Risk vs. reward: How directors across the globe see ESG today

Kaelyn Barron

Splashy headlines playing up the backlash to ESG have some wondering whether it's losing momentum. But despite divisiveness on the surface, directors around the globe say tightening regulations and evolving shareholder demands continue to push ESG conversations higher on the agenda.  

In its annual ESG report, the Diligent Institute explored how the growing importance of ESG is changing the way boards set, monitor and report on ESG goals — including common challenges they encounter and the strategies used to overcome them.  

Is ESG strategy a risk mitigator or value creator?

Over the last few years, ESG has shifted from a developing movement to a central focus for virtually every business. The Diligent Institute's report shows that 90% of directors have incorporated environmental goals or metrics into one or more areas of their businesses, and 87% have done the same for social goals and metrics. A majority of directors (61%) say their companies are taking extra care to ensure their ESG strategy is fully and accurately reflected in annual reports and filings.

But are companies framing their prioritization of ESG in terms of risk or opportunity? That varies widely, particularly by region. Globally, directors report a very balanced view — focusing on both the risks mitigated and opportunities created by effective ESG strategy.  

Yet, according to data collected by the Diligent Institute, European directors are far more likely to see ESG strategy as adding value and generating opportunity for their businesses, whereas U.S. directors are much more likely to frame ESG in terms of mitigating risk.

How boards incorporate ESG metrics today

Though nearly every business today has linked ESG metrics to business strategy, examining the level of integration reveals broad disparities in how and where ESG is driving business strategy.

Across the globe, roughly two-thirds (63%) of directors say they're making business decisions around reducing carbon footprint, while a third consider environmental metrics in supply chain and vendor selection. Directors commonly use social metrics to make decisions around employee, director and executive training, evaluation and compensation.

But when we view these statistics by region, gaps emerge. Once again, European boards lead the way when it comes to integrating ESG into strategy and decision-making. For example, nearly 90% of European directors use environmental metrics in carbon footprint reduction plans — double the rate of integration among U.S. directors (46%). European directors also report higher rates of social metric inclusion in decision-making, with twice as many U.S. directors (18%) saying they don't consider social metrics at all.

Is ESG integration driving stock performance?

As they increasingly integrate ESG goals into different areas of the business, directors are getting a clearer picture of how their ESG initiatives impact business KPIs — and stock performance, in particular.

The broad consensus suggests ESG integration is not yet correlating with stock performance. But again, regional disparities tell a more nuanced story. In the U.S., the majority of directors (61%) say ESG has not improved stock price, with just 10% saying they have seen an increase in prices. Meanwhile, in Europe, only 27% feel sure there has not yet been a bump in stock price.

These disparities suggest a fairly intuitive conclusion: European companies' more advanced integration of ESG metrics correlates with increased reporting of positive stock impacts. As ESG metrics are more fully and cohesively integrated into business strategy, companies will see those ESG metrics correlate more directly with stock performance.  

Put another way, as investors and other stakeholders can more clearly see ESG's connection to core business KPIs, they will increasingly recognize its business value.

How ESG is changing board oversight structure

How has the rising importance of ESG impacted the function of boards? A third of directors (29%) say they're spending more time discussing ESG issues in the boardroom. Nearly half of directors (48%) say they'll maintain or increase their ESG efforts in the coming year. Another 19% expect to make efforts to more directly link ESG to business impact over the next 12 months.

As ESG becomes a core business focus, the structure of ESG board oversight is evolving, as well. Most notably, responsibility for ESG oversight now falls on the shoulders of the entire board — a significant shift from a similar study conducted by Diligent Institute in 2019.

But as requirements and complexities grow, half of the companies represented in the 2023 survey now have a dedicated ESG or sustainability committee. This trend will almost surely accelerate as more companies delegate ESG oversight to specialized committees with focused expertise to understand and address the intricate challenges of ESG goals.

What's holding back ESG integration? A lack of clarity

Given the continuous expansion of ESG initiatives — and the growing correlation between ESG integration and stock performance — what's preventing companies from going all-in on ESG?  

Media coverage hypes ESG polarization as a barrier, but directors don't see public backlash as an obstacle to furthering its integration. Rather, the challenges are much more straightforward: Roughly half of directors say they need a better understanding of how ESG goals connect to business strategy, and another 1 in 3 say they just need better clarity on what those discrete environmental goals are in the first place. Without that clarity on the what and the why of ESG, making the case for its prioritization is more challenging: One in four (22%) directors say competing business/strategic interests take focus and resources away from ESG integration.

Directors also want better closed-loop insights on the progress and results from their existing ESG initiatives. New regulations amplify the urgency around the need for better ESG reporting. As they prepare to meet the requirements of the EU's Corporate Sustainability Reporting Directive (CSRD) and the U.S. SEC's climate rule, 53% of directors say they're enhancing their current ESG disclosures, and over a third (38%) plan to install ESG monitoring solutions to track compliance and measure results.

More data doesn't mean more clarity: Better board reporting is critical

As companies increase and expand their ESG monitoring and reporting, they must also recognize that simply throwing more data at boards won't resolve the clarity gaps.  

Directors are already overwhelmed with information, and most still lack deep ESG expertise. They need ESG metrics to be placed in context and boiled down to what matters most. They want clarity on how they should use ESG metrics to make better, smarter and faster business decisions.  

Looking forward, the ability to measure ESG-related impacts will remain a core competency. But to drive meaningful business outcomes, companies need to tackle a much more complex and critical challenge: the ability to clearly communicate what matters most through effective board reporting.  

Download the full Diligent Institute report to understand how ESG is reshaping what boards need today.

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Kaelyn Barron
Kaelyn Barron, Senior Specialist at Diligent, has expertise in ESG, environmental law and the intersection of governance with these issues. Her background in international relations allows her to provide unique insights into emerging ESG frameworks and regulations that impact multiple regions.