Council Post: The C-Suite’s Quiet Struggle With ESG And Sustainability

- Advertisement -


Stuart Jackson is a partner and former Global Managing Partner at strategy consulting firm LEK Consulting,

- Advertisement -

Environmental, social and governance (ESG) imperatives have made their way from promises in press releases to strategy and operations.

That is good news, given the growing consensus that sustainability is tightly linked to value creation. But it is also a challenge for leaders and organizations. Pledging a commitment to sustainability is comparatively easy. What’s much more complicated is the challenge of operationalizing it—and making critical trade-offs between short-term performance and the achievement of sustainability goals that promise to create more value in the long term.

- Advertisement -

The good news is that leaders are willing to consider making those trade-offs. The bad news is that there is no consensus about how to do so.

The fact that there is confusion and even conflict is unsurprising. As a blue-water sailor, I know well that it’s in midvoyage—well out of sight of land—when the hardest work sets in. Sustainability is now a high-stakes arena in which there is a heightened risk for those who miscommunicate or misstep.

The clearest sign that the stakes have escalated is the ramping up of regulatory scrutiny. The SEC, after proposing new disclosure rules for ESG funds, has expanded the scope of its rulemaking efforts to include public companies. A proposed new rule aims for greater transparency about climate-related risks to public companies’ performance. The public comment period on the latter has just closed, and a final rule cannot be far off. The SEC’s actions promise to add a new layer of complexity to climate and sustainability-related disclosure rules that companies already face in Europe and Japan.

But how ready are organizations and their leaders to take advantage of the opportunity? Indications are that there is a significant gap between the need to improve sustainability reporting—and sustainability programs—and organizations’ ability to respond.

A 2021 SAP/AlphaSense study shows that while companies are increasingly updating their shareholders on sustainability (as measured by keyword frequency in shareholder communications), there are wide variations in what is reported and in the level of reporting by industry. Some—including several financial services segments as well as semiconductors and consumer services—are lagging notably. In other words, even in the matter of communications (the original focus of corporate sustainability efforts), there is a long way to go.

And when it comes to operationalizing sustainability programs and integrating them into strategy, the barriers are truly daunting. My colleagues in LEK Consulting’s Sustainability Center of Excellence recently surveyed over 400 global C-suite and senior executives about their priorities and their progress, or lack of, toward implementation.

The good news is leaders acknowledge the central role of sustainability and ESG strategy in driving growth. Fifty-one percent of organizations are focused on ESG as a growth driver. Leaders feel strongly about it. Fifty-one percent agree their company should address ESG issues even if doing so reduced short-term financial performance and profitability. But on the other hand, 58% report significant differences within the leadership team regarding how to balance short-term financial performance with long-term sustainability investment.

The fact that these differences exist—that leaders are hard-pressed to act on their good intentions—is a classic example of the management trap of prioritizing the urgent over the important. We all know that sustainability is an important priority, but there always seem to be more urgent issues requiring attention—how to manage through supply chain bottlenecks and rising input costs being just two. This is a mistake.

How do you reset priorities and ensure that the important issues win out? Leaders should:

• Confront The Potential For Change: Acknowledge that it is human nature for most management teams to underestimate change. Get your management team to work together on how greater demands for sustainability could affect your industry. Consider using outside speakers or facilitators to provoke the thinking.

• Consider Who Can Benefit: Consider which segments of the industry or types of providers will be able to use these changes to be better aligned with emerging demands and able to achieve faster growth. Often management teams think of changing demands and new regulations just in terms of added costs that need to be minimized. But new demands and added complexity can also drive higher barriers to entry and the potential for new value creation.

• Develop And Implement A Proactive Plan: Change is hard, but the longer you wait to put your company on the “right side of the playing field” to benefit from emerging tailwinds, the more opportunity for competitors to establish an advantage. For example, companies making single-use cold-chain packaging saw big downsides from reusable, active-cooling containers. They were put off by the service demands and complexity of reusable products. Their core capability was manufacturing Styrofoam or similar containers that could be shipped wherever needed. But the first company to embrace the new, more sustainable technology was able to respond to customer demands ahead of competitors. They also had to deal with the headache of recruiting service partners around the country to deal with reverse logistics. But once this network was in place, they had a huge lead over other cold-chain packaging suppliers trying to emulate their success.

All organizations find change difficult. Machiavelli famously said that “there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.”

But this particular new order of things is absolutely necessary. Sustainability is no longer aspirational, and it is no longer window-dressing. It needs to be real, operational and integral to the organization’s performance. Change is always hard. But the risks and rewards are real and will come sooner than most can imagine.


Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


,

Credit: www.forbes.com /

- Advertisement -

Stay on top - Get the daily news in your inbox

DMCA / Correction Notice

Recent Articles

Related Stories

Stay on top - Get the daily news in your inbox