As it reported its fourth straight quarterly loss yesterday, Exxon tried to deflect a growing shareholder revolt by adding an independent board member and announcing investments in low-carbon technology.
The move was widely seen as too little, too late.
The oil company’s leadership has long adopted a “head in the sand” approach to climate change and shifting market and regulatory trends, actively opposing reporting and management of climate-related risk and eschewing a proactive low-carbon transition strategy that would ensure the company’s long-term survival. The lack of leadership has prompted investors to try and shake up Exxon’s board. Activist hedge fund Engine No. 1 has nominated four new board members who have expertise in moving to a low-carbon future (see, “There’s a new impact sheriff in town: activist hedge funds“).
Exxon’s dearth of board leadership on environmental, social and governance, or ESG, issues is the rule for multinational companies, not the exception. Just three board members out of 1,188 in the Fortune 100 in 2018 had climate change-related credentials, our research at NYU Stern Center for Sustainable Business found. And there have been limited shifts since then.
The issue goes beyond climate. Our study found that Fortune 100 board members have limited social, governance, or other types of environmental credentials, with just 6% having some type of “E” or “G” credentials, and 21% with some type of “S” credential (mainly in diversity and health care).
Managing for material ESG issues has become a must-have versus a nice-to-have. To be successful, business strategies must incorporate relevant ESG issues. For example, insurance companies must factor in infrastructure and health impacts of climate change, retailers must factor in diversity and pay equity issues, and consumer packaged goods companies must manage for climate, water, biodiversity, waste, and working conditions throughout their supply chains.
And yet we found that among retailers, where employee turnover and productivity is a material issue, only 10 of 69 had social credentials. Insurance companies have material risk related to environmental issues, as well as the opportunity to incorporate ESG into their investment strategies. Yet only 6% (11 board members of 149) had relevant “E” credentials. In the transportation sector, which must navigate challenges from a fast-moving energy transition to a shifting regulatory landscape, only one of 66 board members had environmental credentials.
Lack of expertise
Liberty Mutual, which offers property and casualty insurance, has no board members with climate credentials, though two are affiliated with energy companies. Its website has no extended bios for its board members; in fact a lack of disclosure about board member backgrounds, and especially credentials that may be ESG relevant, is a problem across many companies.
Looking at the retailing sector, which has a low number of ESG credentials, Home Depot illustrates the trend. The company’s material ESG issues include sustainable sourcing and packaging as well as diversity and equity for frontline workers. Home Depot had one board member who had social credentials (in health care and diversity), who has since left, and one board member who is chairman of a recycled product company (the “E” in ESG). Home Depot provides an interesting summary of what skills they believe directors bring to the board as part of their bios. Not one ESG issue is mentioned.
Or take McKesson, which has been sued by various states for contributing to the opioid crisis and has material ESG issues ranging from energy and water usage, access to medicine and ethical clinical trials, and misleading advertising and use of doctor “incentives.” Why then, does it have no board members with relevant ESG credentials?
The ecommerce behemoth Amazon has material governance (such as customer privacy and cyber security), social (employee diversity, health and safety, retention) and environmental (packaging waste, energy, climate) issues. But just two board members with relevant credentials: a former assistant to the Secretary of Energy and a former CEO of a nonprofit focused on family and community development. The company is missing board members with expertise in essential areas including cyber security and customer privacy issues, employee issues and broader environmental issues.
Interestingly, in a signal that some companies are beginning to take ESG more seriously, since our analysis was completed, Amazon has added Indra Nooyi – the ex-CEO of Pepsi – to its board. During Nooyi’s tenure, Pepsi focused extensively on ESG risks and strategy. Amazon also added Keith Alexander, co-CEO, president, and chair of IronNet Cybersecurity, Inc.
What about an example of a corporate leadership taking ESG seriously? Dow Chemical – a company operating in an industry rife with ESG issues – has aligned its board member expertise with its ESG exposure. Three of Dow’s 12 board members have relevant environmental credentials: a member of the U.S. Climate Action partnership, a former EPA Administrator, and the Chair of the World Business Council for Sustainable Development. Seven of the 12 are women or people of color.
A growing body of research demonstrates that good performance on material ESG issues results in good corporate financial performance. One study of 2,300 companies found that a portfolio invested in companies that perform well on material ESG issues would have a 6% outperformance on stock price. A portfolio characterized by companies with low performance on both material and immaterial ESG issues would underperform the market by nearly 3%.
Another study found that in an environment where firms are spending growing sums on litigation, strong ESG performance is correlated with lower penalties for regulatory violations and a 13% reduction in the likelihood of lawsuits. The results are consistent across E, S, and G – each yields a 5% to 7% reduction in lawsuits for firms with individual CSR ratings one unit above the mean.
With ESG becoming an issue of material risk, financial performance, and business strategy, corporate boards must become ESG competent, know what questions to ask, and hold leadership accountable for ESG execution.
Tensie Whelan is Clinical Professor of Business and Society and Director of NYU Stern Center for Sustainable Business