15 Dec 2022
Making sense of the ESG Wild West: an evening with Steve Varley, EY Global Vice Chair
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Áine Hurley, Partner and Head of the People & Culture Practice, recounts the events of Odgers Berndtson’s annual HR Dinner
In 1970, Milton Friedman famously argued that the primary responsibility of business was to maximize profits: “The business of business is business,” he said.
Steve Varley, EY Global Vice Chair and our speaker for Odgers Berndtson’s 2022 People & Culture Dinner, disagrees, asserting to the audience that the theory is no longer fit for purpose.
Steve posited that the role of business is to create value for multiple stakeholders including shareholders and investors, employees, and the communities within which the company operates. It is a perspective that appears to be shared by most, if not all, of the attending guests.
Prior to the event, we conducted a survey of a broad range of CPOs across the FTSE, PE, Government and the third sector.
84% of them agreed that their company’s ESG goals were directly linked to their organisation's purpose. ESG is now undoubtedly a core component of how companies conduct business.
What’s more, over 78% of respondents also said that their board and executive team had clarity on delivering their ESG goals. It indicates that leadership in UK companies are potentially on the right path when it comes to aligning business and ESG.
The challenge, according to Varley, is one of measurement and accountability. Without standardised reporting, ESG remains a “Wild West” with inconsistent rating systems, and inefficient methods of assessing a company’s ESG commitments.
In this sphere, there is little or no dialogue between rating agencies and the companies they assess. This challenge was highlighted by our audience, 53% of whom represented organisations not currently accredited independently on ESG.
From Odgers Berndtson’s perspective, ESG plays an increasingly influential role in shaping the employer brand. On the evening, Varley highlighted the importance of ESG ratings/accreditation for young talent, citing the EY organisation, who employ 1200 graduates every year in the UK alone. Interestingly 58% of respondents believe that ESG has minimal to no impact on their talent agenda, a statistic which we would expect to evolve rapidly.
The other difficulty is from CEOs who use the 'net zero by 2030' target as a way of setting goals. The problem, Varley explained, is that while this might work for countries, “it translates very badly to companies”.
Because their 2030 announcements are rarely financially grounded, CEOs often run into a problem where they may be faced with needing to reduce the dividend or reallocate capital to achieve the stated ambitions. This can come as a shock to some shareholders and investors who will revolt if the CEO doesn’t deliver on earnings expectations.
“Too many CEOs are losing their jobs because they’re not able to create a competitive advantage from being more sustainable.”
There are ways to deliver superior growth and be more sustainable, however. Companies could “find new customer segments, build a more loyal customer base, or develop services, some with higher price points that bridge the intention gap” – the financial commitment customers will make for brands they know and love.
Finding the sweet spot between committing to ESG and increasing earnings is a difficult but necessary challenge.
“A financial misstep may cost you your job, so CEOs need to authentically create more upside and growth from ESG,” Varley said.
When asked how quickly he expected new renewable technologies to come online and make a significant difference, he said he was optimistic about the medium to long-term potential of renewables.
In the short term, we face local political and economic challenges, such as “the gilets jaunes in France and Germany closing its last nuclear power plants”; the war in Ukraine is also driving up the price of oil: “there’s no way renewables will scramble to fill that gap as low cost energy is needed today with many facing the challenge of ‘heat or eat’”.
Will there be more appointments of Chief Sustainability Officers, as a result?
“We’ll see more CSOs with a deeper business background,” he said, reiterating his earlier sentiment that business growth and ESG need to align. He also speculated that the role may only last c.5 years, as CSOs impart education and embed change, before moving onto the next organisational challenge.
Finally, when asked about the practical steps that CPOs could take to deliver change in their organisations,
Varley reiterated the importance of linking ESG to talent and remuneration.
This was reflected in our survey answers, as 80% of respondents believe that their company’s ESG strategy is linked to remuneration.
He also pointed to the successful reverse mentoring programme that had been effective at the EY organisation. “We paired a group of young people who were straight out of university with members of the EY executive team, to have conversations about ESG.”
Making ESG client-driven (and therefore business-growth driven) was a highly effective way of achieving change, which, for an organisation of EY’s scale and complexity, could be challenging. “We invited clients in to tell us what they wanted, and what they wanted was to work with a company that was far more responsible when it came to the ESG agenda.”
It is perhaps an unsurprising approach from an organisation whose Global Vice Chair believes that “the business of business is bigger than business.”
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.