Transcript | Focusing on ESG Planning and Strategy

ESG is a driving theme and priority for most organizations around the world today, and, like any other key initiative within these organizations, whether it be global expansion or launching new product lines, there must be a plan and strategy for ESG programs and activities. They cannot be approached as a side project.

This is Kevin Donahue, a senior director with Protiviti, welcoming you to a new edition of Board Perspectives. In this episode, I speak with Protiviti’s Ellen Holder and Britta Sadoun about the importance of building an ESG plan and strategy and the board’s role in this process. Ellen is a director and Britta is an associate director with Protiviti’s Risk and Compliance solution. Both are members of Protiviti’s ESG practice and leadership team.

Ellen, thanks for joining me today.

Thanks for having me here, Kevin.

And Britta, it is great to speak with you as well.

Thank you, Kevin.

Britta, let me ask you our first question. How is the concept of sustainability and ESG evolved over the past couple of years in the wake of the pandemic, global commitments to climate change and overall global sustainability goals?

Sustainability has, as a concept, a long history. Its start goes back to a German miner — I don’t want to tell the whole story there, but it’s from the 17th century — and for today’s discussion, nowadays, we would refer to the Brundtland Commission in the 1980s. So, again, decades ago, and sustainability deals with long-term developments. It involves global politics, and enticing businesses and other stakeholders into action as well. Sustainability is always bridging different interests and issues.

This is also the reason why it’s so complicated and seems so complex, and this is why we need systemic thinking. I can give you an example: We have the world conferences, and they defined the environment and development long time ago, and we also know the corps are looking into climate issues, and there, everything comes together. As part of global governance, we have the states, we have private businesses and their associations, the nonprofit organizations. They are finding a common ground. It’s difficult sometimes but also necessary to tackle this concept of sustainability and ESG.

Then, we always had seen these positive and negative times for issues of sustainability. And at the moment, when we see how the world gets disrupted and human suffering evolves with the global pandemic and wars and conflicts such as, for example, the Russian war of aggression against Ukraine, sustainability issues, some things, get in the background, and one could think that’s the way it goes. On the other hand, all these issues are clearly linked to sustainability issues, and the relevance even grows.

Good health and well-being, for example, are part of sustainability concerns, and peace, of course, is a fundamental need of humankind. When we are looking from the business side there, it’s setting goals so that you have this orientation in this complex field of sustainability, and we also see that in contrast to what some had expected, the journey there really continues. It becomes more and more important, and the tendency to make rules for ESG and sustainability to become mandatory and hold organizations accountable is growing, as we can see with the Green Deal in Europe, for example, or the SEC developments in the U.S. We do see a market restructuring when it comes to standard setting with the ISSP and the European effort, for example.

That’s a great rundown. Thank you, Britta. The ESG landscape is a complex one, and it’s not new. It’s been around for decades, really. A lot of factors go into this. Ellen, why is an ESG strategy such an important topic for the board to address at this particular time? What benefit does that bring?

In these times, it’s more important to understand the stakeholders and have a clearer USP. The consumers or business have less money to spend, or feel uncertain about the future. They consider where to spend the money. Times of great change bring people to question themselves and their priorities. Just look at the Great Resignation, or the Big Quit. Each organization is a different situation, with different stakeholders, a different business model, size, the industry for each requirement or media attention. The stakeholders vary and the situations vary, but there are clear observations showing a fundamental shift of many stakeholders toward more sustainability.

For example, consumers, they’re interested in green and sustainable products. Investors, they want to invest in more sustainable products. They want to make sure that their investments have a long-term perspective and even contribute to sustainability goals. Media and NGOs, they increase the public awareness on sustainability issues, and they are quicker in blaming companies for greenwashing. They set higher and more comprehensive requirements for sustainability reporting, more transparency on products or risk management. They want to drive the transformation of society — for example, as mentioned, the European Green Deal.

A company stand, on the other hand, explores the market opportunities for green and sustainable products. Sustainability is an increasingly important topic. It’s not just the nice-to-have topic anymore. It’s a must-have. But not all organizations realize so far the importance, the urgency of the shift. We had a client reaching out to us with a main focus in the fish industry, and they were preparing for an IPO. In the conversation with us, they said, “We had many conversations with investors and banks, and they asked about ESG.” They sounded surprised, and this shows to us that organizations are aware of the importance of sustainability or about doing this right, so this can truly help organizations and provide many benefits.

