As investors are increasingly scrutinising companies’ environmental, social and governance (ESG) credentials, it is no surprise that boards are in the hot seat. To date, they have alot of work to do to sharpen their skills and acumen.
As investors are increasingly scrutinising companies’ environmental, social and governance (ESG) credentials, it is no surprise that boards are in the hot seat. To date, they have alot of work to do to sharpen their skills and acumen.This is according to a new report – How Competent is Your Board – from Competent Board, which runs ESG education programmes for board directors and business leaders, and the Copenhagen Business School.
They conducted in-depth analysis of publicly available information on 390 boards of Fortune 500 European companies and 447 boards of Fortune 500 US companies in 2023.
The focus was on the competency of corporate boards in terms of sustainability, including roles, experience and education.
The findings showed that only 2% of these companies stood out as “beacons of progress”, demonstrating “high levels of sustainability competency.”
Over 4% of boards in the US and Europe exhibit “no evidence at all of competence in this increasingly critical area of their companies’ business.”
This signals a critical deficiency that could leave companies ill-equipped to address the growing demands for responsible and sustainable business practices.
Surprisingly perhaps, the report noted that despite the stricter regulatory environment in Europe, American boards overall were “better equipped to deal with sustainability issues.”
Around 84% of European boards have room for improvement compared to 76% across the Atlantic.
On the education score, used to measure directors’ sustainability expertise based on their education, nine out of ten boards in both Europe and the US showed low competency in this area.
It was the only area where European boards outshone with two out of 10 boards compared to three out of 10 US boards had no relevant competency.
This was not the case with the committee score which reflected a director’s participation in sustainability-related board committees.
Over 50% of European boards performed below average, while over 50% of US boards exceeded the average. Three in 10 US boards demonstrated strong performance in this attribute.
The weakest area for both regions was the education score, which uses educational qualifications to indicate a director’s knowledge of sustainability issues.
The research found that over half or 55%) of European boards and 36% of their US peers performed below average, while nine out of 10 boards in both Europe and the US demonstrated low competency in this area.
The report also looked at directors’ past roles and found that 62% of US and 60% of European boards did worse than average, with just 1% of American boards performing “exceptionally.”
Market participants are hoping that the Competent Boards report serves as a call to action. They believe that boards must prioritise sustainability competencies to not only comply with regulations but to thrive in an era where responsible corporate governance is a strategic imperative.
Their view is that the report’s insights could trigger a reevaluation within boardrooms, prompting proactive measures to bridge the sustainability gap and ensure a resilient and sustainable future for Fortune 500 companies.
There have been a plethora of global sustainability disclosure initiatives such as the International Sustainability Standards Board and European Sustainability Reporting Standards designed to strengthen corporate governance.
These mandate detailed reporting on sustainability and climate risks, linking them to financial performance, and necessitating skilled oversight in these areas for strategic and responsible governance.
“Insufficient board competence in sustainability and ESG may hinder smart, strategic, and innovative decisions for long-term value creation,” according to the report.
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