Corporate leaders in North America are less engaged with ESG than their global counterparts, as the term itself continues to fall out of favor. But does that mean climate change and sustainability don’t matter. Protiviti’s Jim DeLoach has 10 questions for boards and top execs.
According to a global survey by Oxford University and my firm, 250 directors and C-suite executives widely dispersed across countries and business sectors unanimously acknowledge the growing importance of ESG matters to their companies’ success over the next decade. But for every ESG factor addressed in the survey, North American respondents indicate significantly less engagement with and commitment to ESG.
What do these findings mean, and why should corporate leaders and their boards care?
To illustrate, only one in four leaders surveyed in North America is of the view that ESG strategy will be extremely important by 2032. But that number jumps to nearly six in 10 in Europe and seven in 10 in Asia-Pacific. To some, this may not be a surprise.
ESG as a term has become so politicized in the United States, that even BlackRock’s CEO, Larry Fink, has admitted he has stopped using it because in his view, the extreme left and extreme right have “weaponized” it. Further, he has stated BlackRock’s intention to be part of the solution to shareholder proposal overreach, as evidenced by the firm’s voting to approve just 7% of these proposals in 2023, down from 22% in 2022 and 47% in 2021. He has also acknowledged that plans focusing solely on limiting supply of and failing to address demand for hydrocarbons will drive up energy costs for the poor.
But decarbonization, governance and social issues remain relevant, right? Well, maybe, maybe not.
The Oxford survey noted that fewer than 40% of North American leaders expect greenhouse gas (GHG) emissions to decline over the next 10 years, whereas 81% and 88% of leaders in Europe and Asia-Pacific, respectively, have such expectations. Similar gaps manifest themselves with respect to the assessment of environmental risk levels and expected corporate spend, process improvements to reduce the impact of company operations on the environment, the level of risk posed by social factors on the business, and the likelihood of changes in board composition.
These gaps raise two essential questions with implications for the future.
What is driving the North American findings?
The Oxford study offers two insights to explain the disparity in geographical results. First, just over half of the North American participants believe that ESG reporting will not be mandatory in 10 years, while almost all of the European and Asia-Pacific respondents believe it will. Thus, the views of North American business leaders may be influenced by a belief that the selection of ESG content for disclosure purposes will continue to be purely voluntary. This is not true elsewhere. In the EU, for example, the Corporate Sustainability Reporting Directive (CSRD) requires standardized and, in most cases, verifiable reporting on ESG performance.
Second, stakeholder engagement is widely expected by European (67%) and Asia-Pacific (79%) companies to increase in 10 years’ time. By contrast, 57% of North American respondents expect stakeholder engagement to remain about the same as today or even decline. This phenomenon is happening now. While the number of ESG-related proposals submitted for the Russell 3000 during the 2023 proxy season (951) through May 15 was at about the same level as in 2022, only a fraction (3%) received majority support (compared to 5% in 2022). The decline in voting approval of shareholder proposals by BlackRock is an illustrative trend in this regard.
Do the above results point to North American companies as laggards relative to their overseas counterparts? We know that many CEOs take this stuff seriously. What it may mean is,companies in Europe and Asia-Pacific may be thinking more strategically about environmental and social objectives, recognizing them as an imperative for building reputation and brand image and creating competitive advantage. As they embed sustainability into strategy and product development, they expect to create breakthrough innovations and operating models that support the business and drive sustainable financial performance.
By contrast, North American companies may view ESG more with a risk and compliance perspective, a check-the-box approach that may be lacking true commitment and can even lead to “greenhushing” (a deliberate attempt to avoid greenwashing allegations by under-communicating or otherwise publicly reporting as little as possible regarding progress toward climate objectives).
Are North American respondents correct that sustainability disclosures are likely to remain voluntary in terms of substance and content? Perhaps, but the SEC remains focused on mandating additional climate disclosures, though timing remains uncertain, and is likely to increase the robustness of human capital disclosures with additional guidance. With respect to the CSRD, it is estimated that approximately 10,400 non-EU enterprises will be required to comply, and nearly one in three of those non-EU companies (31%) are based in the United States, according to research from financial data firm Refinitiv. The bottom line: Whether they like it or not, mandatory ESG reporting will soon become a reality for these companies.
