Boards facing regulatory scrutiny intensify focus on ESG

By Jim Tyson for CFODive.com

• Corporate boards are intensifying their focus on environmental, social and governance (ESG) best practices as the Securities and Exchange Commission (SEC) prepares proposals for mandatory disclosures on climate risk and workforce, according to surveys by BDO and PwC.

• The proportion of directors who say their companies have linked ESG to business strategy surged to 64% this year from 49% in 2020, PwC said, citing a survey of 851 directors. Seventy-three percent of directors are focused on keeping up with regulatory guidance on ESG, according to BDO, which surveyed 230 directors. Both surveys ranged across industries.

• “Board members now report that ESG is the No. 1 topic investors most want to discuss with directors during shareholder engagements,” according to PwC. “However, the value of ESG initiatives extends beyond satisfying shareholders’ growing interest: Directors understand ESG efforts are good for business and will contribute to long-term stability and growth,” BDO said.

The SEC division of corporation finance last month asked CFOs in a variety of sectors to provide more detail on the impact of climate change on their financial condition and operations.

The agency requested a range of information, including the physical impact from climate change and the direct or indirect effects on business from climate-related legislation and regulation. The SEC released a sample of its letter, while not specifying the extent of its distribution.

SEC Chair Gary Gensler said in July he has asked agency staff to submit a proposal for mandatory climate risk disclosures for agency consideration by the end of 2021. Such reports may be required in an expanded Form 10-K and describe a company’s direct and indirect carbon emissions, including those by suppliers and partners in its “value chain.”

Companies may need to report on metrics such as greenhouse gas emissions, financial impacts of climate change and progress towards climate-related goals, Gensler said, adding that he aims to ensure investor access to “consistent, comparable, and decision-useful disclosures.”

The proposed disclosure rule may not be ready for public release until early 2022, Gensler said last month, noting rising pressure from investors for such information. He has also asked staff to propose a regime for disclosure on “human capital.”

ESG activism by shareholders took center stage during the 2021 proxy season when Engine No. 1, a hedge fund, won investor support in May for replacing three directors on the board of Exxon Mobil.

Engine No. 1 rallied investors including BlackRock, State Street and Vanguard Group by arguing that Exxon had wasted capital on oil projects that yielded meager returns while ballooning company debt. It also said Exxon lacked a solid plan for shifting to cleaner sources of energy.

“In 2021 we see a real shift in how boards are thinking about and addressing ESG,” according to PwC.

Sixty-two percent of directors say that sustainability is part of risk management discussions and 54% say ESG issues have a financial impact on company performance, PwC said. Still, only 25% of directors say their board understands ESG risks very well.

Within the next three years, 75% of boards plan to create an internal ESG-reporting framework, 73% intend to align sustainability reporting metrics with corporate strategy, 67% plan to improve their company’s positive impact on the environment and 35% plan to create a board committee focused on ESG, BDO said.

During the same timeframe, 82% of boards intend to build a more diverse board and leadership team and 72% plan to focus on social issues important to stakeholders, BDO said.