You can meet stakeholder expectations. You can keep best talents and stay relevant for clients. You can stand out from the competition, and of course, it helps comply with regulations and requirements to keep the license to operate, in the worst case. You can mitigate and reduce risks. It helps to lower the cost of capital or key operation performance. There are many benefits, but for achieving these benefits, you need to link it to the core business. There is no one-size-fits-all for all clients — all organizations are unique. You need to understand what is sustainability.

The question then is, what are the key elements? What does it mean? One part is about when you talk about strategy. Sustainability is a continuous journey, with risks and opportunities. It also means you will never be perfect, to be honest. It’s about E, S and G. It’s not just climate, but also anticorruption, ethics, human rights, sustainability or supply chain topics, biodiversity — and there are no blueprints, no out-of-the-box solutions. You need to connect to the core business. Otherwise, your efforts will fall flat or be wasted.

You have to think in two directions. The impact you have on society and environment: the inside-out impact — for example, your emissions. On the other hand, you think about the outside-in impact— the risks and opportunities: for example, if your organization is threatened due to increased temperature or lack of water. And the best thing is, if you define your purpose — why does your organization exist, and who does it serve, and then link this to your sustainability efforts — the aim for this is to be a purpose-driven and a value-adding company.

Ellen, these are great points. From the perspective of the board of directors, is it their job to set the tone with this, particularly with the company, like the example you mentioned, where management may not have been thinking about ESG strategy and sustainability in their day-to-day business activities?

Sure. You, as a board, have to set the organization, because otherwise, the core organization will run in different directions but have no clear direction. For example, I was in a discussion with a client, and they had discussions about an IPO, and asked me whether they are ready to go. I asked them about their current situation, and they listed preplanned activities. I was asking, “What is your current situation? Do you understand what your stakeholders want to achieve? What are your topics? What are you competitors, and do you have a road map?” Their answer was like, not so far.” You need to have this sorted. You need to have a proper approach for sustainability, and the key driver in this whole definition is the board.

Excellent. Thank you. Ellen, what are key attributes boards and the company’s management need to consider when creating their ESG strategy, especially when it is probably going to be unique to their organization, as you referenced before?

You have to think about your purpose, your core business and value chain, your stakeholders. Then, you’ll think about E, S and G and your culture and all the areas they have to tackle — and, yes, this is a lot, I know, so it’s crucial to have a structured approach to know what you’re doing. In short, you need to understand where you are, where you want to be and how to bridge this gap.

If we want to have a look at the approach, first, you have to clarify where your organization currently stands with regards to ESG. You can perform a capability maturity assessment to review how mature your organization is and you need to check, are we aware of the most relevant laws and regs? You can also have a look at your competitors — what are they doing? What are best practices?

In the second step, you then have to clarify which topics are mature for your organization. Have a look at the internal, external stakeholders. Who are they, how important are they for the organization and which topics are most relevant to them? And again, consider both directions — inside out, outside in — and what are some option that really help. Have a look at the various frameworks and standards, focusing on different aspects of sustainability — for example, climate change or human rights, and then select the ones you want to use for your orientation.

The interesting part, then, is to bring all this information together. One part here is to define your ambition level. You’re going to be the leader and set an example for the whole industry, or do you want to run more in the middle of the pack, or do you more focus on being compliant with current laws and regs as the starting point?

You have to ask yourself, what is your purpose, your vision, mission and beliefs related to sustainability. And here, you identify key areas of action and align your efforts toward ESG and sustainability with your business strategy. And of course, you have to ensure that the strategy has to be implemented. You have to translate your strategy into, hopefully, bold, ambitious and smart targets, identify KPIs, and develop the road map. You also have to be aware of the extra awareness and long-term initiatives to achieve your vision. And beside this initial planning, you also have to think about the ongoing program management with implementing, supervising, monitoring, reporting on the various projects and, to ensure success, set up a proper ESG governance.

These are elements you have to consider when creating ESG strategy. They are really important, and just one example here for the importance of sustainability and the board: We had a workshop with a client to understand the current situation, and they had many internal activities. They had also many employees who were highly motivated and wanted to support the organization in the sustainability efforts. The problem was, there was no overarching strategy. The board shied away from making tough decisions. The people were frustrated, and some left the organization. The problem here was the board saying, “We don’t commit ourselves. We don’t define the strategy, because it seems too complex” or “We have to make the hard decisions.” It was important to consider, the organization needs a bigger picture, and you need, in every situation, board-level commitment.