Are North American respondents correct that stakeholder engagement is likely to wane? That seems unlikely given nearly daily reminders of the impact of climate change and the significance placed on certain ESG matters by younger generations — in particular, on working for and buying from socially responsible companies. For example, in the U.S., the term “climate quitters” is emerging to describe individuals who leave their jobs or turn down job offers because of their perception that the current or prospective employer doesn’t perform to its environmental objectives.
Analysts predict the AI revolution could disrupt the jobs of 70% of the global workforce. Companies need to adapt to a world of flexibility, agility and accelerated upskilling, says Protiviti’s Jim DeLoach.Read more
What are the implications to leaders and their boards?
Executive leaders and directors should be inquiring about the progress being made toward a sustainable business in a changing world. “ESG” may be on the decline as a useful term, but sustainability objectives remain relevant for longer-term success. To that end, the 10 questions below apply to all public companies worldwide and to private companies with IPO aspirations as well as those that answer to customers and other stakeholders. But they are particularly important to North American companies.
Are we waiting for regulators and stakeholders to tell us what to do? The fundamental issue for corporate leaders is: What’s the right answer for the company long-term, irrespective of the regulatory or stakeholder environment? It should make no difference whether sustainability reporting is mandatory or voluntary. Companies with a “wait and see” mentality regarding sustainability priorities run the risk of conveying to their stakeholders a lack of vision and values. As mentioned above, foreign companies operating in the EU may be subject to the CSRD requirements. These companies need to start the necessary preparatory work immediately if they haven’t already begun.
Are we prepared to invest in GHG emission reductions or not? The Oxford survey discloses that 63% of North American respondents expect their company’s GHG emissions to remain the same or increase in 10 years’ time versus only 19% and 12% for their European and Asia–Pacific counterparts, respectively. It is interesting that 10% of North American respondents believe that emissions will actually increase over the next 10 years despite all efforts to reduce them. Only 7% of North American respondents believe that environmental risks will be extreme in 10 years’ time, whereas for Europe and Asia-Pacific, 23% and 34% of respondents, respectively, believe so. Further, 50% in North America believe that costs of ESG compliance will remain the same or decline over the next 10 years, yet another significant gap. (The proportions of respondents in Europe and Asia-Pacific who agree are 19% and 10%, respectively.)
This disparity on global issues suggests that European and Asia-Pacific companies are prepared to invest more in addressing the environment than those in North America. How will that play out with respect to attracting and retaining younger generational talent, responding to customers’ sustainability information requests and addressing the transparency that regulators are certain to drive with mandatory disclosure requirements? Candid strategic conversations regarding corporate purpose, values and goal-setting relating to environmental and social matters are needed in the C-suite and boardroom.
Are inertia and indifference limiting our ability to move beyond past conventions and the status quo? Are North American companies constrained by short-termism driven by constant efforts to “make the quarterly numbers”? Using a distinction in age demographics between people over 50 and those under 50, the Oxford survey noted that younger executives are more attuned to the growing importance of sustainability matters. For example, 60% of business leaders younger than 50 believe that ESG will be extremely important to business success in 10 years, while only 42% of those older than 50 share that view. The question arises as to whether short-term thinking and generational distinctions are impeding broader strategic thinking. If so, should there be more diversity of thought in the C-suite and boardroom?
Have we given sufficient attention to the implications of sustainability issues for the future? For sure, ESG has its share of critics. Some are quite vocal (e.g., numerous state attorneys general attacking an institutional investor’s use of ESG screening). Others argue that getting swept into political, social and culture issues is a distraction from more pressing global issues such as energy prices, inflation and supply chain congestion, all of which have been exacerbated by Russia’s war against Ukraine. Still others assert that ESG is too difficult to measure. Stakeholder capitalism is hard when there are stakeholder conflicts. That all said, leaders should take a long-term view of sustainability as ensuring an organization’s relevance and competitive position.
