The ESG Advocate #100: Turn and face the strange

Let's make a change to get to the change we need

Welcome to the 100th issue of The ESG Advocate! 👏👏👏

Even though it’s been just over two years, so much has changed for me, the newsletter, and ESG. I’ve had two different commercial sustainability roles, written an ESG book, talked to many great people, and have even more on the horizon!

And yet, other things haven’t changed. The definition of ESG still hasn’t been formalized and remains mired in pushback. There have been some successes, too, like the anti-ESG struggles to pass legislation, and some companies are still hanging on to the acronym because it represents a quality perspective to use to assess pressing issues.

One thing hasn’t changed. Most companies I talked to have yet to ‘turn and face the strange’ of operating in a changing world. I’m more convinced than ever that a mindset shift is needed if companies are to address their most pressing ESG issues, innovate, and survive whatever comes next.

Something is coming next, and the status quo won’t cut it. Whether it is extreme weather, shifting and polarized social sentiment, geopolitical instability, or the continuing march of technology, change is now a constant business companion. As we’ve seen over the past year with the latest ESG rebranding from the markets, a transition is on the horizon, and it might not only be ‘an energy transition,’ as some have called out. After all, the opportunity is huge!

This week, rather than reviewing the past 100 issues (which are all available for free), I thought I’d put together something to help ESG and sustainability professionals uncover some ideas that can help secure budget to get things done.

The 43% statistic

While some companies enthusiastically pursue ESG efforts, let’s not kid ourselves. Today, companies primarily focus on disclosures and reporting. At best, the metrics have become a proxy for progress, but at worst, they have become solely a compliance exercise that affords the executive team a hasty exit as the winds shift. Either way, companies fund disclosure efforts over improvement and innovation.

Last month, IBM launched a report that popped up in my LinkedIn feed called Beyond checking the box. One stat captured everyone’s attention:

According to our research, spending on sustainability reporting exceeds spending on sustainability innovation by 43%.

The IBM report does not include a dollar amount. While 43% is disappointing, consider how low this dollar amount number probably is, and you’ll be even more distraught. I wrote about the reporting costs last week, as the SEC estimated that new sustainability reporting requirements would be about 21% of a company’s spend on compliance elsewhere. If this is accurate, the investment in sustainability innovation is a truly meager number. We’re talking about 21% of total compliance costs for the SEC’s forms S-1 and 10-K discounted by another 43% for innovation.

I often point out the WSJ stat that a company would spend $750,000 in the first year complying with the SEC’s Climate Rule. If that’s true, sustainability innovation might only be around $322,500.

Good lord.

So, it sounds like a company might have two people whose job is to run sustainability innovation, and it looks like they have no budget.

Funnily enough, the IBM report doesn’t define ‘innovation’ either. However, based on the content in the report and its alignment to ‘transformation,’ it should be safe to say that this goes beyond operational improvements into how I define innovation in ESG Mindset:

Innovation focuses on new products, services, markets, and engagement models.

Stating that so little investment is made in innovation is undoubtedly a bold statement. Is there evidence that companies are missing out on innovation?

If you’re like me, you probably talk to many people in this field and hear about the lack of executive sponsorship and investment beyond the basics. I rarely speak to an ESG or sustainability professional who isn’t only focused on reporting. When I first entered this space, a trusted advisor and friend warned me that it was a low-value exercise only. When I explained how ESG issues connect to the core business, he came around slightly but cautioned that it was an uphill battle.

Boy, was he right.

Our business systems are designed to look backward regarding periodic reporting cycles. The short-term annual CSR report cycle closely parallels the quarterly focus of the CFO. Neither tells an investor what is happening today, and the annual CSR report is often out of date by 18 months!

So, the Sustainability Office's priorities look backward, setting the entire path to innovation and transition adrift. In other words, short-term regulatory reporting may prevent effective long-term movement into needed improvements and innovation.

Regulatory Reporting > Improvements > Innovation

If the IBM report is correct, there might be wide funding gaps between those arrows, with innovation getting the smallest investment. If you’ve ever read a sustainability disclosure RFP, you’ve seen the heavy priority and intensity of regulatory reporting as if it were the end state.

