Modern Governance and ESG: Connecting Board Effectiveness and ESG Maturity

| Edna Twumwaa Frimpong

Executive Summary

As pressure increases for companies to take action on ESG, the question remains: How well-aligned is the board to environmental and social goals? In collaboration with the Esade Centre for Corporate Governance, the Diligent Institute set out to learn more about how board effectiveness is related to progress on Environmental and Social (E&S) goals. In our analysis, we sought to answer the following questions:

  1. What is the correlation between metrics used to measure board effectiveness and metrics used to rate Environmental and Social performance?
  2. Which expertise and skill-set backgrounds at the board level are correlated with board effectiveness?
  3. Are companies with Sustainability Committees likely to also have higher E&S scores?

This report was originally published by our research partner, Esade Centre for Corporate Governance, in Spanish. It is an abridged and translated version of the original piece, which was published in April 2022.


We analysed 5,295 public companies in Australia, Japan, the European Union (E.U.), the United States (U.S.), Canada and the United Kingdom (U.K.). Fifty percent of the companies analysed are headquartered in the United States. Thirteen board effectiveness metrics collected from company reports and public filings by Diligent Compensation and Governance Intel were used. These practices include:

• Board size
• Gender equality
• Age dispersion
• Nationality dispersion
• Board expertise
• Board independence
• Director interlocks
• Over-boarding
• Tenure of independent director
• Senior Independent NED on Board
• CEO duality
• CEO succession plan
• Classified board use

This set of 13 metrics are applied as the fundamentals to determine correlation with the E&S scores of surveyed companies using data from Refinitiv. Additionally, eight areas of expertise of board members and their degree of association with E&S scores are analysed, including:

• Leadership
• Non-executive
• Executive
• Industry and sector
• International
• Corporate governance
• Finance
• Technology

ESG Score Grade

Refinitiv ESG Scores transparently and objectively measure ESG performance, engagement and effectiveness, based on public information. It collects and calculates more than 450 ESG measures at the company level, of which a subset of 186 of the most relevant and comparable measures according to the industry are used in the evaluation and scoring process of each company. These measures are grouped into 10 main categories that constitute the score for each of the three pillars and the final ESG score. A graphic description of the ESG evaluation and scoring process is detailed below.

Key Findings

ESG performance: 40% of the companies in our sample are rated with a “C” score . This implies a satisfactory ESG performance and a moderate degree of transparency in the reporting of non-financial information, according to the Refinitiv workspace.

ESG performance by country: French companies lead the way in terms of relative ESG performance, followed by Switzerland and Spain. We also find a better ESG performance among countries of civil law origin (such as continental Europe) than among those of common law origin (Anglo-Saxon countries).

ESG performance by sector: The data analysed suggest that the industries with the best ESG performance are materials, utilities and consumer staples

Board diversity: Among the board effectiveness metrics, board diversity has the strongest correlation with E&S scores. On average, companies with gender equality are associated with better E&S scores (the correlation score between these two variables equals 0.29).

Specialised committees and ESG performance: Companies with specialised ESG committees tend to outperform companies without them on ESG metrics.

Board Composition Snapshot


Average E&S scores by country

When looking at companies’ E&S scores, we wanted to know whether results would differ significantly based on what country the company was headquartered in. On average, we find that French companies have the highest E&S score (74.27), which is more than double the score of companies in the United States (U.S.). French companies are followed by Spanish companies, with an average E&S score of 69.41 points, and Italian companies, scoring 65.15 points. We also find that listed companies from civil law origin countries have a relatively higher ESG score compared to the Anglo-Saxon listed companies.

Average ESG score by sector

In addition to learning about how companies scored on E&S metrics in each country, we also wanted to learn whether certain sectors scored higher on ESG metrics than others.
Companies in the materials, utilities and consumer sectors have the highest ESG scores in our sample, with an average grade of B-. By comparison, companies in the healthcare and financial sectors have the lowest average scores. Notably, despite the energy sector’s inherent proximity to environmental issues, companies in the sector had an average ESG score of C+.

Gender, Age, and Nationality Correlated with Higher E&S Scores

To learn more about how board composition could be influencing progress on E&S metrics, we studied the correlation between different factors of board effectiveness and the scores on E&S metrics. The graph below shows how each of the board effectiveness practices correlates with overall E&S performance and in each of the E and S pillars. Having higher gender parity shows a stronger correlation to better E&S performance in each of the E and S pillars. Similarly, greater diversity in terms of director age is also related to better E&S performance.

