The world is presently awash with pledges and commitments to environmental, social and governance (ESG) related goals.
Pressure for change is being exerted by politicians, institutional investors, CEOs and a whole spectrum of special and general interest groups. When Larry Fink, chief executive of BlackRock and the world’s biggest investment fund manager, says pushing climate policies is about profits, not being “woke”, you better believe businesses are listening.
While the imperatives are clear, the evolving landscape and roadmap to a more sustainable future is anything but. Many corporations have been late to the party, but the pressure from major investors, the demands of new regulatory requirements and the visibility and frequency of extreme weather events means businesses are having to catch up.
If 2021 was the year of pledges, 2022 will need to be the year of action.
How?
Beyond some nice PR and ESG brochureware, the big question is: “what’s the plan?”
While we can be certain of more regulation and litigation, which can influence some ‘big-ticket’ items such as carbon-neutrality, most large organisations have a very long way to go and are struggling to define anything more than a desire to be seen do something.
Many companies and industries have faced existential threat in the past, and many have successfully navigated to a brighter future. Netflix moved from DVD rental to streaming digital content, IBM moved from hardware to software (and services), Marvel moved from comics to cinemas. Each of these organisations responded to a fundamental threat to their existence through transformation.
The question is, can everybody else? Because that is what the environmental crisis presents - a fundamental threat to existence.
In a finite world, companies cannot continue to extract materials and value ad infinitum, an inarguable principle that Professor Kate Raworth developed into her powerful book, Doughnut Economics. We recently explored this with Erinch Sahan, Business and Enterprise Lead for the Doughnut Economics Action Lab. This global community was set up to bring the ideas within Doughnut Economics to life. For businesses, this means moving from extractive, centralised economies to regenerative, distributive ones.
“Companies are not people and they don't necessarily have the right to consume our finite resources. They can exist if they create social and ecological benefits,” says Sahan – if businesses can’t transform, they will disappear.
The problem is the ‘what’
In the world of ESG, the word transformation is everywhere. Its hyperbole provides the sense of scale and challenge required, as well as creating an optimistic, future-focused and dynamic narrative of change. Alternatives such as ‘revolution’ have the former but not the latter, while ‘strategy’ has the latter but not the former.
But let’s take a look at the literal meaning of the word transformation. It is a complete change of state, from one thing to another. It has a clear start point and, crucially, a clear end point. All strategic transformations have this clear endpoint – indeed, all the examples above had a state they had to transform to.
This is not the case for the transformations being discussed, implied or needed in ESG terms. There is no blueprint for what an organisation needs to become, how it needs to reconfigure, or where it should operate in order to secure its future. The world is changing faster than organisations can react and the default approach for many is to pretend that simply committing to net zero will do.
What help is there?
It is not like there is nobody trying to help. A diverse ecosystem of corporate ESG players has sprung up around boards and organisations, each with a particular perspective and specialism:
Activist investors and lobby groups who have pushed net zero targets to the top of the agenda and are likely to be influential in defining the KPIs and reporting requirements that help hold companies to account
ESG specialist consultants who understand the policy goals and the metrics, are passionate about the topic but are massively overloaded in terms of demand, and have very little understanding of how to effect transformational change in large organisations
Internal sustainability resource, recruited relatively recently to measure how a company is doing, but who don’t know how to enable, don’t have the authority to demand, and don’t have the ability to define what to change to
Conventional management consultancies who are trying to codify the journey to net zero into a generic playbook, but without a sufficiently nuanced understanding of an organisation’s appetite and capacity for transformation
Governmental departments and regulators who are keen to lay out a path to a bright shiny future, which industries and companies will naturally be happy to work together to bring into reality
The likely direction of travel for this ecosystem is that ESG specialists will be pressured into becoming business advisers and transformational change leaders (an external resource being pulled out of their swim lane) while companies’ strategy and transformation offices will need to pick up the ESG mantle quickly (internal resource being pulled out of theirs).
Board members, who may find it hard to engage with an area they do not understand very well, will find themselves trapped between protecting the long-term value of the business, and the ever-present demands of growth and performance. Arguably, the two are no longer inextricably linked. Fundsmith founder Terry Smith’s broadside at Unilever’s focus on sustainability credentials, at the expense of running the business, brings this clash into sharp relief.
What would make a difference?
We are creatures of habit with an innate resistance to change - the more we do things, the more familiar they become and so the easier we find them. Companies also dislike change, as they are generally very good at doing what they do and have spent years practising. Because it is difficult, change requires a catalyst, something to initiate it.
From a behavioural perspective there are generally three types of catalyst that can ignite the change needed:
Pain If what you have always done is now incredibly difficult and painful to do, you will change it. If extreme climate events lead to dramatic rises in raw material cost that drag down your bottom line, you might consider switching to an alternative. If consumer attitudes cause them to avoid products with certain ingredients in, then you may want to change to avoid them too. Such a catalyst is acute and therefore powerful, but it is often short lived, always reactive and tends to be rather mono-dimensional
Fear If you worry that continuing to do what you have always done will cause you pain in the future, you can choose to change. If legislation is coming into force that current operations will fall foul of, you have an incentive to change. If technological development has the potential to render your offer obsolete, you can decide to do something about it. Somewhat less acute and so less powerful, it is however longer-lasting, but only if the fear is continually fanned – which is exhausting.
Ambition In our experience, ambition is the most sustainable route to initiating, embedding and delivering change. Companies must want to change, not just be coerced into it. The desire must be pervasive – from the top down, and from the bottom up. Herein lies the key issue; where ‘the top’ is defined as shareholders and investors, creating such pervasive desire for change is challenging, to say the least. A top that is only interested in value extraction is unlikely to desire anything less
What the business world needs
The likely result of this is a world of pain for business leaders; unable to define what their future will look like, under enormous pressure to continue to deliver growth now, but confronted with the unquestionable knowledge that the world is changing. ESG goals, business strategy and transformational change will be stuck in the middle.
We believe that a better configuration of resources would be;
Senior ESG expertise and accountability INSIDE
An ESG expert who needs to be on the staff, not just an outside provocateur. A Head of Sustainability who has the ear of the board
Stronger non-executive directors, with experience in strategic transformation and conversant with ESG
ESG metrics overt on the executive dashboard, complementing other strategic KPIs
Transformational change agents OUTSIDE
The vast industry of change consultants (covering business process re-engineering, digital, technology, supply chain) needs to quickly add ESG know-how to the mix, building out of core skills in change and transformation and applied to a different context
Change programs in other organisations will affect success –no single company can do it on their own. Those in your ecosystem should be brought closer, or at least be part of the conversation
Such changes to structures are not wholesale, but they are a significant shift in mindset, and they are pressing.
To quote Erinch Sahan from DEAL again: “Asset managers are starting to realise that the market is not factoring in the changes needed” to protect a company’s future. They are looking for organisations that are adopting new structures, ones that are more regenerative and distributive by design.
“Make these decisions, even if they are not being forced upon you,” says Sahan.
You may feel vulnerable, but as research professor Brené Brown said in her famous TED talk of 2010, vulnerability is a powerful source of change. Perhaps this is the source of change that business leaders should embrace.