Consultant Russell Reynolds Associates opens this report on 2020 corporate governance trends by observing that, "[f]or the first time, in 2020, we see the focus on the 'E' and the 'S' of environment, social and governance (ESG) as the leading trend globally, including in the United States, where it traditionally has not received as much attention by boards." That conclusion—that sustainability has now ascended to the forefront of corporate governance trends—is reinforced by this year's annual letter to CEOs from BlackRock CEO, Laurence Fink, announcing initiatives to put "sustainability at the center of [BlackRock's] investment approach," as well as the Business Roundtable's new Statement on the Purpose of a Corporation, which outlined a "modern standard for corporate responsibility" that makes a commitment to all stakeholders. (See this PubCo post and this PubCo post.) For its report, RRA interviewed over 40 governance professionals, including institutional and activist investors, pension fund managers and proxy advisors to "identify the corporate governance trends that will impact boards and directors in 2020." Those trends are summarized below.
Importance of E and S. As noted above, RRA has identified as the leading trend for 2020, both globally and in the U.S., the focus on the environmental and social components of ESG, with boards and management "playing catch-up on how best to define, integrate and oversee" material environmental and social issues. According to RRA, boards will need to "strengthen their oversight and knowledge of material E&S matters and disclose their connection to the business in the form of risks and opportunities." RRA predicts a consensus forming around the Task Force on Climate-related Financial Disclosures (TCFD) (see this PubCo post) and the Sustainability Accounting Standards Board (SASB) (see this PubCo post)as the preferred disclosure frameworks. Notably, BlackRock's Fink also advocates adoption of the SASB standards for reporting on sustainability across a wide range of issues and the TCFD for evaluating and reporting climate risks.
In the U.S., according to RRA, there is also demand for transparency and enhanced board oversight of all aspects of ESG: climate change, political expenditures, corporate culture and HCM, human rights concerns around supply chains, as well as board quality, composition and director overboarding. With regard to environmental and social issues, investors expect disclosures of the risks and opportunities and how they relate specifically to the business. (Similarly, BlackRock's Fink noted in his letter, investors are now "recognizing that climate risk is investment risk.") RRA advises boards to ensure they understand the priorities of their shareholders "and benchmark themselves to good E&S oversight practices among peers."
According to the WSJ, "[c]limate has muscled to the top of business worries." Consulting...