Meanwhile, having a board with a greater proportion of local directors, who are therefore less diverse in terms of nationality, is correlated with lower E&S performance and in each of the separate pillars. Counterintuitively, a larger number of independent directors is not associated with better E&S performance or in the social pillar, but it is related to worse environmental performance.

However, having a senior/lead independent director is related to better E&S performance and better performance in each pillar. In addition, having a lower number of independent directors with tenure is related to better E&S performance and better performance in each of the environmental and social pillars. Boards with a variety of expertise represented are also related to better E&S and environmental and social performance. Regarding the size of the board, and counterintuitively, those larger boards are also related to better E&S performance and better performance in each of the separate pillars. It is also surprising that those companies with a CEO succession plan* are not necessarily associated with better E&S, environmental or social performance. In contrast, boards with a classified structure are negatively related to E&S performance and performance in each of the E and S pillars.

International, Governance and Executive expertise have strong correlation with E&S scores

Similarly, we also wanted to learn whether having directors with certain expertise types present on the board influenced how that company performed on E&S metrics. The graph below shows the degree of correlation between the percentage of board members with expertise in each of the different areas and performance in E&S metrics and in each of the E&S pillars. The graph shows that all areas of expertise are positively correlated to E&S performance, except for the industry and sector category. Therefore, having a higher percentage of board members in any of the other seven areas of expertise is associated with better E&S performance and better performance in any of the E&S pillars.

How important is the Sustainability Committee for E&S issues?

As Sustainability Committees become a more popular method for the board to oversee ESG issues, we wanted to learn more about how these committees are structured and whether having a Sustainability Committee is correlated with higher E&S performance. Of the 5,295 companies analysed, approximately 12% have a Sustainability Committee, mainly a specialized one (versus a hybrid type). In terms of membership, the Sustainability Committee tends to have a high degree of overlap with that of the Audit Committee.

According to our results, having a Sustainability Committee is positively correlated with E&S performance. Companies with a Sustainability Committee score 19 points higher in E&S performance when compared to companies without it, and this difference is even more pronounced for the Environmental pillar alone, for which companies with a Sustainability Committee score 24 points higher than their counterparts without one.

Conclusion: Board Diversity is positively correlated with environmental and social performance (E&S)

The results of the study show that diversity on boards, including with respect to gender, nationality, age, and professional expertise or experience, have a high degree of positive correlation with environmental and social performance. Out of all the areas of diversity analysed, gender diversity stands out the most. Boards with higher levels of female representation are also more likely to have all eight of our expertise categories represented, reinforcing the idea that when companies diversify their boards along gender lines, they are also likely to bring in new and different skill sets, and vice versa, diversifying the board along more than one dimension with a single hire.

Previous research has shown that board diversity adds value and leads to better financial, environmental and social performance for companies. Additionally, more diverse boards also demonstrate a greater concern with and position in addressing social inequalities, which are closely related to the environmental, social and governance (ESG) pillars. Based on our results, it is likely that having more diverse boards gives an organisation the perspectives and skills needed to achieve E&S goals. In addition to ensuring diverse perspectives are present in the boardroom, understanding ESG and having proper oversight are key. A few years ago, when technology and cybersecurity first became top issue areas in the boardroom, research showed that merely adding one or two directors with technology expertise did not materially change the board’s ability to understand and oversee cybersecurity and cyber risk, and it wasn’t until at least three directors had a foundational understanding of trends around cybersecurity and digital innovation that progress was made. Similarly, when it comes to ESG, regardless of background or current expertise, all directors should be engaging in upskilling around ESG through education and keeping up on current developments.

About the Author

Edna Twumwaa Frimpong

Edna Twumwaa Frimpong

Director of International Research

Edna Frimpong is an experienced research analyst with a demonstrated history of working in the information technology and services industry. In her role with the Diligent Institute, Edna oversees and directs corporate governance research projects and partnerships internationally, outside the US. She joined Diligent Institute in 2021 after six years with CGLytics  -- a corporate governance analytics firm based in Amsterdam, The Netherlands, acquired by Diligent -- where she served as Head of Research for the EMEA region. Previously, Edna held research positions at firms including Sustainanalytics and Carnomise.  She received her Master's Degree in Finance and Law from the Duisenberg School of Finance in Amsterdam, and her Bachelor's Degree in Administration, Insurance and Risk Management from the University of Ghana.