The governance structures within investment organisations are having to evolve to keep pace with sustainability’s rise to the top of the risk/return agenda. The days of naming a relatively junior person to deal with Environmental, Social and Governance (ESG) questions should be long gone. As we have seen in recent people moves, many firms across the world have been creating new Chief Sustainability Officer (CSO) roles. At the same time, the Global Reporting Initiative (GRI) is asking whether it should be Chief Financial Officers (CFOs) taking responsibility for sustainability issues, especially given the argument that ESG factors represent multiple material risks and opportunities that can affect companies’ profitability. So where exactly do CSOs fit in, and how can they be most effective?
In early 2021, the Institute for International Finance (IIF) teamed up with Deloitte to survey roughly 70 organisations with combined assets under management of almost USD 20 trillion on the subject of the future of the Chief Sustainability Officer. The responses helped identify several “tipping points” giving impetus to the decision to create or appoint a CSO. One such point arises when the pace of external change exceeds that of internal change – in other words, the existing organisation has neither the time nor the expertise to deal with the multitude of sustainability issues arising from regulators, national legislators, and global standard setters. The second trigger that was highlighted in the survey occurs when stakeholder expectations run ahead of realities. An example of this could be when a firm signs up to concrete sustainability-related targets, but is then unable to deliver the relevant granular, incremental reporting demanded by external stakeholders. CSOs are described as “sense-makers”, selected for their ability to navigate the policy-making world and effectively translate the new sustainability requirements into actionable changes across all the established business activities of their firm. The final common theme identified as a tipping point by the CSO survey is when companies have progressed beyond a simplistic, reactive approach to sustainability. Most firms will begin by prioritising the implementation of the recommendations and guidelines of their industry regulators. There does come a point where the significance of ESG factors to the future bottom line of a business will compel senior management to take the next step and bring that expertise into the core of their strategic, C-suite decision-making process.
Not all CSOs are created equal
The IIF/Deloitte study also found that the CSO job description and responsibility level varies greatly from firm to firm. The responses suggest that larger companies have a stronger tendency to create such dedicated roles, which may reflect the greater scale and complexity of their business. There may also be public image benefits for highly scrutinised larger firms in creating these senior sustainability roles. This is where reporting lines can be telling: if sustainability is truly a strategic priority for a company, it can sensibly be argued that the CSO should report directly to the CEO. This was only the case in just under a third of respondents to the survey. In other cases, CSOs were placed within Marketing and Communications, Human Resources, or various other corners of the organisation. Given that CSOs are considered as agents of change designed to affect all aspects of a business, it stands to reason that they can be more effective if their mandate comes from the very top. One of the key challenges highlighted by respondents was convincing middle-management in multiple business areas to genuinely and systematically integrate ESG considerations into day-to-day business decisions.
An important role that may be destined to disappear
The overwhelming majority of survey respondents believe that the CSO role will proliferate and increase in importance over the next few years. This is also reflected in recruitment firms’ keen interest in analysing and understanding this fast growing area. Nevertheless, if they are indeed effective agents of change, their ultimate goal could arguably be the creation of their own demise. Once an organisation has integrated ESG criteria into all aspects of its business, every key player from the CEO down should ideally have the skills necessary to support the implementation and development of a sustainable long-term strategy. This brings us back to the GRI’s argument that CFOs should be the ones using the sustainability reporting tools and analytics that they have to hand to steer their companies in the right direction. Some smaller firms may be already doing this out of necessity or prescience. In the meantime, CSOs, if given the right weight of influence within an organisation, can take on the challenging and crucial role of helping companies make the transition towards sustainability.