Senior Client Partner, ESG & Head of Board Effectiveness Practice
ESG By Another Name
They like the cause, just not the name, apparently.
In recent years, work has expanded around sustainability, governance reform, and social impact initiatives like diversity. At the same time, vigorous public debate has surrounded the term “ESG.” Now, new research from Korn Ferry shows that boards are shying away from creating stand-alone ESG committees or incorporating the ESG label into existing ones.
An analysis of committee names on S&P 500 boards found that only three companies used the ESG acronym in 2022. Instead, firms are opting for “sustainability” or similar terms—as 27% of S&P 500 companies did last year (up from 10% in 2016). “The ESG acronym is misunderstood, and it can cause as much confusion as enlightenment,” says Anthony Goodman, leader of Korn Ferry’s North American Board Effectiveness practice, who co-authored the study.
Advocates of ESG efforts have argued that boards need to maintain their commitment by using the acronym. But Lizanne Thomas, head of the corporate governance team at law firm Jones Day, says boards struggle with the idea that each ESG component has a different role and means a different thing to individual companies and investors. “The E doesn’t have anything to do with the S, and the S doesn’t have anything to do with the G,” says Thomas. “It’s unfortunate that all three travel together.”
Typically, boards have three standing committees: compensation, audit, and nominating and governance. But after relying on those committees for many years, some companies have added more that are concentrated around themes like technology, human capital, and sustainability. In the Korn Ferry study, more than 40% of S&P 500 companies changed the name of a compensation committee to include “human capital” or a related term between 2016 and 2022. Similarly, use of “technology” or a related term in committee names increased 50% over the same timeframe.
According to Vini Oliveira, managing director at investor-relations firm Clermont Partners, creating or changing a committee name isn’t just a semantic exercise; it also requires writing or amending that committee’s charter to enumerate its scope and responsibilities. “The biggest criticism about ESG isn’t about its aims, but how they are defined,” says Oliveira.
From the board perspective, words like “sustainability” and “corporate responsibility” are easier to understand. For instance, the use of sustainability increased in popularity as a term in committee names from 16 companies in 2016 to 68 in 2022, an increase of 325%. The largest increase was in the number of standing committees adding sustainability-related terms to their names, growing to 14% of the S&P 500 last year from just 3.3% in 2016. At the same time, the number of stand-alone sustainability committees increased by 86%, to 63 companies from 34.
Goodman says “sustainability” is a more accurate term than “ESG” for assessing a board’s responsibility for long-term value creation. He says sustainability is a part of every aspect of a company and as a result plays a role in overall corporate strategy and risk management. Using that term, he adds, avoids the political connotations attached to ESG. “Boards are looking for other ways to talk about those things that are more readily understandable,” says Goodman.
For more information, contact Korn Ferry's Board Effectiveness practice.