CEOs and ESG: As ESG Landscape Shifts, Corporate America’s CEOs Face Fresh Challenges —and Opportunities

The center of gravity in ESG is shifting, which presents a fresh set of challenges—and opportunities—for corporate America’s CEOs, as detailed in a new report by The Conference Board.

While major institutional investors were once the most consistently vocal stakeholders driving companies’ ESG agendas, today, regulators and business partners are exerting increasing influence. At the same time, companies are facing opposition to their ESG agendas, with 61% of surveyed US firms saying “ESG backlash” will stay the same or increase in the next three years.

“As CEOs seek to integrate sustainability more deeply into their business strategy, they will face the challenge of not having their sustainability initiatives driven by generic regulatory requirements, but instead shaped by external factors such as customer demand, the state of sustainability in their industry, and the interplay of technology and sustainability,” said Merel Spierings, Senior Researcher at The Conference Board and co-author of the report.

This evolving landscape calls for CEOs to take a proactive approach to ESG, including focusing on ESG-related business opportunities; assessing the ROI of sustainability investments; engaging the board as thought partners; collaborating effectively with business partners; and deciding whether to adopt a purpose statement.

The report was produced in collaboration with Ramboll and Weil, Gotshal & Manges LLP. It features insights from a Chatham House Rule convening with CEOs from the US and Europe on how to best integrate ESG into a company’s business strategy and operations.

Insights and findings from the report include:

 CEOs should maintain their focus on ESG-related business opportunities.

• Context: Companies are facing more pressure to address a growing set of ESG issues (“the what”) from an expanding group of stakeholders (“the whom”). Competing and sometimes conflicting demands can make it more difficult for CEOs to keep their companies focused on the opportunities associated with the sustainability transformation of their businesses.
• Steps for CEOs: CEOs and their companies can capitalize on ESG-related business opportunities by integrating sustainability into their firms’ business strategy and operations. They may want to consider focusing on the three areas where their businesses intersect with ESG:
  • The workplace, including through facilities, core operations, and capital investments.
  • The marketplace, including products and services they sell as well as those they purchase through supply chains.
  • The public space, including through government relations and corporate philanthropy.

“We currently are at the early stages of a sustainability transformation of business, which may eventually match the magnitude and impact of the digital transformation. At this point, B2B companies may be leading B2C companies in this transformation. Consumer demand, especially in the US, continues to be driven more by price and quality than sustainability. By contrast, business customers—often under regulatory pressure—are prioritizing sustainability,” said Paul Washington, Executive Director of The Conference Board ESG Center and co-author of the report.

While companies are increasingly held accountable for delivering returns on their ESG initiatives, they lack a consistent methodology for measuring and reporting on the ROI of ESG.

• Context: Calculating the returns generated by sustainability initiatives may be more complex than that of many other initiatives. Among the reasons:
  • The challenge of what qualifies as a “sustainability initiative” vs. business-as-usual, especially as companies are increasingly integrating sustainability into their business.
  • The benefits of sustainability initiatives include not just direct cost savings and revenue enhancements but intangible benefits as well.
  • Companies typically employ various sustainability initiatives simultaneously.
• Steps for CEOs: As a start, companies can use existing operational key performance indicators (KPIs) to quantify the financial return on their sustainability investments. CEOs can facilitate this process by ensuring collaboration among their firms’ financial, sustainability, and business functions to engage in this ROI assessment.

“As we at Ramboll have begun to quantify the ROI of our ESG initiatives, we recognize that certain achievements cannot be adequately captured by traditional financial measures. Therefore, we are committed to measuring both impact and financial returns to gain a comprehensive understanding of our ESG efforts' effectiveness,” said Jens-Peter Saul, CEO of Ramboll. “This dual focus ensures that our initiatives contribute not only to the long-term success and growth of Ramboll, but also societal well-being and environmental sustainability—which allows us to build trust among stakeholders, and act as the partner for sustainable change.”

CEOs should meet the board where it is on its sustainability journey.

• Context: Directors come to boards with significantly different levels of understanding of environmental and social issues, in contrast to their more consistent levels of knowledge in areas such as strategy, governance, and finance.
• Steps for CEOs: CEOs should begin by gauging their boards’ current level of fluency in relevant sustainability topics, rather than assuming a level of knowledge and/or interest. Then, working with management, they should help enhance directors’ fluency in ESG by:
  • Educating the board on the ESG issues that tie to the firm’s main risks and opportunities.
  • Supporting board attendance at external education programs and events.
  • Engaging outside providers to deliver trusted information, benchmarking, and advice.

“Companies should consider the relationship between management and the board as a partnership and a complement to the oversight model required by law,” said Lyuba Goltser, Partner at Weil, Gotshal & Manges. “Engaging the board as a strategic partner can facilitate a transformation of the board's mindset from a focus primarily on risk mitigation to one centered on identifying and capitalizing on opportunities.”

Compared to traditional business objectives, companies need increased levels of horizontal and vertical collaboration to achieve their ESG goals.

• Context: Addressing ESG-related opportunities and risks is not an endeavor that companies can (or should) undertake in isolation. Indeed, with 69% of procurement executives taking sustainability performance into consideration in their procurement decisions, and with EU regulations forcing thousands of US companies to have discussions with their upstream and downstream business partners on ESG, companies have both an obligation and opportunity to collaborate on sustainability.
• Steps for CEOs: Especially in industries where technology plays a key role in driving (or impeding) sustainability, companies may find value in collaborating in a lawful manner with competitors to mitigate risks, share resources, and foster innovation. CEOs and their teams should approach such collaborations with the same level of strategic, financial, governance, legal, and compliance rigor with which they approach other partnerships.