Senior Client Partner, ESG and Organizational Strategy
The 5 ESG and sustainability questions you need to answer
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Read by: Andrew Lowe, Senior Client Partner, Head of ESG & Sustainability for EMEA at Korn Ferry [16:20]
Everyone is talking about environmental, social and governance - better known as ESG. News stories. Blog posts. Investment conversations. Disclosure reports. Not a day goes by without the latest topics and issues being raised, challenged, debated and discussed.
This article is the first of a multi-part series where we look at the critical people considerations for your ESG strategy, including purpose, board governance, leadership and talent, operating model and culture.
Sustainability embeds value generation into business strategy for the long-term benefit of all stakeholders. An integrated sustainability strategy reinforces that environmental, social and other impacts are incorporated into important business and operational decisions.
ESG stands for Environmental, Social, Governance. ESG measures performance through a set of criteria developed for rating and reporting. An ESG rating measures environmental and social impacts and the effectiveness of corporate governance in managing them.
We believe people are the key to delivering successful ESG and sustainability outcomes.
Increasingly, board members and management teams are going public with sustainability commitments, inspiring us all with ambitious, well-intentioned statements about what they are going to achieve.
But when organizations make these overarching ESG and sustainability statements, they are often missing key details.
For example, how does the organization intend to reach its ESG and sustainability goals? What exactly is its approach to ESG and sustainability? Is there a concrete change plan in place or an ESG framework and, if so, who is going to deliver it?
The lack of detail here may be why, as our research has shown, roughly 70% of transformation efforts fail — because the critical element of successful transformation is too often overlooked.
A recent Korn Ferry study found that senior leadership and organizational culture- just two out of 50 possible factors - explained more than a third of the difference in whether an organization is successful at transformation. Interestingly, these are factors you rarely hear mentioned in commitments on sustainability.
It is time to consider a more people-focused approach to your ESG and sustainable strategy. Working tirelessly with environmental scientists to find a path to net zero is important, but if you aren’t simultaneously considering how your people are going to take you down this path, your efforts are bound to fall short.
We look at five critical people-related questions organizations need to ask and answer about ESG and sustainability
Purpose-driven organizations are more successful organizations.
Korn Ferry research reveals that companies driven by purpose post compound annual growth rates of 9.85% compared to 2.4% for the S&P 500 overall. So, when we talk to our clients about developing a sustainable culture and sustainable business, the first question we always ask them is “Why do you want to build a sustainable business?”
Answering this question is not always easy. But it must be answered—because unless you can clearly articulate what or who is driving the need for the change, you will not be able to identify the actions and levers required for success.
DTE Energy, a Detroit-based diversified energy company, has committed to achieving net zero carbon and greenhouse gas emissions by 2050.
A key priority for its executives over recent months has been to refine and communicate the company’s purpose in line with its bold sustainability goals. The company’s refreshed purpose is We improve lives with our energy. Diane Antishin, Vice President of HR Operations and Chief Diversity & Inclusion Officer for DTE Energy, explains: “Our aspiration is to be best in the world and best for the world, so this purpose statement represents the idea of what we contribute and do to enable progress and society.”
The wisdom of DTE Energy’s approach is borne out by years of Korn Ferry research: for truly successful change, leaders need to rally around a unified purpose that is propelled and sustained by people across the organization.
ESG related issues are a growing concern in the boardroom.
Large institutional shareholders, proxy advisors, regulatory bodies, and ESG rating agencies are subjecting companies’ sustainability and risk profiles to ever greater scrutiny. If they are to provide the required oversight and support, boards need to have the right ESG information reported to them. Only then will they be able to act and make changes where necessary.
Putting an effective ESG and sustainability reporting process together takes careful thought and preparation. The management team needs to decide what to measure and how. The board needs to work out how to evaluate management’s work and ensure it aligns with the organization’s values, ESG targets and overall goals.
Other ESG and sustainability strategy questions that need to be answered in detail include:
These are questions we often hear from organizations.
While these are all relevant and must be answered, we think the most important question for boards to address is: How can you ensure your organization treats ESG as a holistic and strategic business imperative?
We believe that most organizations should identify ways to embed ESG into the fabric of their culture and operating models. And boards should integrate material ESG issues into their oversight and support of corporate strategy and enterprise risk.
The number of companies adopting ESG metrics as part of their annual and/or long-term incentive programs has exploded in recent years.
Only five years ago, most corporations had not heard of this practice. Today, 44% of the S&P 500 use one or more ESG metrics in their incentive plans for at least one member of their executive team.
In the U.S., early adopters have tended to focus on diversity and inclusion. European companies are more inclined towards environmental objectives. Either way, the use of such metrics in executive incentives is only likely to increase. In the future, we can expect ESG and sustainability to exert a major influence on how senior leaders set priorities each year and how they hold themselves and others accountable.
