ESG and CEO: A Difficult, but Necessary Relationship

When the CEO of the world’s largest asset management firm wrote his annual letter to CEOs, Larry Fink was clear about the importance of ESG.

“Our conviction at BlackRock is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities, and their shareholders.”

But he was also honest about the challenge for CEOs: “In this polarized world, CEOs will invariably have one set of stakeholders demanding that we do one thing, while another set of stakeholders demand that we do just the opposite.”

Certainly, he is not the only one recognises both the value and challenge of ESG.

As EY points out in their 2022 survey, it is no longer enough to achieve profit and revenue goals alone when considering the metrics to meet stakeholder expectations. As a result, CEOs are valuing ESG higher. Their survey found that around 27% already see the competitive advantage of having a clearly defined sustainable strategy.

In the Eurozone, the respondents identified the growing focus on ESG as the top challenge or opportunity changing the role of the CEO, higher than the global figures.

There is a good reason for this: 86% of Eurozone CEOs think that ESG is an important value driver, even higher than revenue growth.

Furthermore, in the 2021 version of the same survey, 26% of Eurozone CEOs cited ESG as the key reason for pursuing acquisitions. This is driving a substantial uptick in ESG-driven investments in the Eurozone, with 2021 being a record year for the region.

Sharing the task

Investors have some clear expectations of CEOs and are asking them questions.

Are they able to harness and energize the full power of the C-suite?  

Yes, the CEO must be the beacon of vision and purpose that makes the ESG strategy clear, but unified senior leadership is vital if those priorities to are to cascade through the business.

In particular, the CEO must ensure that there must be harmony as the sustainability teams, risk teams, financial reporting teams and investor relations teams work together to drive progress.

A different kind of team

Building their leadership team has always been an important part of the CEO job, as Gary Payne of our Houston office spelled out recently. But the composition and purpose of this team is changing as businesses themselves take on a wider understanding of their purpose.

Gary explains, “Traditionally, a CEO’s goal was to develop what I call a “high performing team,” in which each member was responsible for a different function that created value for investors and customers. But thanks to a growing emphasis on ESG considerations, today’s leadership team must now serve a wider caste of stakeholders than its predecessors.”

 “Employees, for example, are now considered primary and equal stakeholders to investors and customers.”

“Similarly, many more investors are now evaluating companies based on their social and environmental relationships with the communities in which they operate.

“As a result, modern CEOs need to build what I call “high value creating” teams, in which success is measured by the team’s ability to create simultaneous value for a broad array of stakeholders.

“A side effect of this widened imperative is that success is no longer measured by looking at how individual members of the leadership team execute their individual functions. Instead, a successful leadership team has to work interactively, across functions, to ensure that it represent the interests of (and creates value for) all stakeholders.

“For first-time or new CEOs, building a value-creating leadership team—and making sure that you get the right people on it—is crucial to your ability to focus broadly across the needs of the organization and to increase value by steering company purpose and culture. But it’s not easy to do. A Systemic Leadership Team coach can be invaluable in helping the CEO build, lead and motivate the perfect team.”

The leading voice of ESG

The CEO is also the key figure when it comes to communicating the importance of ESG to all stakeholders—including customers, employees, and shareholder. And they will need to do this while making the difficult resource-allocation trade-offs that can often be associated with ESG initiatives. “When it comes to ESG, CEOs usually raise three different questions: How urgent is it? Is it measurable? What are the effects for me as CEO and the company? The answers will drive his agenda”, explains Klaus Hansen, Partner at Odgers Berndtson Germany.  

Transparency, clarity and honesty in this communication is key.

A recent PWC survey points out that “if companies take the right actions on ESG, investors will support it, but they want to be brought along for the ride, however bumpy it might be. That means being upfront about your prospects for long-term value creation and the ways in which you’ll manage risks, including unexpected ones. When you tell investors and other stakeholders how you plan to reset your strategy, reimagine your reporting, reinvent your operations, and drive toward new outcomes, you build trust while creating sustainable value for the long term.”

Pay related to ESG performance?

As consumers, employees and investors are increasingly voicing expectations that businesses address ESG issues, and putting CEOs in the spotlight, should their pay be linked to their pay?

Certainly there is advice to link executive and firmwide compensation packages (including the CEOs) to a broader set of metrics, with clear targets and behavioural standards aligned to a purpose-led strategy with strong ESG underpinnings.

This will reinforce your commitments to all stakeholders and ensure that that any risks and rewards are distributed as fairly as possible. But there are important considerations for leaders and their remuneration committees to keep in mind when they include ESG measures as part of pay.

For example understanding the difference between internal targets that the company uses to benchmark itself, and external targets based on measures of stakeholder impact, such as the total amount of emissions produced or employee engagement scores.

The right KPIs for CEOs

If you take a multidimensional approach to ESG that includes diversity and inclusion, employee welfare, supply chain issues, environmental impact, and so on, things can get a little complicated around KPIs and scorecards. Striking a balance between comprehensiveness and manageability is challenging, but necessary. “Without the right set of KPIs, CEOs might be tempted to only focus on those parts of the ESG agenda that will serve the external visibility, reducing ESG to a marketing tool”, adds Gabriele Stahl, Partner at Odgers Berndtson Germany. 

Other questions to consider include, will a short-or long-term time frame be most effective? And how do you best determine which metrics determine a stretch target that will accrue additional awards? As PWC points out, “Boards and remuneration committees need to become familiar with all these dimensions and understand how executive pay is aligned with the company’s stated purpose, which stakeholders will benefit, and why.”

Full inboxes, rounded leadership

These days, everyone’s inbox is full, and the CEO’s is no exception. Juggling an ever-broader array of competing priorities, including ESG, will take leaders with a growth mindset, able to regularly demonstrate empathy and a willingness to embrace debate and be confident enough to admit their own weaknesses.

In our view, finding those leaders, both from internal and external talent pools, takes equal parts data and the judgement that comes from deep knowledge and experience. Not to mention the global reach that a firm like ours can offer.

To find a CEO up to the challenge, senior leader coaching, or to discuss your own career path, please don’t hesitate to get in touch. We’d be happy to help.