Dynamic changes to environmental, social and governance issues are occurring. Is your board prepared?
As a board member it is critical to stay informed and up to date to ensure effective oversight over strategy and risk as well as to manage the company’s ability to meet shifting investor, market and regulatory expectations. An important course of action is to understand what investors expect of directors on ESG. Read on to find out how you can identify any weaknesses and prepare your board to withstand increased investor scrutiny.
ESG is on the agenda
Historically many ESG matters, in particular the “E” and the “S” issues, were not considered ‘board business’. Now, many directors expect to see ESG topics appearing on their meeting agendas. However, the fact remains that many boards lack the context and understanding of ESG to successfully shape and oversee its strategy for their organizations. Recent politicization of ESG and emerging regulatory reporting requirements adds additional complexity for directors attempting to respond to expectations.
While directors’ duties have not changed, investor expectations have. Board leadership and oversight must consider ESG when evaluating company strategy and approach. These matters have taken a firm hold across companies of all sizes, all industries and all markets, meaning boards cannot afford to ignore ESG.
A universe of oversight
As investors continue to increase their expectations around board oversight, it’s clear that boards must pay greater attention to a broader range of issues than ever before, in addition to managing disparate views on what ESG issues are important to consider.
More stakeholders and shareholders are engaging on the board’s role in overseeing various ESG considerations, including human capital, climate change, cyber security, and regulated reporting. Investors expect directors to have the relevant skills and ability to articulate the company’s approach to ESG. Investors are also showing a greater willingness to vote against directors if they perceive a lack of progress on material ESG issues.
Understand how your directors are being assessed
Your company can help investors understand the extent of the board’s oversight by providing transparent and comparable disclosures, aligned with ESG standards and frameworks such as International Sustainability Standards Boards (ISSB) and the Task Force for Climate-related Financial Disclosure (TCFD). But it’s also crucial to understand how investors are assessing directors’ capabilities and actions.
2020 - 2022 saw an increase in voting action against directors for ESG related concerns. For example, in the year up to June 30, 2021, BlackRock voted against 255 directors and against 319 companies for climate-related concerns. More recently the largest Institutions have decreased their voluntary disclosure while maintaining their approach to engagement. The decrease in transparency places directors who are not engaging with their investors on ESG matters at a disadvantaged. They may not be aware of how they’re prioritizing ESG considerations for the companies they hold.
In addition now with the universal proxy card (UPC) it’s Increasingly important for director expertise to be clearly aligned with the needs of the company, including on material ESG topics. it’s critical that management clearly understands the ESG landscape and how investors may evaluate your directors skills in relation to it.
Top 10 institutional investor proxy voting guidelines — ESG and diversity
| | ESG Incorporated in Proxy Voting? | Specific Board Diversity Guideline |
|---|---|---|
| BlackRock | Yes | BlackRock expects companies to have at least two female directors on their board. If a company has not adequately accounted for board diversity within a reasonable timeframe, BlackRock may vote against members of the nominating/governance committee. |
| State Street | Yes | If a company in the S&P 500 does not disclose, at minimum, the gender, racial and ethnic composition of its board, State Street will vote against the chair of the nominating committee. |
| Vanguard | Yes | The Vanguard funds may vote against directors at companies where progress on board diversity falls behind market norms and expectations and they may hold nominating committee chairs or other relevant directors accountable. |
| Dimensional Fund Advisors (DFA) | Yes | No specific board diversity guideline. |
| American Funds/ Capital Group | Yes | No specific board diversity guideline. |
| Fidelity International | Yes | Where companies consistently fall short of market/sector practice with respect to board gender diversity Fidelity expects them to adopt objectives for more equitable representation and demonstrate progress over time. In addition, if a board is not seen to address this issue seriously, additional measures may be considered, including voting against the re-election of the chair. |
| Invesco Advisers | Yes | Invesco will generally vote against the incumbent nominating committee chair of a board where women constitute less than two board members or 25%, whichever is lower, for two or more consecutive years, unless improvements are being made to diversity practices. |
| JP Morgan | Yes | JP Morgan will generally vote against the chair of the nominating committee when the issuer does not disclose the gender or racial and ethnic composition of the board. |
| Legal & General Investment Management | Yes | LGIM expects all companies to have at least one female board member and expects companies to promote diversity throughout the broader organization. LGIM will also vote against companies in the S&P 500 and the S&P/TSX that have fewer than 25% women on the board. |
| Northern Trust Investments | Yes | Northern Trust believes that an effective board should be comprised of directors with a mix of skills and experience, this includes diversity of background, experience, age, race, gender, ethnicity, and culture. Northern Trust may vote against one or more directors where they have concerns relating to the composition and diversity of the board. |
| Nuveen Asset Management | Yes | Nuveen Asset Management generally vote in favor of the board’s nominees but will consider withholding or voting against some or all directors when there is insufficient diversity on the board and the company has not demonstrated its commitment to diversity. |
| T. Rowe Price Associates | Yes | For companies in the US and Canada, T. Rowe Price Associates will generally oppose the re-elections of governance committee members if no evidence of board diversity is present. |
Ensure your board is engaged and informed about the topics that matter to your company, investors, and industry
It’s key for directors to be prepared for the changing and dynamic expectations around ESG. Georgeson’s ESG advisory team offers board education that includes:
- Breaking down the ESG landscape, whether you are starting at the beginning or taking topical deep dives
- Examining the leading ESG reporting frameworks and standards, including TCFD and ISSB, as well as any relevant sector specific efforts
- Understanding investor preferences and processes, such as engagement priorities, use of third party ESG data, ratings agencies, proprietary scoring systems, and discussing materiality – including the concepts of double materiality and dynamic materiality.
- Uncovering the material ESG issues pertinent to your business and industry, ranging from diversity and inclusion to climate change and everything in between
- Understanding ESG skepticism and how to manage competing perspective of different stakeholders
With ever increasing scrutiny on directors combined with the dynamism of ESG in the coming years, it’s crucial to stay abreast of the changing ESG landscape and make sure your board is engaged, educated and informed.
No matter what stage in your journey, Georgeson will help you conquer your ESG challenges.
Our advisory services help you understand your own, unique ESG landscape, advance your practices and communicate with investors effectively.