Investors and stakeholders want your company to DO SOMETHING. You likely know this, dear subscriber, but I’m emphasizing this in case you decide to forward this post internally.

If our companies are ever to move from regulatory reporting to the changes needed, those changes need to be funded. There might be evidence that change is underway.

A friend of mine, Pamela Cone of Amity Advisory, posted an article this past week with insights on how the responsibility of ESG is starting to make its way across the business and out of the General Counsel office (however, it can be under numerous offices). Still, this shows a trend of embedding or mainstreaming ESG around the business. In the article, there is a quote from Susan Mac Cormac, global co-chair of MoFo’s ESG practice:

Smart organisations are preparing beyond regulatory disclosure requirements and looking past the external ESG scrutiny to assess how their ESG programme can help with risk management, operational efficiencies and shareholder value creation.

All of these things certainly sound like improvements and innovation. So, how do we get there? Is diffusing ESG around the organization enough? Well, maybe, but it takes a specific approach.

Everything is sales, even sustainability and ESG

To start, we need to shift mindsets around the business. Unfortunately, the only things we have are smart people and ESG metrics. Sending ESG metrics up to an executive team without the business context might generate interest, but it isn’t going to garner funding, no matter how smartly presented.

Sustainability and ESG teams must start lower in the organization with the business units, circling back on the original requests for activity data with a show of value.

Think about any time you had to sway a colleague to your position. Did you succeed by being rational and educating them, or did you discover what matters to them and convince them it was to their benefit? This is Sales 101, and everything, even an ESG mindset, takes a bit of sales.

Think about the sales calls and emails you receive. Did you go with the seller who email-blasted you, the one who did the best job educating you on their product, or the one who could explain it in the context of your business and your goals?

Yet, Sustainability Offices are a bit stuck. The pull of disclosures and their short-term objective aligns with a powerful organizational force: inertia. After all, disclosures don’t represent change; they only report what’s happened in the past. As a result, companies aren’t making much progress with improvements and innovation.

Last week, we saw a typical corporate mindset manifest on LinkedIn through a post from Sasja Beslik, Chief Investment Strategy Officer at SDG Impact Japan. Sasja wrote about an exchange with a company’s Investor Relations representative. I recommend checking out his full post (and this one).

I am asking company I currently analyse for potential investment what is their ESG premium? Company IR representative is first quiet, looks bit puzzled and starts rumbling up, EU taxonomy, CSRD, TCFD, Net Zero and Global Compact.
I ask again: What is your ESG premium? How do you make money on ESG or Sustainability efforts your firm is conducting and reporting on, as well as spending money on?

Company IR representative looks firmly at me, and answering; Our Board and CEO are convinced that Sustainability play’s significant role in strengthening our brand perception, our employees and local communities.

I ask again; How is your Sustainability strategy linked to your financial strategy. Are they aligned? Is your Climate Net Zero commitment aligned with your financial growth projections?

Company IR representative answers: Our target is to be Net-Zero by 2050 and we are on the path to achieve that goal.

When it comes to corporate ESG and sustainability, it is goals and disclosures all the way down. Not only is sustainability innovation missing, but the connection to the core business is, too!

Look, there are all kinds of investors out there, but the more savvy investors will want to see that a company understands its intersections with ESG. If you aim to garner more investor favor, aligning with regulatory reporting is table stakes. If you want to capture investor and stakeholder sentiment, you have to put in the work and show progress.

But wait. Did you catch what I wrote about stakeholders? Companies that do not understand ESG issues or invest in innovation miss out on commercial opportunities!

Somewhere, I picture a sustainability or ESG professional reading this and screaming at my screen, “I TRIED TO TELL THEM!” Yes, I hear you, friend. Again, feel free to forward this around.

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But remember, if all you have are the ESG and sustainability metrics, you are missing half of the puzzle. Learn about the priorities across your business units, then revisit everyone you bothered for their activity data and show them how ESG can help them improve what matters to them most. If it doesn’t, that means one of two things:

• You are attempting to drive a non-material issue through, which will never get funded.

