ESG is a Burning Issue for HR Strategy and Organisational Design
This article delves into the growing need for true business sustainability and the impact of tightening ESG criteria and standards that organisations have to adhere to.
Sustainability has become a significant issue within the business world as organisations face increasing pressure to address environmental concerns, implement effective Environmental, Social, and Governance (ESG) strategies, and demonstrate responsible practices.
This article delves into the growing need for true business sustainability and the impact of tightening ESG criteria and standards that organisations have to adhere to. We explore the need for purpose-driven ESG strategies to attract and retain emerging talent who can become future leaders. We question whether ESG should be professionalised to ensure businesses have the capacity and influence to implement genuine changes rather than just giving the impression of good sustainability practices and the role HR must play in achieving this.
A Genuine Sustainability Strategy is now Vital for Businesses
Organisations are increasingly under the microscope around their environmental efforts. Greenwashing - the practice of leading with small or borderline-irrelevant environmental claims to disguise the real impact of a product or practice (say, promoting the packaging on a packet of single-use plastic straws as being recyclable), thus attempting to persuade consumers that choosing their product is helping the planet - is routinely being called out from all angles.
With governments worldwide pledging to accomplish zero net emissions by 2050 and businesses expected to play a crucial role in achieving this, sustainability efforts are becoming vital to corporate strategy. The business world and the general public are starting to realise we are running out of time to save our planet.
The rising costs of climate change are also a concern, with Insurer Swiss RE reporting a staggering global economic loss of over $275 billion in 2022 due to natural disasters. It is estimated that in the UK alone, banks and insurers could face annual climate-related losses worth almost £340 billion by 2050 unless decisive action is taken to mitigate the impact of rising temperatures and sea levels.
In response, in 2023, the UK government committed to introducing a 'green taxonomy.' Like the EU green taxonomy, this framework will define the criteria for activities to be classified as environmentally friendly. This will enable businesses' sustainability practices to be compared like-for-like and recognise companies that genuinely uphold their environmental commitments. Such measures will foster benchmarking of best practices and ensure the sustainability of businesses moving forward.
What Climate Change Impacts Does ESG Strategy Need to Address?
With businesses increasingly unable to hide behind greenwashing to drive sales and appeal to their customers’ social conscience, the need to provide a real and transparent sustainability strategy is critical. These strategies must address how climate change is affecting businesses, including:
Investors now consider ESG factors when making decisions. Businesses not doing enough to address climate change may face pressure to improve their sustainability practices, affecting access to capital and investment opportunities. Conversely, companies prioritising sustainability can attract socially responsible investors and reap financial benefits in the long term.
To highlight this, PwC’s Global Investor Survey found that ESG factors have become a make-or-break consideration for global investors. 79% of investors said how an organisation manages ESG opportunities and risk is crucial in their decision-making process.
Supply Chain Disruptions
Climate change-induced shifts in weather patterns can disrupt the availability of inputs in supply chains. Extreme weather events like hurricanes, floods, and droughts can cause delays, shortages, and increased costs, particularly for companies dependent on a global supply chain. This leads to lost sales, increased prices, and customer dissatisfaction.
Regulations aimed at curbing carbon emissions can impose additional costs on businesses. Stricter environmental standards and emissions caps may necessitate investments in innovative technologies to comply with the rules. Failure to meet these requirements could lead to penalties and legal repercussions, including fines and court orders. For instance, the European Union's target of reducing greenhouse gas emissions by 55% by 2030 as part of its 2030 Climate Target Plan necessitates businesses to invest in new technologies and adjust their practices.
Anticipated rises in physical risk exposures and insurance claims resulting from climate change will escalate insurance premium rates significantly. This escalation can potentially hinder the affordability and availability of insurance products covering climate-related hazards over the medium to long term. Additionally, the heightened frequency and severity of natural disasters linked to climate change pose challenges for insurers in accurately predicting future loss probabilities and appropriately pricing insurance products.
Attracting Talent and the Influence of Gen Z in ESG Strategy
Gen Z are seen as the climate generation, a claim backed up by 76% expressing that climate change is one of their biggest concerns.
