Boards at UK companies recognise the imperative to grasp environmental, social and governance (ESG) issues, but are struggling with the practicalities of ESG, new research from Board Agenda reveals. The study ‘Leadership in ESG Integration’ suggests that, while ESG is now a clear boardroom priority for leading businesses, many directors are frustrated by the difficulties of operationalising their thinking, and that they are struggling to embed ESG in strategy.
Board Agenda’s research, conducted in collaboration with the professional services firm Mazars and Henley Business School, suggests boards in the UK have largely accepted that they must grapple with ESG challenges. Overall, 78% of boards have now published an ESG or sustainability policy, the study reveals, with 88% of boards saying they recognise the need to engage on ESG because of its materiality to their business.
Most boards also recognise that key ESG issues matter deeply to many of their stakeholders. Almost three-quarters of boards say they have engaged with employees on ESG issues; over half say they have held discussions related to ESG with both customers and shareholders.
At the same time, however, many boards worry that they are not properly equipped to consider key ESG issues. And they are also concerned about the quality of the information that their organisations are publishing through work such as environmental reporting.
Over a third of boards do not think they yet have all the skills and knowledge they need in relation to ESG, the research reveals, while just 39% think they are receiving sufficient ESG data and information from their management teams. More than half point to gaps in their companies’ ESG disclosures.
Chris Fuggle, partner and global head of sustainability at Mazars, said the research suggested boards had made good progress on embracing ESG, but he warned there was more work to do.
“Overall, companies have largely moved beyond the debate about the nature of ESG and how it is relevant to their organisation. Now, they are thinking about how to properly embed ESG in strategy and to operationalise,” Fuggle said.
“Key issues to resolve include how to expand engagement even further – more conversations with investors, customers and employers, and increased reach out to groups such as suppliers and community groups – while putting ESG strategy into practice is also a challenge.”
Sustainability and supply
Fuggle pointed to the supply chain as one example of where boards were finding it particularly difficult to work with the business practically on ESG concerns. Board Agenda’s research reveals that only half of companies have so far made changes to their supply chain practices in order to reflect ESG concerns.
Filipe Morais, research fellow in governance, leadership and directorship at Henley Business School, said that while focusing on the ESG agenda could lead to frustrations, it was encouraging to see many companies now prepared to conduct challenging conversations.
“The variety of interpretations of what ESG means is leading to tensions building up in the boardroom, as directors struggle to generate a rationale that satisfies the multiple views of ESG, and as executives feel frustrated that boards are asking for trade-offs that look doable on paper, but face tremendous hurdles in practice,” Morais said. “These are good signals: they suggest boards and executives are having to think harder about how to create sustainable value.”
Board Agenda’s research, based on a survey of 100 UK companies, suggests this debate is now playing out in real time at many businesses. As boards think more deeply about how to make explicit links between their organisation’s purpose and its corporate strategy, they are developing new governance and oversight structures within which to operate.
The pressure to change is, in part, external. The research reveals that 52% of boards have come under pressure from customers to address ESG issues at their companies, with 40% facing pressure from shareholders. But internal audiences such as employees are also pushing for change, with 46% of boards reporting pressure from this key stakeholder group.
Boards are responding accordingly. More than half of the companies in Board Agenda’s research have reviewed their mission or purpose specifically due to ESG concerns in the past five years. Two-thirds say they now have a policy for engagement with stakeholders on ESG matters.
“ESG is becoming a de facto competitive requirement,” added Henley Business School’s Morais. “Boards that fail to articulate a rationale will also ultimately fail as a business.”
Mazars’ Fuggle urged boards to embrace the ESG debate as an opportunity to drive positive change and improve performance. “Directors now recognise the social and moral imperatives to engage with issues such as climate change, but they also understand that the embrace of purpose can be a crucial value driver,” he said.
“The ESG narrative has changed – while it was once a conversation about what and where to start, today’s agenda is all about how to make a success of key initiatives.”
You can read and download the report Leadership in ESG Integration here.