• You don’t yet have the right ESG data. Remember that not all material data points exist in the disclosure frameworks.

Finding out what matters means going beyond materiality to find out the material priorities of others. This action is another step to securing budget.

So, what about the adage: What gets measured and managed? The reality is this:

What gets measured, gets measured.

Measurement does not necessitate action. We need Chief Sustainability Officers and Offices who can influence without authority. As it turns out, that, too, might be happening.

The Weinreb Group’s 2023 Chief Sustainability Officer Report contains some interesting statistics on what it takes to be a successful CSO, and the stats look like they would drive a shift toward innovation.

CSOs identified the top attributes needed to be effective in their job: 68% said they needed to be able to influence without authority, 86% said they need to have strategy and vision, and 67% said they need to be a corporate chameleon (able to translate sustainability topics into language that resonates with their recipients).

(Side note: I heard about this report on Mike Hower’s Sustainability Communicator podcast and his interview with Ellen Weinreb.)

While sustainability and ESG necessitate more than disclosures into strategy and vision, the other two callouts might be overlooked. Don’t underestimate the power of influence and serving as a collaborator and translator. Again, it sure sounds like an internal sales role to me.

Sustainability Offices need to be influencers and translators

The skills listed in The Weinreb Group’s report are necessary to progress beyond the disclosures, but what does that team look like? The IBM report outlines two other stages of sustainable value for Sustainability Offices to consider, representing a similar perspective on the above path but from how the team is focused. In the IBM report, it goes like this:

Compliance focus OR Sustainability as a “project” OR Embedded Sustainability

So, after the regulatory reporting, we might see one-off teams running sustainability in a silo. I see this sometimes, but only as a byproduct of the first team. Sustainability as a “project” pigeonholes these offices into only seeing the data through their office’s lens or philanthropy, not the business need (which would be ESG).

The goal should be Embedded Sustainability or some flavor of what you might have heard, such as, “Hopefully, one day I will put myself out of a job.” This is where every business unit understands ESG topics and the data to make the most informed decision possible. Rather than putting these talented people out of a job, they should be the subject matter experts who wield that influence without authority and serve as the translator of these issues to the business.

Embedded sustainability does not involve larger or more plentiful sustainability-focused efforts and programs. Rather, these organizations incorporate sustainability into their core operations and transformation efforts.

The IBM report also doesn’t miss the ESG connection but doesn’t call out ESG specifically. Instead, it relies on materiality.

Each organization must understand where it can have the biggest material impact for the business and the environment.

Regulatory compliance and its subsequent metrics are only the starting point for what is needed. Sure, you must measure what’s happening, but diffuse the idea throughout your existing structure to drive business value by bringing ESG metrics and other data alongside the business data for context. Layering on each business unit’s priorities is critical to understanding that context and pulling those levers of influence. This is where innovation gets funded.

If you only ever build a regulatory compliance team or even create a one-off function and don’t invest in embedding sustainability and ESG, you will find a vestigial office with no power to accomplish anything.

What I wrote in ESG Mindset is that:

…the company needs each business unit responsible for those areas to upskill on ESG and take ownership so the company can collectively transform.

Collective transformation is a type of innovation and needs a few things:

• ESG metrics (and smart people)

• Business metrics and an understanding of each team’s priorities

• A team that can influence and translate in the context of each business unit’s goals and materiality

• Embedded sustainability across the organization

Whether your company calls it embedding, mainstreaming, or integrating, ESG must be woven into the business strategy if we’re ever to progress to improvements and that underfunded innovation. For those screaming above and attempting to create business cases, there is a path to influence and budget power through data analysis and diffusion, but it only starts with your actions. Where it finishes might be an entirely different business unit. Recognizing the power and influence that other teams have and working to convince those teams to find the gaps, improvements, and innovations along their priorities is one way to break the endless cycle of disclosures or at least put it to some good use.

It might seem unnatural to change our attitude toward sales to get what we want, but it is worth a shot. This capturing of influence will hopefully define sustainability and ESG professionals in the near term as they attempt to drive change, build resilient companies into the following stages of improvement and innovation, and get that elusive investment they need.