Our ESG specialists unpick the link between leadership and sustainability

October 05, 2022
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The recent news that the Chouinard family, the founders of Patagonia, had given away their $3-billion company to fight climate change produced the sort of headlines that the organisers of COP27 can only dream about. The 27th Conference of the Parties to the United Nations Framework Convention on Climate Change takes place in November 2022 against a backdrop of extreme weather events, global upheaval and a growing environmental, sustainability and governance (ESG) backlash. While Patagonia’s action has turned the spotlight on the extent that business could and should be expected to protect the planet, AltoPartners’ ESG experts point out that corporate leadership is addressing more ESG causes than ever before. They give their perspective on how that’s playing out.

Can big business really self-regulate to protect the planet?

“Cop 26 did seem to move the needle where other conferences had failed, and many believe that the difference was the extent of business involvement. Business was much more participative and brought plans and strategies to the table that, while not perfect, gave impetus to ESG initiatives. Basically, shareholders and customers have made this a priority and companies are responding,” says Scott Eversman, Managing Director and Practice Leader, Energy – Diversified Search Group/ AltoPartners USA.

Austin Ume Zurike of AltoPartners Australia agrees: “Historically Wall Street birthed ESG with ethical investment in mind: ‘if you do this and that, we will invest in your company’. So, it wasn’t industry-led from the onset. But now the focus has gone beyond attracting investors and on to the actual implementation of ESG with the goal of sustainability. The major driver in recent times is the rapid acceleration of energy transition, particularly decarbonization, in the energy industry”

Do not underestimate the power of industry associations, many of whom have significant international reach says Keith Labbett, Managing Partner Osprey Executive Search / AltoPartners: “In Canada, commercial real estate and infrastructure has shown an outstanding commitment to reducing their carbon footprint. We are fortunate to have many well-run, well-funded companies with a long history of supporting industry associations that can provide thought leadership, best practices, and aligned government relations.”

While institutional investors have driven the change in recent years, let’s not forget the social context in which this is taking place says Richard Fortune, Managing Partner AltoPartners Australia: “In a world where faith and religion are in decline, younger generations are finding meaning and purpose in protecting the planet and making it a more equitable place. Business has become a platform to achieve their mission.”

So, we have shareholder activists to thank for spurring organisations into taking their ESG commitments more seriously?

“Money drives business behaviour. When the CEO and Exco have money on the line for achieving ESG targets, they will obviously try to achieve these metrics. The danger of looking good on paper though is that it can create a perverse incentive that is in fact counter to ESG principles. For example, if a huge financial incentive is riding on zero harm, then people tend to underreport incidents, which runs counter to a strong safety culture. Good behaviour really needs to be driven by culture, and culture comes straight from the heart of good leadership and cascades down through the organisation,” says Fortune.

And while companies are coming up against the sharp end of shareholder activism, Eversman says he is seeing a real, tangible sense of an early understanding of climate risk, which manifests in threats to business, supply chains, resources and a wide range of other ‘givens’ that impact on profitability. “This, coupled with a sense of urgency triggered by extreme weather events which bombard our screens weekly – floods, droughts, wildfires, runaway heat waves – have made ESG a mainstream issue for consumers.”

In developing countries, funders have established and driven the ESG agenda. “The southern tip of Africa was a little slow to adopt and push ESG principles. However, in the last two years established private equity funds raising new capital offshore were challenged by previous funders who, despite receiving good returns, now wanted proof that the new funds they were investing in subscribed to ESG. They want a guarantee that all new investments subscribe to and have a growing ESG culture. But this comes at a cost, and if it materially affects their returns, corporates end up paying lip service to ESG. Recessionary pressures and the poor state of many economies have given rise to a call to have a ‘uniquely African’ perspective on ESG, one that takes local conditions into account,” comments Stephen Dallamore, a director of Search Partners International (SPI) / AltoPartners South Africa. It all comes down to the money, agrees Labbett: “Investors are now enabling (to put it nicely) or in many cases, forcing executives to make proper ESG cases. This means investing in doing the right thing versus what is best for short-term ROI or staying with the low-risk status quo. Although primarily driven by large, influential pension funds, it’s catching on through the entire North American market with some public market funds insisting on extraordinarily high standards.”

A role dedicated exclusively to ESG is still relatively new though. In your experience, how can companies structure this role for maximum impact?

The team is unanimous: a flat structure, reporting directly to the CEO is the most viable option, although as Eversman points out, the view that the CEO needs to effectively be the ‘Chief ESG/Sustainability Officer’ is gaining momentum. In this instance, a senior ESG appointee would be required to implement the CEO’s mandate. However, warns Labbett, it depends very much on the CEO: “If the CEO has neither the time nor the inclination to spearhead objectives, this can be a roadblock to meaningful change. If the organisation is fully committed top to bottom and the COO/CHRO is mandated to implement ESG policies and programmes this will allow the Head of ESG (however the organisation has allocated the role, be it Head of DE&I, VP Sustainability or VP ESG) to focus on execution of programmes and objectives.”

