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The “must-have” ESG toolbox for C-suite
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Earlier this year Donato Calace, SVP of Accounts & Innovation at Datamaran, sat down with Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship at London Business School - and an expert in ESG - to discuss some critical issues related to ESG strategy and reporting, greenwashing and how the C-suite needed to respond and act. This is the last in a three part series of conversations.
ESG is the hottest ticket in town - which means everybody wants to get a piece of it. Nearly every other day you have an announcement about a company launching a new ESG software, or a new solution or consultancies or other existing providers launching their new ESG practice/arm. This doesn’t make things easy for decision makers. Leaders want to be equipped and have the right credentials in place. What do you think is the “nice to have” in the ESG toolbox versus a “must-have”?
The first thing I always say to executives is that ESG is not a reporting issue. ESG is a strategic issue with a very important reporting dimension to it. But that's only one of the dimensions of the ESG challenge. So as we discussed earlier, the idea here is that ESG is this deep, transformational process that needs to happen in most organizations.
A lot of organizations would claim that “we were born with ESG credentials”, however, the truth is, even if they were, a lot of ESG issues have momentum. Social issues like gender pay equality, or racial discrimination, bubble up over time. It’s important to understand that this is a transformational process.
So what do we need in the ESG toolbox?1. Well, first of all, we have to look internally because as with any transformational process, the transformation towards ESG is going to first assess the leadership and in fact, trusted leadership.
In other words, if you're an executive that wants to motivate an organization to undertake this whole journey, do you have the trust? Do you have the confidence of your employees and of your team to do this? And you'll be surprised how many employees may be cynical, demotivated, demoralized against it vis a vis their leaders. And therefore, if you don't have that trust, then there is no ESG journey ahead for you.2. Now, on top of that, is, as we mentioned earlier, the journey towards a sustainable business model means having to rethink many fundamental things. For instance, you have to define your products, your services, the very core of your business model.
Look at the automobile industry - they went from innovating to reduce carbon emissions of fossil fuel cars to investing in new technologies to rethinking what the car is - from hydrogen hybrids, and then electrics, all the way to having a conversation about what is the future of mobility? And how does that fit into this idea, for example of smart cities? That evolution is not going to happen unless the organization has a deep innovation capability.
So again, as a leader, not only do I need to be trusted, but I need to evaluate the extent to which my organization has that innovation capability on the sustainability journey. And last, but not least, is to evaluate whether the organization is capable of changing.
Are there pockets of resistance? Are there pockets of champions on this journey? Because transformation is very difficult. Let's be honest, most organizations fail at it. So these are the questions for executives as they consider the fundamental elements of the ESG toolbox, because it's the how.
Yes, you can set targets, yes, you know about climate. Yes, you know about biodiversity and inequality, and so on. But how are you going to get there? How are you going to meet those targets? Do you have the internal capability to implement change? And that breaks down into whether you're innovative enough, and whether you have at least some sort of capability to change, which most organizations lack in the long run.3. Now, that's on the internal side; there's also a whole kind of a set of tools, or another component of your toolbox around your external legitimacy for change. And the external legitimacy will be derived by your relationships with your investor base. In other words, you would need the support, the encouragement, sometimes the financial support on the journey towards this transformation.
You will also need the legitimacy of your supply chains, because if you are a large organization with hundreds of thousands of small holders in your supply chain, clearly, you will need to get all those on board. This especially holds true if you are or want to be one of those companies that recognizes responsibility beyond the walls of your own business.
And then you also need other stakeholders to be on board. You need the NGOs to understand what you're doing, especially when we talk about local communities, or if we talk about industries, like mining for indigenous communities that might be affected by your operation.
So you're shifting your business model; you also need external legitimacy by then but also regulators and investors who are deeply invested in what you're doing. Also regulators that have the responsibility to oversee some of these impacts on industries. I think that's the kind of a macro level type of toolbox that one needs to have in place in order to implement change.4. Now if you go one level below, all of those capabilities that I described need to be monitored over time, whether qualitatively or quantitatively. You need to be able to prove a point and use such metrics as incentives within the organization. That’s a means through which you create trust within the organization.
How do you report to your investors? How do you report to society at large? How do you become accountable? It’s a two way street. First, you need to account for the impact of the ESG trends on your business. But you also need to account for what are the ESG impacts of your business on the world. And those are two very different things.
This relates back to your point that you mentioned earlier about the double materiality, because that's exactly what's reflected here. How your business is being impacted (how your financial performance is impacted), but also how you as a business impact the world, which is the materiality from a stakeholder point of view. This credibly communicates to the world what it is you're trying to do.
Reporting and monitoring is going to be so important. But as a reflection of this process, where you try to gain both internal as external legitimacy in order to move the organization interested towards a sustainable business model. So that's how I would see an ideal toolbox, with any executive that wants to embark on this journey.