Corporate boards raise concerning knowledge gaps when it comes to sustainability, new global research finds

• A new report by Heidrick & Struggles, INSEAD and BCG, found that more than two-thirds of directors (68%) feel that sustainability has little impact on financial performance today, and only 10% believe sustainability will negatively affect medium- to long-term financial results.
• The survey also found that only 29% of global board directors feel completely knowledgeable enough to challenge or monitor execution on sustainability, and 89% rely only on management updates to stay informed on the topic of ESG.
• A combined 48% 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 prioritization of the environmental, social and governance (ESG) agenda. That is according to a new global survey of board directors published today by Heidrick & Struggles (Nasdaq: HSII), a premier provider of global leadership advisory and on-demand talent solutions, in partnership with Boston Consulting Group (BCG), one of the world's leading management consulting firms, and the INSEAD Corporate Governance Centre, a global INSEAD centre of excellence for research, innovation and impact in corporate governance.

The report finds that, despite greater societal expectations on businesses in terms of ESG, most boards do not feel financial pressure to act on sustainability issues. 68% of those surveyed said that sustainability considerations have "no effect" or a "slight effect" on financial performance today, but 52% of those surveyed said they are acting on sustainability because it's the 'right thing to do', with a similar number (51%) citing legislative requirements.

The Role of the Board in the Sustainability Era 2023 is a global survey examining the perceptions of boards towards a full spectrum of ESG issues, as well as how the drive for sustainability is influencing and reorganizing the efforts of boards. The findings reveal how boards are adapting their own composition, governance, and process considerations with varying degrees of success to better meet their organizations' ambitions and stakeholders' expectations for sustainability.

This tension between the importance of sustainability, and the time and effort required to consistently give it the attention needed to prioritize it is a persistent theme, according to the report. Although a significant majority (79%) of board members surveyed said their board had a very clear understanding of the strategic opportunities and risks sustainability presents, only 29% completely agreed they had sufficient knowledge to effectively challenge management on sustainability plans and ambitions and exercise oversight on their execution.

The survey highlights that these challenges are a global phenomenon, with very few differences evident across regions and sectors, despite very different traditions of corporate governance and responsibility.

"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 & Board at Heidrick & Struggles. "If progress on sustainability is to improve, it is clear that further education, broader director diversity, and greater prioritization of ESG in the boardroom must be standardized 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: 10% expect a negative impact on medium to long term financial results and 13% see a threat to survival in the medium to long term.

"Today, organizations, 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 behavior, leading to organizations that only do the bare minimum," said Ron Soonieus, a Senior Advisor at BCG, a Director in Residence at INSEAD, and a coauthor of the report. "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 believe that if they comply, sustainability is covered. Only 34% of respondents say they have a clear understanding of how long-term trends impact the future value of the company. Boards have a key role to play in ensuring sufficient weight is put on making sustainability an integral part of the long-term strategy, and to start seeing it as a source of competitive advantage."

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%) reported that boards' expanding remit is increasing time requirements for directors. The share was higher for directors in the energy (77%) and finance and insurance (74%) 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 of the 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% 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% 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% said that sustainability considerations should be fully integrated into business strategy - but just 38% said that that is the case today.

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

While challenges remain with dedicating time and resources to prioritizing sustainability as a key focus area, leaders highlighted the value and importance of integrating sustainability into other strategic considerations as essential to driving greater sustainability outcomes.