself, and even some investment companies that were looking at ethical investments and considering if they wished to be invested in energy intensive industries that emitted carbon.'
Does Hosking's observation apply to directors all over the world? The answer is complicated'especially when you look at the United States.
65% of US boards have no established ESG policies or practices, vs. 35% of boards in the rest of the world. ' Diligent Institute report, Winds of Change: Environmental Sustainability Governance Rises to the Board LevelDiligent Institute, a new global think tank and research arm, set out to understand board practices related to environmental, social, and governance (ESG) issues. In its first report, Winds of Change: Environmental Sustainability Governance Rises to the Board Level (published Feb. 2019), the Institute found interesting discrepancies between US boards and those throughout the rest of the world.
- 65% of US boards have no established ESG policies or practices, vs. 35% of boards in the rest of the world.
- Only 29% of US boards oversee ESG issues vs. 55% of boards in the rest of the world.
- Only 32% of US boards have some form of ESG reporting, versus 56% of boards in the rest of the world.
- Only 17% of US boards have any committee with a full ESG mandate vs. 37% in the rest of the world
- Only 11% of US boards have a formal mandate for the full board to address ESG issues, vs. 25% in the rest of the world.
Differing views on relevance and responsibility
49% of UK directors ranked social impact among their top three motivators for prioritizing ESG issues, compared with only 36% of US directors. ' Diligent Institute report, Winds of Change: Environmental Sustainability Governance Rises to the Board Level
Why are directors in certain regions of the world more invested in environmental governance than others? One reason could be the conditions they experience personally. Piere Clarke, the Chief Risk Officer at Barclays Bank Mozambique, said, 'Living in Africa, you're so clearly able to see the impact of global warming, to see the impact on weather patterns. Generally, we know that we've got to adapt.'
Meanwhile in the United States, where ESG impact is often less visible, people see ESG as more of a fad than an imperative'something to be leveraged by activist investors who want short-term results.
Attitudes toward ESG roles and responsibilities differ greatly between the US and the rest of the world. Clare Wardle, general counsel and company secretary of Coca-Cola European Partners, cited 'a lot of very targeted taxation of our products in relation to sugar and plastic, and we expect future regulations on plastic and packaging. Plastic straws are a good example.' In a survey by RBC Global Asset Management, US and Canadian respondents say shareholders should take the lead in influencing companies on ESG issues, while European investors feel it's the role of government regulators.
Yet even among investors, those outside the US are more prone to wield ESG scrutiny. According to Carina de Klerk, communication and investor relations manager at South African electronics company Reunert, 'Investors are asking these questions more regularly now, but it is more the European investors asking. The US investors do so less often.' She explained, 'European investors want to understand if you're a signatory to the UN Global Compact, and we should see a growing interest in how corporates are supporting the Global Goals for Sustainable Development.'
This lack of investor ESG pressure may be surprising to governance professionals in the US, given headlines naming '2018 the Year of ESG Investing' and touting 'Portfolios with a Purpose.' Only 9% of our survey respondents selected 'investor pressure' as a primary motivation for prioritizing ESG.
The rise of citizen and bottom-line demands
The factors more likely to force US businesses to act are financial risk and consumer pressure, according to Tensie Whelan, clinical professor of Business at New York University, the director of the Center for Sustainable Business, and the former president of the Rainforest Alliance. Whelan said, 'The US government has abdicated a lot of responsibility, so now there is demand from citizens that companies take on responsibility that were never part of their mandate 10 years ago.'
Customers want to engage with environmentally friendly products and services; 21% of Diligent Institute respondents cited this as a reason to prioritize ESG issues.
Ensuring long-term business viability is also a primary ESG motivator for 37% of respondents'and it's not just oil companies and chemical manufacturers who are seeing ESG as critical to their business success. For a tech company, energy usage and greenhouse gas emissions have an impact that matters to millions of people. And for a company in insurance or financial services, good corporate citizenship is a priority for employees and prospects'especially the next generation.
People are asking more from corporations than to just make profits. We have to put sustainability at the top of our agenda because employees care about it. ' Guy de Selliers, board member at Ageas S.A., AMG Advanced Metallurgical Group, Ivanhoe Mines Limited