In Short : The current state of sustainability reveals a stark contrast between leaders and laggards in embracing environmentally responsible practices. While some businesses and individuals are making commendable strides towards sustainable practices, others lag behind, contributing to environmental degradation. The urgency of addressing climate change and preserving natural resources necessitates a collective commitment to sustainable living. It’s crucial to accelerate efforts, foster awareness, and hold all stakeholders accountable to create a more sustainable and resilient future for our planet.
In Detail : Last summer Professor Alison Taylor (who has just published an excellent book “Higher Ground: How Business Can Do the Right in a Turbulent World) and I published an article in the Harvard Business Review titled “The Evolving Role of the Chief Sustainability Officers.” The tagline asserted “They once focused on optics and reputation. Today many are interacting with investors and helping set strategy.”
Our article was based on interviews with 29 leading CSOs and 31 investors. We noted that “Historically CSOs have acted like stealth PR executives—their primary task was to tell an appealing story about corporate sustainability initiatives to the company’s many stakeholders, and their implicit goal was to deflect reputational risk.” In the companies we studied this was changing rapidly over the past two to three years. Interestingly enough, this was especially apparent for companies in challenged industries such as athletic wear (e.g., Nike), food and consumer goods (e.g., Unilever), electric utilities (e.g., AEP), mining (e.g., Vale) oil and gas (e.g., ConocoPhillips), packaging (e.g., Greif), retailing (e.g., Groupe Casino), and tobacco (e.g., Philip Morris International).
In the best companies when it comes to really integrating material environmental, social, and governance (ESG) issues into strategy and capital allocation the CSO has a much more strategic role and is closely integrated with other functions, such as finance, operations, product development, and technology. Sustainability professionals no longer simply reside in the function itself but throughout the organization. CSOs are joining meetings with investor meetings, and with both the ESG/stewardship teams and portfolio managers. At the same time, investors are seeing more integration between these two roles. People in the CSO role have also changed. Instead of coming up through the sustainability function (still called corporate social responsibility in some companies), CSOs are coming from functions more core to the company such as finance, investor relations, operations, product development, and research and development.
Alison and I were well aware of the fact that we had chosen a selected sample of companies since we were looking to find the leading edge of practice. This obviously begged the question of what’s going on in the more general population of CSOs. Towards that end we teamed up with GlobeScan, where the team was led by CEO Chris Coulter, and Salesforce, whose team was led by Brian Komar, Vice President Global Sustainability Solutions. In November and December of 2023 we conducted a global survey that resulted in 234 responses (mostly from the sustainability function but also others, such as finance and technology) in a wide range of industries. The results showed that the rest are a long way from being the best. Here is the full report, “Sustainable Value Creation: Closing the gap between commitments and operational realities.” You can also watch a webinar hosted by GreenBiz and moderated by Grant Harrison, Director Sustainable Finance & ESG, where Chris, Suzanne DiBianca, EVP & Chief Impact Officer at Salesforce, Alison, and I discuss the results of the survey.
The hope and good intention are there. Ninety-three percent of respondents felt that sustainability was very important or fairly important to commercial success. From there it unravels, showing a serious lack of real commitment which demonstrates the sorry state of sustainability for many, if not most, companies today. Only 37% of respondents saw sustainability as very integrated into the core of the business. Only half of senior management teams (SMTs) are focused on sustainability risks, opportunities, and impacts. Only quarter of companies are devoting sufficient capital to sustainability initiatives. One result of this is that the lack of high quality data on sustainability performance is enormous. While 95% believe that high quality data is very or fairly important only 29% report having it. One reason is that lack of integration with the finance and technology functions, although that is improving.
The consequences of these gaps between intent and execution are telling but not surprising. The areas where sustainability is perceived as having the highest value are the usual hard to quantify ones—enhancing brand and reputation, stronger stakeholder and community relations, employee attraction and retention, and facilitating partnerships and collaborations. This is not to belittle their role in shareholder value creation. But ranked much lower are more well-defined economic benefits such as growing sales, attracting more investment, and increasing efficiencies to reduce costs. It is one thing to issue the mantra “Sustainability is key to value creation!” It is quite another to show it. The respondents don’t see it themselves and there is a lack of data to help make the case.
Perhaps even worse is the low levels of belief of what kinds of sustainability actions can unlock more value. The one with the highest score, at only 42%, is with R&D and product innovation. It goes downhill from there. About one-third cite engagement with customers and employees and defining clear goals and targets for sustainability. Imagine if only one-third of CFOs thought clear financial goals and targets would unlock more value.
It gets worse. In dramatic comparison to the best, only 29% cite improved sustainability metrics (so I guess the data gap isn’t all that important), 24% cite identifying which topics are most material to the business (no wonder there is a lack of integration with the core business), 20% cite engagement with investors (one of the most defining features of the best), and 16% percent cite improving the reporting process (how can you effectively engage with investors if you’re not reporting high quality data on sustainability performance and showing its impact on financial performance?).
Given that the EU is seen as being more receptive to sustainability than polarized America around all things ESG, it’s fair to ask if things are better there. Not really. For the most part, the results are the same. European companies have a slight edge on SMT focus on sustainability risks (65% vs. 40%)—although no difference on opportunities and impact—and attribute more importance to managing climate risk (70% vs. 46%). And that’s it. These results aren’t surprising. Both can be explained by the “European Green Deal,” the “EU taxonomy for sustainable activities,” and various regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR).
The most recent proposed regulation is the Corporate Sustainability Due Diligence Directive (CSDDD) “which aims to enhance the protection of the environment and human rights in the EU and globally. The due diligence directive will set obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners.” The CSDDD has proven to be very controversial with pushback from both the business community and some countries. As I write, its fate sits on a knife’s edge, likely to be decided by a final vote in a week or so. Although I appreciate the good intent of this directive I have also written about some of my concerns about it.
Here’s another one. Our survey raises the question of whether companies have the necessary capabilities and resources in place to effectively implement this directive should it be passed. And explain to their investors how it is value enhancing for shareholders, as many of its supporter claim it to be. I’m not saying it can’t be. I’m just saying that this needs to shown, not asserted. Most companies seem poorly equipped to do so.
Putting the CSDDD aside, advocates for sustainability (and I include myself among them) have a lot of work to do to make reality match the rhetoric. Adoption of the standards of the International Sustainability Standards Board can be helpful in showing the link to value creation because they are focused on financial materiality. Standards developed by the European Financial Advisory Group’s Sustainability Reporting Board and the Global Reporting Initiative can be helpful in showing impact materiality. While reporting standards are very useful, they are not a silver bullet. Alone they do not ensure good performance. Our survey provides some suggestions for what else must be done. Doing this hard work will finally make sustainability a key contribution to value creation.