CEOs are responsible for the overall success of the organization, leading the development and execution of long-term strategies with the goal of increasing shareholder – better yet, stakeholders – value. At the same time, sustainability topics are – at last – ubiquitous. CEOs and their boardrooms should, in fact, watch out for ESG very earnestly. From global climate frameworks to regional carbon-reduction pacts, to the UN’s sustainable development goals, new policies and regulations, as well as global reporting initiatives and duties, sustainability is designed to forge a new world and “force” C-levels that still think it’s a buzzword down that path.
However, here’s five reasons why CEOs should switch that around and instead be the “force” behind sustainability.
1. CEOs are personally responsible for ESG
Whether they like it or not. Now the question of such personal liability for ESG breaches has been answered by the latest developments at Deutsche Bank, for example. On June 1st, 2022, Chief Executive of Deutsche Bank subsidiary DWS Asoka Woehrmann had resigned after German law officials stormed offices over claims that the company exaggerated the sustainable credentials of some of its financial products. This happened right after the US Securities and Exchange Commission released fines of more than $1 million to BNY Mellon for misstatements and omissions about ESG in specific managed funds. Undoubtedly a case of personal responsibility.
Further, with the European Green Deal’s EU taxonomy, organizations located or doing business in Europe are required to report on the climate change mitigation and adaptation, and to disclose their goals. The proposal for the directive on corporate sustainability due diligence was, in fact, agreed upon by the European Commission. Yet the EU taxonomy’s focus on Europe’s first climate-neutral continent by 2050 isn’t very clear on CEO responsibilities, but still “companies in scope will need to report on their ‘eligible’ economic activities…. And starting in 2023, they will need to report the taxonomy alignment of their activities.”
On another continent, the SEC (US Security and Exchange Commission) is about to require companies to increase disclosure in corporate reporting, potentially making them liable for material misstatements or omissions. It’s inevitable that CEO executives’ compensations get more and more linked to ESG targets.
2. Risks and regulations are key ESG components of the CEO’s agenda
As organizations adopt sustainability practices, climate incidents, emissions or transitional risks inherent to changing strategies around planet and people as well as physical risks directly related to global warming occur. At the same time, regulations in each industry and region are now a necessity to support the United Nations Sustainable Development Goals.
Indeed 77% of executives report regulatory pressure to act on climate change. In the Netherlands, administrations must report on their exact ESG impacts. In South Africa, regulations are in place, requiring companies to produce a BEE certificate that ensures support of previously disadvantaged groups. No doubt, you should be concerned. Even places you won’t expect a high focus on sustainability, governments and associations are taking initiatives. For example: in India, one of the largest producers of cotton in the world, sustainable business practices are becoming more relevant. So the government has come up with the Better Cotton Initiative (BCI) to maintain economic growth while keeping the sustainability factor in mind.
Hence, your company needs to mitigate risks, comply with regulations, put procedures and policies in place to ensure resilience. This needs C-Level backup as it requires transformation and excellence in everything you do, thus this belongs to the boardroom’s agenda.
3. Sustainability is all about finance
86% of Eurozone CEOs believe ESG is an important value driver, even more critical than revenue growth. In 2021, Larry Fink from Blackrock set the scene with his CEO letter: “I believe that this is the beginning of a long but rapidly accelerating transition – one that will unfold over many years and reshape asset prices of every type. We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.”
As we stated before, the EU taxonomy requires companies to report on their environmental, social and governance actions. Not only in the EU, but also in North America. The SEC currently prepares new disclosure requirements.
That applies to the Global Reporting Initiative, the Value Balancing Alliance, the Task Force on Climate-Related Financial Disclosures, international sustainability standards, you name it. All these reporting frameworks require corporations to disclose their goals and progress on climate and society. In fact, 46% of investors use ESG indicators in making investment decisions, and consumers request more and more sustainable products and services. As the trend continues to grow, this leads to increased interest from chief financial officers.
4. ESG (non) actions impact brand reputation
A 2021 survey by Deloitte of more than 2,000 C-suite-level executives across 21 countries found that 74% reported regulation as the main external ESG driver, and 77% reported pressure from governments to act on climate change and regulators. Eight out of ten CEOs even believed that ESG issues were increasingly important to be discussed. 75% of that pressure comes from customers and clients; 65% of that pressure comes from staff: young consumers and workers are increasingly demanding that social responsibility comes first. 75% of consumers are changing their preferences based on sustainability, and 46% of employees would only work for a company with sustainable practices.
Whatever industry you are in, your customers will take a deep look at your business practices, and your activities will either make or break trust. They are looking for green producers trying to reduce the environmental impact. Fast fashion brands are therefore making bold statements on sustainability while still substantially contributing to massive amounts of waste, water pollution or labor conditions. In less obvious industries, such as banking, greenwashing allegations can be dangerous for the image of your company, and you must be able to back up your statements with real proof.
5. Sustainability is a core strategic task
As we saw with all the above examples, sustainability impacts all business areas and operations and revolutionizes how your business works. It requires deep transformation of your operations based on strategic decisions, e.g. to support UN SDG number 8 to promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all. Sustainability only becomes real when it comes down to processes.
To support climate action, you need to take a deep look at how your enterprise operates and where the potential and challenges are with your processes. Circular business models rely on a redesign of the processes. Social responsibility is anchored in the business processes, and ESG reporting sums it all up, needing insight into the business. A CEO is responsible for envisioning, nominating and enabling the company’s vision and sustainability strategy. This strong change needs to be enforced by C-Level commitment to mature and increase resilience.
Our vision is for Software AG to take a leading role in the global search for technological solutions to the most pressing social and environmental challenges, and to support our customers and partners in their sustainability efforts. Renewing our commitment to creating ecological and social value will contribute to Software AG’s economic success.”Sanjay Brahmawar, Software AG CEO
Now you might ask yourself: how exactly do you get the key to this quest? Well processes might be the answer and ARIS the tool of choice.