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Making ESG a strategic asset

CEOs can advance environmental, social, and governance concerns by treating them as more than a compliance requirement.

Corporate boardrooms and the media today are abuzz about the importance of environmental, social, and governance (ESG) metrics. But what do CEOs really think about ESG? In PwC’s most recent Annual Global CEO Survey, just 22% of more than 4,000 respondents said they had made net-zero commitments. And, for now, there is a propensity to favor value creation over sustainability commitments (see chart).

As a public company board director, I look to see how ESG goals help the company operate in a more effective and transparent way. And as the leader of an organization that brings CEOs together to discuss the practice of leadership that aspires to higher ambitions, I have a window into their thinking. Although some consider ESG an overhyped fad or a sideline initiative for corporate social responsibility (CSR) teams, most CEOs see potential for real progress with it. They recognize that greater transparency and a commitment to improve ESG measures will build stakeholder trust, increase valuations, and create more sustainable organizations. These CEOs are prioritizing working with their teams to find the best path forward.

Yet, I also hear that organizations aren’t moving the needle on ESG as quickly as they’d like to—in part because there’s no clear, agreed upon way to measure progress. That doesn’t mean leaders shouldn’t act now to assess what their organization can do, what impact ESG is likely to have on short-term strategy, and what will require more time.

Thinking of and acting on ESG as a strategic weapon rather than compliance handcuffs will help executives propel their companies forward and fuel the business in ways they may not have imagined.

Abercrombie & Fitch CEO Fran Horowitz puts it like this: “We’re very committed to ESG—and we know it’s important to our associates, our customers, our investors, our partners, and our global community. The challenge is that there is just so much to do in this space. And that’s why you’ve got to choose a few areas where you feel you can make a meaningful change. For more than two decades, we’ve worked to implement programs and initiatives around the globe that build value for all our stakeholders across sustainability, inclusion and diversity, and philanthropic initiatives.”

As it relates to the company’s sustainability efforts specifically, Abercrombie & Fitch has committed to run its campus on renewable energy by 2023. They report on progress against public targets for sustainable sourcing of down, cotton, and other materials; the reduction of water consumption in manufacturing; training workers on how to avoid human trafficking; and other areas of particular interest in the apparel industry. ESG goals are kept prominent in board deliberations through its CSR committee as well as the ESG Council, which is made up of senior leadership.

Prioritizing actions

When I was head of procurement at Verizon, our team worked to ensure visibility and transparency across the supply chain ecosystem. We prioritized diversity in supplier and vendor selection. We evaluated the level of energy requirements when selecting vendors for our data centers. These decisions were not only for compliance. All of the participants across our supply chain ecosystem had a cumulative impact on the business and on our customers.

What works best is not a prescriptive and rigid approach, but an organic and adaptable one in which leadership translates values-driven policies into measurable actions. Leaders can make sure their team understands where to focus energy and give them the tools to embed these values into their everyday work and practice.

One problem facing all companies is the lack of a standardized approach to address these issues. There are many bodies, including the United Nations’ Sustainable Development Goals, the Impact Management Project, MSCI ESG ratings, and Sustainalytics monitoring and rating ESG efforts and helping to set standards. Later this year, the International Sustainable Standards Board will issue new recommendations. But these bodies can seem to offer too much and at times conflicting advice. They tend to zero in on individual dimensions and scores, rather than considering more holistically the impact and ramifications of all these aspects taken together. Plus, their lens on ESG often doesn’t align with the strategic priorities of an organization and its CEO.

It is crucial for leaders who are working to produce results to pause and ask, “Which actions on ESG will actually make a difference for our strategic goals and for our stakeholders at the same time?” Doing so shifts the focus from an approach that’s incidental to one that’s intentional.

Looking inside

In a recent conversation with our member CEOs, Professor Robert Kaplan of Harvard Business School advised companies to turn away from the advice of those outside their business on what and how to measure ESG. Instead, he encouraged executives to look inside.

When CEOs actively listen to their employees and their organizations’ trusted customers and partners, the measures that matter will emerge. This approach will help leaders identify the ESG dimensions that will create value for their business and distribute ownership into their organizations.

As Barbara Humpton, CEO of Siemens USA, told our team, “We recently established a new ESG strategy that sets targets in decarbonization, ethics, governance, resource efficiency, equity, and employability—our DEGREE program. This puts sustainability at the center of all of our investment decisions, and we really want to keep digging into the subject of how to measure nonfinancial targets that are so essential to our success and long-term health. We’re not there yet, right? None of us in business are, but there is so much learning going on right now. That has to be one of the key areas we focus on.”

Thinking of and acting on ESG as a strategic weapon rather than compliance handcuffs will help executives propel their companies forward and fuel the business in ways they may not have imagined.

Siemens is working to target the human dimensions of ESG, and is creating a culture that fosters equity by encouraging employees to speak up, managers to have courageous conversations and take courageous action, and leaders to hold themselves accountable for meaningful commitments. The company has woven diversity, equity, and inclusion (DEI) through its employee training, cultural activities and events, and community outreach. And it is transparent with its progress through published rankings such as the Corporate Equality Index (CEI) and the Disability Equality Index.

In late January, Siemens earned a 100% rating on the 2022 CEI, for the third year in a row. This top score goes to companies that have comprehensive nondiscrimination policies, benefits, and practices to ensure greater equity for LGBTQ employees and their family members.

The time has arrived where we can make real progress—within our companies and collectively on a larger scale. So, where to start? Resist the mindset of talking about ESG and, instead, focus on doing. Rather than a massive, detailed plan across all possible ESG measures, find the specific practices that will move the needle on the impact measures that matter most for your organization.

To get there, I challenge to you to ask:

  • When it comes to ESG, by which yardstick am I measuring myself?
  • Where will ESG progress make the biggest difference for our people and our strategy?
  • How can we make a commitment to ESG metrics that will move with us as our business adapts?

The responses to these questions will help leaders prioritize specific and meaningful actions that can make a difference to their enterprise.

Author Profile:

  • Jeannie Diefenderfer is CEO of the Higher Ambition Leadership Alliance, a former Verizon executive, and an independent corporate director.
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