That’s a recurring theme in the podcasts we’ve done on ESG — that it’s not just a sideline strategy or in the margins. It’s a business strategy, and if it’s not approached in that manner, it’s not going to be effective at all. Britta, I want to bring you into the conversation and follow up on this dialogue around the board’s role. From your perspective and your experience, what are boards doing, or what should they be doing, to drive the ESG strategy throughout the organization, and addressing some of the points Ellen just made? What can they do to bring the strategy to life and work toward the goals that the organization is setting?

It starts with the tone from the top. That’s the experience that we are seeing all over. I would add, giving guidance by clear goals and targets and strengthening the interlinkages. I can go a little bit into these items. Having worked with different organizations and various sectors, it becomes clear: It’s the tone from the top — leaders are faced with the challenge to keep sustainability on the agenda and to listen to the organization as well. There’s a need for a good mixture of clear guidance and defining ambition levels, as Ellen just explained, and trusting, on the other hand, the organization and its contribution. It’s also important to stay accessible for sustainability and ESG issues.

For example, when we’re looking into the organization, the question is, do functions have a chance to relate to the board with respect to sustainability? Is there an agenda setting on the board meetings in a regular way? It’s not enough to review the reporting part. It’s a need to institutionalize quarterly reports on key KPIs that you have defined to demonstrate, how is your organization evolving toward the goals? Also, keep always in mind when the board requests the information, the information will be there. Otherwise, priorities may be set differently from functions or business units in their own regions.

That’s the driving force behind the board’s tone from the top and interest in these issues, but then, also, setting the high-level goals and the actual targets and KPIs for each division or leader and applying methods really to monitor this target setting. That’s very important. You need to see where you’re heading to. Otherwise, there will be no efficient dealing with these issues. Then, also build a narrative — strengthen the links between all these different goals and issues. Whenever there is an occasion to link it in decisions and statements, do so, because the story has to be told, and this is also to be seen from the top down that there’s a relevance of sustainability, and we are dealing with these issues. It’s the chance to shape the organization and live up to the purpose and the overall market positioning. To summarize, tone from the top, high-level goals, build a narrative, and have a clear way to lead and develop the road with them.

A quick follow-up: Amid all those activities, how should, or how do, boards approach the sustainability goals while still focusing on profits?

It has to go hand in hand. It’s all about, how do you integrate sustainability and ESG in your business decisions? You need to have the short-term perspective but also think about the mid-term, long-term perspectives of the organization. And if you have the chance to manage risks and, on the other hand, discover new areas where you can expand your business, be it with services or products, where you can attract more talent to your organization with the help of sustainability and ESG. For me, it’s not a contradiction of first and second line. Integrated thinking is needed at that stage.

Sustainability can redefine organization. It’s can set you apart from the competitors while impacting the whole organization regarding ways and intensities. Strategy and proper planning help organizations define direction and reach targets. It’s something like a win-win — a win for the organization to define its direction and a win for society and the environment. But we also need to be honest: There are conflicting goals, so our organization has to make hard decisions, and to make the hard decisions, we need the strategy, and the top management needs to live up to this.

Britta, let me ask you, what are some of the top concerns of your clients right now as they relate to developing an ESG strategy and looking to the future? I would imagine some of these themes are weaving into their concerns at the moment.

There’s always this underlying question of the relevance of sustainability and ESG at all and in these particular times, and then there’s the need to clarify about the regulatory requirements but also, of course, on particular issues that you have in this wide scope of sustainability and ESG. When we are looking into the relevance of sustainability and ESG, any time, of course, when there is economic struggle, one of the top concerns is when you’re balancing the efforts with the threat of global recession.

But always — and Ellen also stressed this — we need to find out, what are the benefits of sustainability and ESG, and how is it integrated in the core strategy and the organization? It cannot just disappear, but you have to find another balance of different issues, and balancing the short-term, mid-term, long-term activities. Sustainability is linked to intergenerational thinking. Keep in mind how well the world looks like for our children and their children, and what consequences could and do have today for their lives. We do see many initiatives in monetizing the impact of biodiversity and its loss for humankind, or measuring the real impact of other activities. It’s just a matter of finding suitable indicators. We see a development to get there, but also, let’s face it, as always, if there is a will, then there is a way, and if it’s not, it’s getting really tough.