Leaders of sustainable organizations need to both perform and transform. It is not enough simply to deliver strong results today. They must rally the workforce around the organization’s purpose and vision and empower them to take the right actions for tomorrow.
This requires a deep understanding of how the organization is connected to its ecosystem and what impact it has on society and the environment. It also means operating in a world with fluid boundaries and broad horizontal networks.
Traditional leadership models are not suited to this more complex and ambiguous world. The span of control is not flexible enough. The chain of command is too rigidly defined.
So, what should replace them?
Korn Ferry’s recently released Enterprise Leadership Framework provides a research-based multi-dimensional model linked directly to strategic impact. The “enterprise leader” applies the mindsets of purpose, courage, self-awareness, inclusion and integrative thinking. Purposeful leadership builds resilience in the face of disruption and setbacks. These enterprise leaders believe they have a responsibility and an opportunity to go beyond their own interests and the interests of their function to make a significant difference to others across the enterprise and outside it.
Our ongoing research tells us that the mindsets, traits, and drivers that make a great enterprise leader are the same mindsets, traits and drivers that make a great sustainable leader.
Organizations that are serious about ESG and sustainability need to cultivate enterprise leaders at the top.
Organizational capabilities sit at the heart of every transformation because they describe what the organization must be good at to achieve its strategy and intended outcomes.
Companies form organizational capabilities through people, as the skills and knowledge of individuals become widely shared across everyone within an organization. So, organizations must focus on sourcing, assessing and developing talent with the right knowledge and skills for change.
When it comes to ESG and sustainability, we believe there are five individual attributes that will enable companies to develop the organizational capabilities they need.
These attributes for a sustainable business which we have identified through our ongoing work with clients are:
These attributes are currently in high demand, as businesses around the world compete for the talent they need to rapidly adapt and innovate. Organizations that are serious about achieving their ESG and sustainability goals should therefore consider securing skills through a range of talent strategies including “build”, “buy”, “borrow” and “boost”.
Most companies will need to change the way they operate to meet ESG and sustainability goals. Does this mean they need to change organizational structures too? Maybe.
The end goal, of course, is to ensure leaders can lead effectively, employees can do their best purpose-driven work, shareholders receive the value they expect, and customers and communities enjoy the best possible outcomes. The question is, which organizational structure is mostly likely to help you achieve that goal?
Factors to consider include not just your sustainability and ESG strategy but also the various people elements we have outlined. Given the need for sustainability and leaders to exert influence across the ecosystem and around the world, it is likely that organizational structures will become flatter and more interconnected in the future.
Whether you decide on a wholesale restructure or not, you will most likely need to change how work gets done in your organization. Meeting sustainability goals will require new operating models, new technology, new skills and new approaches. Employees will need to collaborate in different ways and perform more complex work. Job descriptions and career paths will inevitably change.
Organizations need to ask six key questions when making decisions about workforce transformation and how it is impacted by ESG strategy:
Organizations that understand and handle these interdependencies properly will be better able to create ways of working that work for everyone: the business, their employees, society and the planet.
Culture is the way things get done within organizations. It is made up of the attitudes, norms, beliefs and behaviors that determine how people show up at work, what they prioritize, and the decisions they make.
Getting culture right is essential for any successful transformation. Organizations can invest heavily in ESG-friendly structures, workforce strategies and governance models, but if they are unable to align hearts and minds and educate around the company’s ESG goals then nothing will change.
Unlike changes to business structures or operating models, this can’t simply be defined and implemented from the top down. Few people are prepared to alter their attitudes and beliefs simply because senior management tells them they should. Instead, leaders need to give people a say in culture change, asking them for input, listening to their perspectives, and involving them in planning. They also need to clarify to everyone in the organization why the change matters, and how it puts them in a better position to meet the needs of their customers and of society.
The good news is that the relationship between culture and sustainability runs both ways. Not only can your culture help drive ESG activities, but ESG activities can also help increase engagement with new and existing employees and rally people around your organizational goals.
If you want to make ESG and sustainability a powerful lever of employee engagement within your organization, there are three key factors you need to consider:
When we make radical choices to build an environment that allows human potential to flourish, we create organizations that are capable of doing far more than simply delivering on financial goals. We create organizations that deliver on the triple bottom line of people, profit and planet.
At Korn Ferry, we call these “radically human” organizations. And we believe that thinking and acting in a radically human way is the key to achieving ESG and sustainability goals.
That’s why it’s critical to look beyond science and technology and start giving serious consideration to the people-related issues that impact your ESG strategy, from corporate governance to company culture, from leadership development to talent acquisition.
For more information, read our next installment in this series on the people-related issues that impact effective and lasting transformation, titled: Your people: The real drivers of climate change.
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