‘Significant number’ of boards lack basic sustainability expertise

Only 2% of companies stand out as 'beacons of progress'

A review of Fortune 500 European and US companies reveals a “concerning reality” where a “significant number” of boards lack basic sustainability expertise, according to a new report.

Competent Boards, which runs ESG education programmes for board directors and business leaders, and the Copenhagen Business School, came to the conclusion having assessed publicly available information of 390 boards of Fortune 500 European companies and 447 boards of Fortune 500 US in 2023.

Only 2% of these companies stand out as “beacons of progress”, according to the report, How Competent is Your Board?, boasting boards with an abundance of sustainability competence.

By contrast, more than 4% of boards in the US and Europe show no evidence at all of competence in this increasingly critical area of their companies’ business.

Despite stricter regulations in Europe, the research suggests US boards are better equipped to deal with sustainability issues. The findings pointed to 84% of European and 76% of US boards having room for improvement on board sustainability competency.

On role score, which evaluates competence based on a director’s past employment titles and sustainability-related roles, 60% of European and 62% of US boards performed poorer than average. Only 1% of the US boards performed exceptionally in this attribute.

The sustainability employment score, which assesses whether a director has worked at companies known for their sustainability practices during their tenure, was the only attribute reviewed where European boards, on average, performed better than the US boards. Two out of 10 European boards and three out of 10 US boards had no relevant competency.

A director’s participation in sustainability-related board committees is captured in the committee score. US boards significantly outperformed European boards in this area.

Over 50% of European boards performed below average, while over 50% of US boards exceeded the average. Three in 10 US boards demonstrated strong performance in this attribute.

Finally the education score, which uses educational qualifications to indicate a director’s knowledge of sustainability issues, found this attribute was the weakest area of performance for both European and US boards.

More than half (55%) of European boards and 36% of US boards performed below average, and nine out of 10 boards in both Europe and the US demonstrated low competency in this area.

“The landscape of board competency reporting is transforming due to regulatory changes and heightened stakeholder expectations. Companies must now provide transparent disclosures about their board members’ competencies to address global business challenges,” the report said.

Corporate governance revolution

Global sustainability disclosure initiatives such as the International Sustainability Standards Board and European Sustainability Reporting Standards are revolutionising corporate governance.

These mandate detailed reporting on sustainability and climate risks, linking them to financial performance, and necessitating skilled oversight in these areas for strategic and responsible governance. 

The US SEC is soon releasing a climate standard, and California’s Governor Newsome signed climate disclosure bills affecting 5,000 companies with strict reporting requirements. Non-compliance with sustainability regulations can lead to financial penalties and reputation damage.

“Insufficient board competence in sustainability and ESG may hinder smart, strategic, and innovative decisions for long-term value creation,” according to the report.