Sustainability is not an add-on. This is the mindset that you need to have to deal with this, and what’s important is to have this perspective in mind — both to have the strategic oversight and provide guidance. Then we have seen lots of regulatory changes, new requirements, in great detail and in great scope. This is also something that we hear from our clients.

For example, when talking to clients about the question of what sustainability ESG framework to select from, the first step is to identify, what do you need it for? It’s no longer a selection plate and you can choose, and it’s not only looking at those issues that you always like to work on. Now it’s also more, you have to find the balance of the mandatory set that is out there and what you can do additionally for your purposes. For us, it’s really important to see, for example, we have the reporting part in there, but please consider your strategic assets as well. Don’t do it just for the report. Do it for your strategic outline.

Clients reach out to us with specific issues touching the E, the S or the G, and often, we hear, it’s all too much. Do we need experts on all of this? Can we ever understand what is human rights due diligence, and what about biodiversity? Why do we have to consider all these stakeholders and do all these things? We are convinced it’s key to differentiate the material issues. We have to understand, what kind of priorities do we want to set from the organizational point of view and those relating to the key stakeholders — understanding, how do these issues influence us, and how do we influence them?

Then for example, if we talk about the human rights due diligence part, to pick one of these issues, they both have a crucial role to play. Human rights, relating it to the core business activities, that’s another story. And with the U.N. Guiding Principles on Business and Human Rights, published around 11 years ago, there was this differentiation of duties for states and businesses, and it was defined as the duty of states to protect human rights and the organization’s and business’s duty to respect human rights. Both need to provide remedy. Again, is this clear enough? Of course, it needs translation, and it’s necessary to fill these abstract terms with real-life examples, relating it to the value chain of an organization — not only the supply chain but also including it, and then opening up the different dimensions and explain opportunities for action and, again, finding out the benefits for the organization dealing with this.

I absolutely agree. Sometimes, we see the organizations just track it with the simple things just to get this implemented because it seems to be too complex and they have too many internal stakeholders, too many projects which don’t align — and here, it sounds simple, but different project and program management helps. It’s about, don’t overbrand the organization, and to be able to vary the space and for tracking of your progress and, for example, using an internal dashboard and develop internal expertise for these ESG topics.

As it is often said, the best people are worth 10 times more than the best pros and technology, but don’t forget the pros and the political choice, because you will need technical support to manage the data you get from all different perspectives, and one part is about starting too late. Be sure you start early enough to get regulatory comments, especially for global organizations. Sometimes it’s overlap of regulations. Be efficient, understand the overlaps and map your activities.

You have to define what is sustainably for your organization. Link to your purpose. Define strategy, and then stick to it. You need to focus. You only have limited capacities and resources, and you cannot save the world alone. So, be smart, be efficient, and link sustainability to your core business and then stick to it. Focus.

This has been a great conversation today. For our listeners, I want to remind you, you can visit Protiviti.com/ESG for more information, including past podcasts in our ESG series. Final question for both of you: Britta, I’ll have you respond first. Going through our conversation today, and this big topic for organizations to address, what is the key takeaway, or what are some of the few key takeaways, that you have for board members today with regard to ESG and the strategy around it?

Again, let me stress, both play a crucial role in setting the sustainability/ESG agenda. It’s not somewhere in the organization. It needs to be at the top of the organization as well, and then make absolutely clear the benefit of the sustainability and ESG issues both for your organization and for society and the environment. And with this, take it seriously within necessary underlying resources and structures. Also, there needs to be an adequate level of quality that you can expect — ask for it, and again, be bold to take the decisions when it comes to conflicts of interest among different sustainability and ESG issues, and relating to other relevant business drivers. Sustainability and ESG, as I see it, is an investment in the future.

In addition, as I said before, start early. Link sustainability to your core business, and be smart. Don’t focus on the pleasant little things, but look at the outcome. Look at the material topics. You will run an organization, and you have to run sustainability in your organization with the same strategic approach. In short, understand where you are, where you want to be and how to bridge the gap, and then report transparently about it and make progress.

My thanks to Ellen and Britta for the great insights they shared on this podcast. I thought they delivered some great messages and takeaways for board members. Numerous stakeholders, both internal and external, continue to ask about ESG efforts and strategies in the organization. This cannot be treated as a side project. ESG absolutely requires a strategy, and that strategy must be driven by the board, which will deliver the appropriate tone at the top.

As a reminder, you can learn more by visiting Protiviti.com/ESG. And last, I encourage you to please subscribe to our Board Perspectives podcast series wherever you find your podcast content.