Why Directors Say ESG Is Overblown

Nicholas J Price
5 min read

Investors have made it known that ESG is an important issue for them. It's a topic that comes up virtually every proxy season. Investors are continually asking companies for reports on how they factor in risks related to environmental, social and corporate governance (ESG) matters. ESG matters to investors from the standpoint of sustainability and long-term strategizing. This is not surprising considering all the changes that are occurring so rapidly in the economy and in the corporate marketplace, and the amazing advancements that technology continues to develop.

There's no disagreement between board directors, senior executives and investors about the importance of ESG. Where the disagreement comes in is with regard to the degree of importance that each of them gives ESG. Many board directors feel that the topic of ESG is important, but that it's vastly overblown in comparison to other issues with which they need to deal. Board directors that get too many questions about ESG may demonstrate a degree of annoyance. In general, today's board directors have voiced their sentiments over investors giving too much attention to diversity, environmental and sustainability issues, and corporate responsibility matters. They're trying to make it clear that they need to find the balance around addressing all these matters in the boardroom while giving each of them adequate attention, without getting to the point of overkill.

Board Directors Desire More Control of Their Boardrooms

As of this year, boards are beginning to push back on the main issues that investors continually bring forth. Diversity, gender parity on boards and ESG are the most pressing issues in the eyes of the investors. However, the reality is that boards have many more issues that they also must address. They've heard investors' concerns on these topics over and over, and they're ready to say, "Hey, we listened to your concerns and we responded. Can we move along now?"

It's as if board directors are looking to regain some of the confidence that investors lost in them through the mistakes of big financial companies in the past. Boards have a job to do. They know their responsibilities and they're open to recommendations and suggestions. What they don't want is for investors, lawmakers or regulators to run their agendas from the sidelines. Boards are looking for credit for knowing their companies, their competitors and the marketplace, as well as their commitment to good corporate governance.

When boards are being pushed and pulled by too many external forces, it takes time away from the issues and projects they feel deserve to be prioritized. Boards no longer want to be distracted or swayed from their own priorities in favor of what investors want them to focus on.

It's important to note that board directors aren't disagreeing with investors on all fronts. Both sides agree with the philosophy that they need to focus on long-term stock performance. According to PwC's 2019 Annual Directors' Survey, about 75% of the board directors who were interviewed said investors are giving long-term stock performance the right amount of attention, compared with 56% in 2018.

The results of the survey clearly indicate that directors are changing some of their priorities on their own accord, despite how investors see things.

The survey reported that 63% of board directors gave too much attention to board diversity in 2019, compared with only 35% in 2018. Around 58% of board directors acknowledged that investors placed too much focus on racial and ethnic diversity, compared with only 33% in 2018. Pertaining to ESG, about 56% of board directors felt investors gave it too much emphasis, compared with only 29% the prior year. About 47% of board directors said that investors worried too much over corporate social responsibility, in comparison with 29% in 2018.

ESG Is Losing Prominence in the Boardroom

While shareholders continue to push their ESG agendas, boards are starting to back off from them a bit to try to regain a little perspective on it. The Annual Director's Survey indicated that only 34% of board directors said that they made ESG a regular part of their board agendas. In addition, only 57% of board directors reported that they made ESG part of their enterprise risk management discussions, even though they felt pressure from investors to consider ESG in terms of risk opportunities.

About half of the board directors responded that their boards have a strong understanding of ESG issues and that they linked ESG to the company's strategy. Board directors acknowledge the importance of ESG to their investors and they're aware that it's the board's responsibility to ensure that they're giving ESG and its related risks and opportunities adequate attention.

If we narrow down the ESG issues more specifically, boards are giving specific areas less attention than last year. In the area of health care, only 26% of board directors felt that it should be a big part of their strategy as compared with 36% in 2018. The same percentage, 26% of board directors, give importance to the scarcity of resources, whereas 31% of directors gave it the same degree of importance a year ago. Boards also gave the issue of human rights slightly less importance this year, with 21% of directors stating that it was very important, compared with 28% last year.

Boards Take a Broad Perspective on ESG

Within each part of the ESG acronym, there are many subcategories. For example, under the definition of social, we can break it down further to encompass employee treatment, pay and benefits. The term also includes employee training, development, safety policies, diversity, inclusion, ethical supply chain sourcing and much more.

Rather than focus on the broadly defined ESG, boards desire to play a role in helping to bring some clarity to the issue of ESG. There are numerous risks and opportunities that fall under each heading of environmental, social and governance, and boards are more inclined to take a deeper dive and to break down the individual issues. Boards are taking charge of those issues as they impact the ERM program and long-term strategy. There is also a new motivation for boards to improve the transparency of ESG disclosures and to improve on how effectively they relate their ESG stories to their investors.

While directors say the issue of ESG is overblown, they're still interested in the many nuances that fall under the umbrella of ESG and how those issues will impact their companies for the long term.