In 2021, a YouGov survey found that in four key markets, over half of consumers were willing to pay more for environmentally friendly products:
According to the same survey, 49% of Gen Z would accept a lower wage to work for a purpose-driven company.
When it comes to attracting Gen Z talent, a robust ESG strategy is vital. Nearly four in 10 (44% of Gen Zs) say they have rejected assignments due to ethical concerns, and 39% have turned down employers that do not align with their values, according to Deloitte’s 2023 Gen Z and Millennial Survey.
These statistics suggest that sustainability equals good business; companies have a financial incentive to be more transparently socially conscious, and in turn, they will be able to attract the talent they need for the future.
How does Organisational Design fit into ESG Strategy?
Armstrong Craven recently attended a summit of CHROs in London. One of the sessions was focused on two key questions: What stage is your ESG strategy at? What role do you as an HR team have to play?
During the discussions, it became clear that many of the multinational businesses in attendance didn't have a dedicated Chief Sustainability Officer (CSO). Therefore, this meant that a large proportion of ESG work fell under the responsibility of the company's HR team, with the emphasis being on the social elements of ESG. For some businesses with big carbon footprints, the responsibility might fall to the COO instead due to the impact on the environment of their day-to-day operations.
This highlighted that there is still no clear place for ESG, and companies are still trying to figure out where it needs to sit.
Where should ESG sit, who’s responsible, and how is it reported?
In a recent survey conducted by Armstrong Craven of 121 globally listed businesses on this critical subject, we found the following fascinating trends highlighting that even large multinational companies still do not all have the same approach to ESG.
Only 10 of the 121 companies researched (8%) have a Chief Sustainability Officer on the Executive Committee (ExCo) of the business, reporting directly to the CEO.
The businesses that do have taken an early lead in ensuring sustainability is represented at the highest level and ESG strategy is driven (and owned) from the very top.
A further 31 companies have sustainability represented at ExCo, but the owner has a dual remit. For example, Legal combined with Sustainability or Corporate Communications combined with sustainability. This begs the question of whether ESG is really a top business priority if the ultimate owner is focused on other things.
Several companies (27%) have a dedicated role for sustainability that reports directly to the CEO, but this role sits on the senior leadership team beneath the ExCo, not the ExCo itself, and so does not have a voice at the very top table.
There is still a high level of companies (47 or 39%) with no representation for sustainability (whether sole or dual) on either the SMT or ExCo.
What is the impact of ESG matters not being reported directly to the CEO and not having a position purely focused on sustainability? Are companies losing out if they don’t have a leader who is solely focused on the effective implementation of ESG strategy? For those that don’t have such a figurehead, how can ESG be effectively driven from the top?
If ESG is not present at the top table, do these businesses really have the ability to make significant changes to investments in sustainability? Should HR be driving the organisation design to ensure that ESG does have a top seat, just as HR had to do for its own position in the not-so-very-distant past?
Should ESG Professionalise to Implement the Changes the Planet Needs?
With ESG still in its relative infancy, finding talent with in-depth professional experience in sustainability coupled with an operational background is challenging for businesses. When we researched the talent pool, 86% were found to have backgrounds in Corporate Affairs, Marketing, Brand Management, HR, Research and Development or Legal or had moved into sustainability more than 10 years ago. Only 10% (15) of the talent pool have recent general management experience, and only 4% (7) have recent operational experience.
This is important because as the environmental and sustainability elements of ESG increase in importance as climate change accelerates, the transformations a business needs to make are arguably more of an operational nature, making the blend of operational/general management and ESG experience critical. Our research shows this combination is still rare.
Therefore, the question is: should the CSO have a place on the ExCo due to the necessity of maintaining a balanced and influential representation of various departments and disciplines around ESG?
In advocating for the CSO's presence at the ExCo table, it is important to emphasise the imperative for this role to facilitate the alignment of various departments and functions within the organisation, including HR. Such alignment is essential to address ESG comprehensively and cohesively. Therefore, the responsibility lies with the CSO, HR, and the business as a whole to embrace and accelerate change in organisational design that enables this holistic approach.