How ESG is Reshaping the ORG - Part 1: Executive Leadership
We look at how modern organizations are reshaping and reinventing themselves around ESG
As we’ve written before, environmental social governance (ESG) isn’t just a strategy, framework, or team — it’s a company-wide approach. When practiced comprehensively, ESG shapes (or reshapes) virtually every aspect of an organization: leadership, product, operations, finance, legal & compliance, HR, innovation, and more.
How is this manifesting inside organizations? Over the next month we’ll be looking at three different levels:
The C-Suite
Operational management and execution
A company’s workforce and employee culture
This ‘Part 1’ focuses on executive leadership trends.
The Convergence of ESG and DE&I
One of the major corporate leadership trends coming out of the 2020 Black Lives Matter protests and 2021 Asian American and Pacific Islander (AAPI) Anti-Hate outcries is organizations confronting their diversity and equity realities (and, hopefully, committing to improve).
Hiring for Chief Diversity & Inclusion Officers doubled this past year, becoming the fastest-growing executive hire in 2021, according to LinkedIn. Rather than narrowly looking at diversity in terms of compliance or basic standards, more companies and executive teams are critically examining pay scales, hiring practices, employee culture, and even the externalities of their business operations.
As one leader at a power utility told us recently:
“We now know the negative consequences and risks of our infrastructure disproportionately impacts poor urban communities — primarily Black and Brown — and we are finally taking action on the understanding that, as a company, we need to change that and do better.”
The Convergence of Sustainability and Finance
A second major C-Suite trend is closer coupling and collaboration between ESG, sustainability, and finance. It’s been said the best reflection of a company’s priorities is its annual budget, and capital allocation remains the clearest signal around the depth (and clarity) of an organization’s ESG approach.
Similarly, we can also learn a lot about a company’s ESG performance and prioritization from its carbon accounting and emissions budgets — two practice terms that already underline the growing convergence between financial and ESG accounting. We can’t just count operating dollars in 2022, we need to count our carbon and CO2e with similar rigor.
Carbon accounting and emissions reporting inside Brightest
A financial services ESG leader recently outlined her firm’s hybrid governance model for ESG with us. At the corporate group level, sustainability reports to the Chief Financial Officer (CFO), but also has direct lines to department-level leads and sustainability champions in other parts of the org, as well as the firm’s risk assessment function. One of her main goals for 2022: continue breaking down the silos between ESG and the rest of the company and its practices.
By doing so, there are documented performance and accountability benefits to aligning sustainability to finance in the C-Suite. According to Accenture’s latest ESG management study, companies are much more likely to embed ESG in
core management processes when the CFO has accountability for ESG metrics (59% where CFOs were accountable owners), versus 38% for companies where sustainability and ESG don’t report to and align metrics with their CFO.
Moreover, between 2013 and 2020, companies with consistently high ESG performance generated an average of 2.6x higher total shareholder returns than mid-tier ESG performers.
“As the custodian of a company’s data and reporting,” Accenture notes, "the CFO is therefore well-placed to own a management process that will allow companies to reach their sustainability targets.”
Finally, it also benefits sustainability and ESG to articulate a stronger financial business case for projects, resources, and capital allocation. P&L shouldn’t be the end-all, be-all for organizational decision-making, but in order for ESG teams to get the budget and resources many deserve, finding clear, double-bottom-line wins and being able to communicate public benefit and organizational benefit in tandem can remove friction around bigger initiatives and shifts.
Comprehensive, Multi-Level ESG Governance
While ESG conversations often trend toward environmental and social topics, many companies are also taking important steps to codify better approaches to ‘G’: governance.
ESG is relatively unique in terms of requiring both clear, central accountability and performance reporting, but also lending itself to distributed, coalition, and committee-based input, decision-making, and action. ESG is a value framework networking different actions and actors across a company.
By forming and empowering more cross-functional committees, hiring, training, and embedding sustainability experts across the business, improving and highlighting sustainability across internal communications, learning, and development, and centralizing ESG data collection and reporting infrastructure, forward-thinking companies are re-orienting internal reporting, decision-making, and leadership structures in support of better, holistic ESG governance.
ESG governance structure example from TD Bank. Source: TD Bank
Targets Do Not Equal Transition (or Transformation)
A third important theme (and mounting leadership criticism) around ESG is growing acknowledgement that setting ESG targets needs to extend far beyond corporate communications strategy. Actions need to back up the words, partnerships, and press releases.
Setting clear, science-backed sustainability targets is an important first step. But by many indicators, the gap between setting targets and transitioning to achieve them has grown in the past decade. For example, only 5% of companies in Europe are on track to meet their own net-zero targets.
One recurring issue we see regularly is a lack of clear, data-driven ESG KPI’s. You can’t improve what you can’t measure, and studies show only 25% of companies implement a robust, data-driven framework, operational management processes, and infrastructure for measuring and hitting their ESG metrics. Data gaps erode trust, hinder goal-setting, and the overall integrity of performance-driven programs.
A second problem is clear, reality-consistent leadership accountability. How does our emissions target reconcile with our corporate operating plan and growth goals? What’s the reality of our global supply chain in 2022 and what does that mean for our ESG performance? What happens if we’re not on track and missing our targets? The operating plans need to be firmer and faster, and so does the C-Suite accountability.
A third issue is culture, organizational DNA, talent, and capacity to embrace (or resist) change. ESG and sustainability skills remain in short supply, particularly when it comes to management and executive leadership. Both retraining, hiring new talent, and employee learning, development, and internal communication programs are likely needed to bridge today’s gaps.
But ultimately, all these challenges and obligations land in the C-Suite: is ESG getting the resources, investment, culture-building, and mindshare it needs to thrive and succeed? Do we have the right teams in the right place(s) to implement the change management roadmap? For years, executives have been laser-focused on digital transformation, but we’ve now entered an era that calls for purposeful transformation.
As BlackRock CEO Larry Fink writes in his latest letter to CEOs:
“It’s never been more essential for CEOs to have a consistent voice, a clear purpose, a coherent strategy, and a long-term view. Your company’s purpose is its north star in this tumultuous environment… The transition to net zero is already uneven with different parts of the global economy moving at different speeds. It will not happen overnight. We need to pass through shades of brown to shades of green.”
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