About 68% Directors Feel Sustainability Has Low Impact On Financial Performance: Report

A new report by Heidrick & Struggles, Boston Consulting Group (BCG) and the INSEAD Corporate Governance Centre found that more than two-thirds of directors (68 per cent) feel that sustainability has little impact on financial performance today and only ten per cent believe sustainability will negatively affect medium- to long-term financial results.   

The survey also found that only 29 per cent of global board directors feel completely knowledgeable enough to challenge or monitor execution on sustainability and 89 per cent rely only on management updates to stay informed on the topic of ESG. 

The report stated that a combined 48 per cent of respondents confirmed that knowledge or experience with sustainability is either “not at all” or just “slightly” part of the competency matrix for their board selection.

Though significant progress has been made on boardroom awareness and acceptance of the sustainability agenda, capacity challenges and a self-declared lack of expertise at the board level has revealed a gap between intentions and prioritisation of the environmental, social and governance (ESG) agenda, it added.

The report found that despite greater societal expectations on businesses in terms of ESG, most boards do not feel financial pressure to act on sustainability issues. Also, about 52 per cent of those surveyed said they are acting on sustainability because it’s the ‘right thing to do’, with a similar number (51 per cent) citing legislative requirements.

“The job of the board today is more challenging than in recent history. Against the backdrop of economic uncertainty, rising social activism, and critical climate targets that are slipping from reach, boards require a new breadth of expertise that far extends beyond the traditional, operational, and financial health of a business,” said Alice Breeden, Co-leader of the European CEO and Board at Heidrick & Struggles.

Breeden added that if progress on sustainability is to improve, it is clear that further education, broader director diversity, and greater prioritisation of ESG in the boardroom must be standardised to meet the challenges of the current environment.

Stakeholder pressure motivating action  

Directors cited increasing expectations from capital providers including investors and the importance of sustainability in attracting and retaining talent as major motivators of action. A smaller share— about one-quarter—see a longer-term financial risk from not integrating sustainability into the business and 13 per cent see a threat to survival in the medium to long term.  

“Today, organisations, including their boards, are completely occupied with the upcoming legislative and reporting requirements. Action on sustainability is mostly driven by stakeholder pressure. This triggers risk-averse and defensive behaviour, leading to organisations that only do the bare minimum,” said Ron Soonieus, Senior Advisor, BCG; Director in Residence, INSEAD.

Soonieus who is a co-author of the report said that while the new rules and regulations serve a clear purpose, compliance does not guarantee the long-term success of the company. Boards struggle to see that and a fair share believes that if they comply, sustainability is covered. 

Notably, only 34 per cent of respondents say they have a clear understanding of how long-term trends impact the future value of the company. 

Boards increase focus on sustainability—but gaps remain  

There has been an undeniable shift in the expectations for the role of business in society which has created new challenges and competency requirements for board members. These heightened expectations have added to boards’ traditional responsibilities to oversee finances, manage risk, and select company leadership - all at a time when boards must rapidly upskill on the implications of AI, new geopolitical risk, and a changing world of working models. 

More than two-thirds of respondents (69 per cent) reported that boards’ expanding remit is increasing time requirements for directors. The share was higher for directors in the energy (77 per cent) and finance and insurance (74 per cent) sectors, two sectors in which balancing the world’s need for more energy with climate change is creating significant new risks and opportunities.   

“Sustainability has become part of boards’ fiduciary duty and steadily gaining priority on boards’ agenda as its importance continues to permeate across the fabric of business and society,” said Sonia Tatar, Executive Director, INSEAD Corporate Governance Centre.  

She added that more than ever, the weighted responsibility on boards is pointing to the imperative for targeted education to bridge the knowledge gaps which are fundamental in driving governance transformation starting from non-conventional stewardship from the top to collective leadership across the various stakeholders and within the organizational spectrum that deliver sustainable impact and actions.

Are board member profiles to blame? 

A combined 48 per cent of respondents confirmed that knowledge or experience with sustainability is either “not at all” or just “slightly” part of the competency matrix for their board selection. Perhaps surprisingly, this rises to 24 per cent of board members stating that sustainability experience is “not at all” part of the assessment criteria for CEO hires. 

Integrating sustainability into the business  

Directors see room for improvement when it comes to integrating sustainability into decision-making across the whole business. 66 per cent said that sustainability considerations should be fully integrated into business strategy - but just 38 per cent said that that is the case today.  

When asked what was preventing them from spending meaningful time on sustainability planning, more than 72 per cent cited the need to devote time to non-sustainability-related, high-priority topics.