Diligent Institute in collaboration with the Institute of Directors, Ireland (IoD) recently conducted a survey to better understand how Irish boards are integrating ESG into their company strategies. Though the findings also suggest that Irish companies may lag some of their European counterparts in areas such as ESG integration into executive compensation, the data showed that Irish companies are picking up with the tides of time concerning ESG integration into their business strategy.
Overall, 262 IoD members representing independent directors, non-executive directors, executive directors, senior management, and company secretaries took part in the survey with more than 70% working for companies headquartered in Ireland.
Who should own ESG within a company?
To address investors’ concerns on ESG issues, there has been great pressure on companies to integrate ESG into their strategy and operations. With that in mind, companies now have to navigate ESG ownership within an organization. One of the key findings of the report was that 59% of our respondents indicated that ESG is dealt with at the board level.
As ESG issues are added to the board agenda, some companies opt to delegate ESG oversight to an already existing committee of the board. However, due to the scope of ESG issues, other boards may choose to constitute a special committee to focus solely on ESG. When it comes to ESG ownership at the board committee level, 48% of respondents who said ESG is dealt with at the committee level of the board indicated that they have set up a special committee to oversee ESG matters. Meanwhile, 18% said that their risk committee is taking on the responsibility for ESG oversight, while 21% indicated that other committees, such as the executive and finance committees, have been appointed to oversee ESG in their organisations.
Many schools of thought seem to side with this trend that boards should have a dedicated ESG committee in place. Having a dedicated ESG committee with the right expertise and background ensures that ESG is embedded in the right way and sits at the centre of strategy and operations. As the drive for ESG strategy is increasing with many regulations on the horizon, it behooves organizations to have the right framework to implement them efficiently. As indicated above, a significant percentage of respondents; 18% indicated that their risk committee oversees ESG related issues at the committee level. A recent report by Margaret Casely-Hayford of the IoD UK puts it into an interesting context.
According to her, delegating to the risk committee can leave ESG more likely to become a tick-box function rather than one integral to strategy.
The impact of COVID-19 on ESG acceleration
To understand how the pandemic has changed ESG discussion in Irish boardrooms, we asked respondents if their boards discussed ESG matters prior to March 2020, and 52% of respondents said their board discussed ESG matters at the time. When we asked respondents whether they discussed ESG after March 2020, this measure rose to 82%,. with a staggering 97% indicating that they foresee their board will be discussing ESG matters at least once a year in the next three years.
These findings shed some light on what the pandemic’s effect has been on accelerating ESG discussions. Aside from the impact on the global economic landscape and the associated health impacts, we have also witnessed companies intensifying their communications around ESG issues. The pandemic highlighted societal issues such as income inequality, racial injustices in the United States for example and companies were forced to look at their policies around this. The worsening climate action currently also increased investor activism on the topic which necessitated companies to respond to their demands. Stakeholders such as employees, investors and consumers have also increased their awareness of environmental, social and governance issues. Employees, especially millennials, are looking to work for companies whose values are aligned with theirs and is ESG-centered. Employees are concerned about employers’ ability to provide and develop workplace safety. Executive compensation is also under heightened scrutiny as employees are dealing with pay cuts, bonus freezes and job losses. Responsible investment is also on an upward trend as investors are also putting their funds into relatively greener funds. Consumers are also concerned about the services of companies to ensure that they are ESG conscious in their activities.
What can Irish companies do to better integrate ESG?
We observed in our results a reluctance to tie ESG to executive compensation. When asked if their board is integrating ESG metrics into their compensation plans for executives, only 17% of our respondents noted that they are currently doing so. Another 30% said they are planning to include ESG in executive compensation, and 49% of our respondents, almost half, are not integrating ESG metrics into executive compensation and have no plans of doing so soon.
In August 2021, we published a paper titled Aligning Pay, People and Planet, which analysed the remuneration plans of EU based companies. The paper suggested only about 17% of Irish companies are integrating ESG related resolutions into their pay plans which trails behind the average percentage of companies doing so in the European region.
Effectively including quantifiable and measurable ESG metrics into executive incentive plans, particularly in the long-term, is seen as a way to increase accountability and progress around the topic. In as much as we expect progress from Ireland on this in the coming years, there is the need for concrete plans from issuers to ensure that they are on the right path to achieving adequate ESG integration.