Do we integrate sustainability considerations with strategy and capital allocation? Corporate leaders and boards are stewards of capital. All initiatives, including those relating to sustainability matters, should be evaluated the same way in terms of risk and reward (e.g., what is the strategic opportunity and purpose, what are the risks and how do we measure return on capital?). That is why sustainability initiatives should be integrated with strategy-setting. Sufficient agenda time in the C-suite and boardroom should be allocated to strategic issues that relate to key environmental and social matters in the context of assessing strategy, risk and capital deployment. These conversations and how the company’s sustainability initiatives compare to those of its competitors can help frame the storyline the company aspires to convey to the market.
Are our strategy and core values aligned with our narrative to the street? Stakeholder messaging on sustainability matters should be founded on purpose, commitment, principles and integrity. Greenwashing has a cost. While over 80% of American consumers are concerned about the environmental impact of the products they buy, 53% sometimes or never believe companies’ environmental claims. Vague slogans, fluffy language, pretty and evocative pictures, lack of proof and over-the-top claims are signs of potential greenwashing, not to mention ineffective investor relations.
Is sustainability integrated with the business, or is it window dressing? The company should integrate relevant ESG considerations with the overall corporate strategy and put in place appropriate people, processes and systems infrastructure to address and report ESG objectives, metrics and targets. Sustainability initiatives and considerations should be factored into performance expectations, monitoring and reward systems. If they aren’t, ESG is relegated to a mere peripheral add-on to the business and will likely be under-resourced and subject to check-the-box compliance.
Are we undertaking an end-to-end process to sustainability reporting? Greenwashing is about disclosure risk, whereas addressing greenhushing risk is more about strategy-setting and having confidence in the ability to deliver on sustainability targets shared with investors. To address both, a collaborative team engaging finance, investor relations, legal, compliance and operations should formulate climate risk strategy, determining the appropriate targets to communicate to the street, designing the processes and metrics for measuring progress, and defining the protocols for the extent and frequency of public disclosures. Climate-related information shared with insurers, banking partners, customers, employees and other third and fourth parties should be identified and reviewed for alignment with the organization’s public climate disclosures and core sustainability values. Internal controls should address data accuracy and governance.
Do we integrate sustainability matters into risk management? As a noted author points out, ESG “is … a collection of … disparate risks that corporations face, from climate change to human capital to diversity to relations among the board, management, shareholders and other stakeholders.” Executive leaders and the board should ascertain that these risks are incorporated into the scope of the enterprise risk management process.
Is the board organized appropriately to engage in strategic conversations regarding sustainability strategy, execution and reporting? Research in the United States of board committee charters of the S&P 100 noted that 93 companies incorporated ESG oversight into one or more committee charters, with 67% of those companies spreading oversight responsibility across two or more committees. As sustainability reporting increases in importance, directors should ensure that the board’s structure brings together the reporting and operational elements into a coherent overall message to achieve a “whole board view.“ This may entail establishing a new committee, altering board composition and/or educating existing members to sharpen the board’s focus.
The above 10 questions merit the attention of senior leaders and their boards to the critical linkage between sustainability and resilience, innovation and growth. They constitute a call to action through a balanced, thoughtful strategic conversation in which there is no room for political extremism. Sustainability is a strategic asset for addressing stakeholder expectations for more transparency in corporate disclosures. A compelling sustainability strategy supported by targets and goals for the future has become table stakes. Companies lacking transformative thinking on the sustainability front risk alienating younger generations and customers.
Are the company’s commitments to all of its stakeholders and just to its shareholders mutually exclusive? Corporate leaders who believe that these commitments are complementary likely base their view on the premise that a stakeholder perspective is integral to generating sustainable long-term shareholder value. With that perspective, sustainability represents a forward-looking disclosure framework. The world has changed such that companies had best focus on how they can carve out a leadership role that will resonate with investors, attract talent and retain customer loyalty — a role that they can execute with intention and that underpins a differentiating story to investors.