Where do you start when appointing a chief sustainability officer or head of ESG?

Deciding on the role and responsibilities depends on the size/maturity of the organisation and the nature of the ESG issues. “For example, in a tech company much of the ESG will focus on DE&I, but in a natural resources company, there will be a lot of focus around environment and community,” explains Fortune. Regardless of the sector says Eversman, companies should start by understanding and measuring their Scope 1, 2 and 3 emissions, i.e., their direct Green House Gas (GHG) emissions, the GHG emitted by their supply chain and other processes, and finally, all GHG emitted by the use of their products. “And don’t forget the Governance,” cautions Labbett. “If Boards don’t prioritise the rooting out of corruption, how can you be sure anything else is being done as reported?”

Who ‘owns’ ESG? The Board?

Not at all says Fortune: “ESG should be subsumed in every function of the organisation, much like people & culture, and health & safety, with clear individual ownership and responsibility. It cannot be mandated as just something else to manage, control, and measure. It has to be infused in the culture.”

Eversman believes the Board is critical and ultimately responsible to shareholders to ensure that the C-Suite implements ESG goals and objectives, but Board members must also be on the shop floor from time to time to satisfy themselves about the extent to which ESG is embedded within the organisation. For it to be meaningful, it is crucial that ESG be a core characteristic of corporate culture: “In my experience, it’s often the layers below executive leadership who authentically embrace ESG principles. To Richard Fortune’s earlier point, many younger employees are acutely attuned to their own company’s ESG credentials, and good ESG has become a differentiator in attracting and retaining new talent.”

What tips do you have for an organisation starting out on its ESG journey?

Keep it incremental and practical, advises Fortune and ensure that everything is tied to a business case: it is either profitable or critical to the future viability of the business. Says Eversman: “Most begin with a climate risk assessment that identifies the threats to the business from climate events and other related phenomena. This covers threats to materials, resources, supply chains, employees, and customers. All ESG initiatives must be endorsed by the Board and the CEO, or they will lack credibility and impact. They are responsible for setting the goals, strategy and framework and creating an environment that takes it seriously by setting the tone. This includes driving a spirit of innovation and rewarding employees for devising better approaches to methods of production and manufacturing.” Whatever you do, keep it real, concludes Labbett: “Employees are the first to spot greenwashing, and you risk losing credibility among your key support base, effectively damaging the brand from within.”

What do you look for in an ESG leadership role?

Says Ume Zurike: “ESG encompasses disparate disciplines lumped together. Traditionally some elements of these functions have existed in one form or the other within organisations. In the oil and gas industry, environmental issues existed within the HSE (Health Safety & Environment) department, social issues were dealt with either by HR or Corporate Communications, while governance has been the domain of the legal department. Pulling these functions together under one umbrella has, perhaps, been one of the reasons that genuine ESG implementation has struggled to gain a foothold in many organisations. Fortunately, with the focus now firmly on sustainability, this is changing, and a body of knowledge has emerged to guide the skills required. On a practical note, it also depends on the specific metrics being tracked. Those tracking Environmental metrics will lean towards skills rich in environmental management and related topics, ditto for Social and Governance.”

This ability to straddle three distinct but interrelated areas is why it is often not so much about skills (although there is a growing body of science-based factors that are part of a more granular skill set to do with sustainability, GHG emissions, and the environment) as about character and capabilities. Says Fortune on what’s needed: “Business acumen, political acumen, learning agility, networking intelligence (if I don’t know, I know how to find someone who does), the ability to cut through the noise, someone who is comfortable with ambiguity and complexity, has high levels of emotional intelligence, and – above all – exceptional communication skills.”

“In my experience, the best ESG appointees are those who really understand all aspects of a corporation’s product and operations, allowing them to understand what is feasible, what is aspirational and how to implement changes without unintended consequences,” says Labbett.

And, adds Eversman, let’s not forget innovation: “One of the key qualities that my clients are looking for in an ESG specialist is INNOVATION, working across the whole range of inputs and outputs, up and down the organization, to come up with solutions for a different way of doing business.”

With thanks to Stephen Dallamore: Director at Search Partners International (SPI) / AltoPartners South Africa, Scott Eversman: Managing Director and Practice Leader, Energy – Diversified Search Group/ AltoPartners USA, Richard Fortune and Austin Ume Zurike of AltoPartners Australia, and Keith Labbett: Managing Partner Osprey Executive Search / AltoPartners Canada