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Corporate boards don’t get ESG

Green Daily

In climate news today...

Tim Quinson's Good Business

Many corporate boards in the U.S. are unprepared to tackle the environmental risks posed by the climate crisis, primarily because few of their members have the background to truly understand what's at stake.

Of the 1,188 directors at 100 of the biggest U.S. companies, just 6% had "relevant credentials" in environmental protection and only 0.3% had expertise in either climate- or water-related issues as recently as 2018, a study released by New York University's Stern Center for Sustainable Business said.

The numbers are especially alarming given that about 1,500 companies have announced net-zero emissions goals, and just a small fraction of them have "concrete plans" in place that will get them to their targets by 2050, according to a survey of more than 600 corporate and institutional investors by Bank of America Corp.

Almost all corporate boards suffer from "inadequate expertise in financially material ESG matters," said Tensie Whelan, the director of NYU's Stern Center for Sustainable Business.

Climate change, water scarcity and pollution, as well as employee diversity, human rights abuses and supply chain scandals, represent a handful of the environmental, social, and governance issues that are creating material risks and opportunities for corporations and investors, and still many boards have little related oversight or expertise, Whelan said.

For example, none of the 13 consumer discretionary companies in the Fortune 100 had a board member with environmental credentials despite the sector's large energy, waste and water footprint; health-care equipment and services companies, which have a similarly large environmental footprint, had only three of 120 board members with environmental credentials. Insurers have material environmental risks and also incorporate ESG-related investment policies to incentivize good behavior, yet only 11 of 149 board directors had relevant "E" credentials.

Pharmaceuticals, biotechnology and life sciences, utilities, household and personal products, and telecommunication services companies had the highest percentage of board members with relevant ESG credentials, Whelan said. By contrast, the industries with the lowest representation were media, retail and transportation companies. Transportation, which has significant environmental challenges such as high-energy use, recently had only one of 66 board members with environmental credentials.

So what is a board to do? Directors have to first understand and pinpoint ESG risks, prioritize them and then bring on the expertise, Whelan said.

"At the board level, you could look to former CEOs who made ESG a core focus, such as Paul Polman, formerly of Unilever," she said. "He really has led the charge around ESG at a corporate level." 

Dow Inc. stands out as a company that has aligned its board member expertise with its ESG exposure, Whelan said. The chemical company has three board members with relevant "E" credentials: a member of the U.S. Climate Action partnership, a former Environmental Protection Agency administrator and the chair of the World Business Council for Sustainable Development.

"Without board members who have a strategic understanding of the issues, the board won't know the questions to ask or even understand that the potential risks might exist," she said.

Sustainable Finance in Brief

  • Banks are failing to address the global plastic-pollution crisis, having provided $1.7 trillion in financing to packaging companies, retailers and related businesses.
  • The number of companies that say they are withholding political contributions from Republicans and others after last week's attack on the U.S. Capitol continues to grow. Here is the list.
  • Biodiversity loss and supply-chain risks rank among the biggest ESG themes of 2021.
  • HSBC shareholders ask the bank to cut its fossil-fuel lending exposure.  
  • Companies are more than twice as likely to report climate-risk data when investors actively pressure them to do so.

Bloomberg Green publishes the Good Business newsletter every Wednesday, providing unique insights on climate-conscious investing and the frontiers of sustainability.

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