Majority of Corporate Boards Lack Understanding of ESG Risks, Reveals PwC Survey

Over two-thirds of corporate boards in the United States struggle to grasp the intricacies of environmental, social, and governance (ESG) risks that may impact their organizations, according to the Annual Corporate Directors Survey recently released by global professional services firm PwC. The study encompassed insights from over 600 directors of public companies across more than 12 industries, with 73% of those surveyed representing companies boasting revenues exceeding $1 billion.

Of the surveyed directors, 64% had served on their boards for over five years. The survey's findings highlighted that U.S. board members have witnessed a marginal reduction in their focus on ESG issues, even amidst continuing geopolitical upheaval and mounting political pressure aimed at reevaluating investors' perceived ESG agendas.

The report revealed that female directors were more likely than their male counterparts to perceive ESG issues as integral to company strategy, with 67% of female directors recognizing this linkage, compared to 51% of male directors. Similarly, 61% of female directors believed that ESG issues influenced financial performance, a viewpoint shared by only 35% of male directors.

While discussions surrounding ESG continue to be integrated into corporate strategies, an overwhelming majority admitted to possessing limited understanding of critical sustainability-related matters. Only 31% of respondents reported that their boards had a profound understanding of ESG risks concerning their companies. Additionally, 42% claimed a solid grasp of their companies' overall ESG strategy, and a mere 27% professed to comprehend ESG opportunities thoroughly.

The directors displayed greater clarity on ESG-related issues such as talent management and corporate culture, with 52% and 45% respectively indicating a strong understanding of these topics. In contrast, only 26% of directors claimed to possess a comparable understanding of carbon emissions, and a mere 20% felt confident in their grasp of climate risk and strategy.

Talent management and data security ranked as the ESG-related topics garnering the most attention from corporate boards, with over 90% of respondents acknowledging substantial discussions about these subjects within the past year. Nonetheless, key sustainability-related issues were less frequently on the agenda. Approximately 49% of boards discussed climate change, 43% talked about environmental remediation, and just a third of boards tackled human rights.

The survey also noted a significant enhancement in the readiness of boards to oversee mandatory ESG disclosures, with 51% of respondents indicating that their boards were well-prepared for this task, a significant leap from the 25% reported in last year's survey.

The report underscored strong board member support for linking executive compensation to non-financial metrics. Only 7% believed compensation should be tied exclusively to financial performance. In contrast, 44% of respondents advocated linking executive compensation to diversity, equity, and inclusion metrics, and 31% favored binding it to environmental goals.

This survey highlights the evolving landscape of ESG issues in boardrooms across the United States, emphasizing the increasing importance of ESG in shaping corporate strategies and governance.