With 78% of boards members and senior executives acknowledging the value of strong environmental, social and governance performance, their focus is now shifting to how to most effectively manage ESG issues alongside profit goals. In this evolution, we are seeing growing numbers of companies release sustainability reports, disclose ESG data, set goals and commitments and communicate a narrative that aligns their corporate purpose with an impact mandate.
While these are important efforts, companies that are serious about progress will need to approach ESG as much more than a top-down exercise, and rather as a transformation of their business requiring significant change management. Imagine, for example, a retailer that has just announced a set of ESG priorities: reducing the company’s carbon footprint, increasing the share of products sold from diverse suppliers and improving diversity across managerial levels. Now, consider the decisions facing a regional manager at the retailer, who has significant autonomy over store-level product merchandising and regional hiring. The regional manager saw a company press release announcing the new ESG strategy, and she is excited about working for a company that values sustainability and social impact. However, she is primarily held accountable for growing same-store profits in her region and is not entirely sure how these new priorities should affect her day-to-day work.
She starts to consider how she can increase shelf space for diverse brands or products that are more sustainable, but she recognizes that many of these brands have limited resources to fund sales promotions, an important driver of her annual sales goals. How should she balance sales targets with these new sustainability and diversity priorities? Will her incentive structure change to account for these new goals? How will she even know which products and brands are the most environmentally sustainable aside from doing the research herself?
It quickly becomes clear that real impact will require companies to undergo a fundamental shift in how decisions get made at all levels of the business, from focusing primarily on profit maximization to considering a range of factors and stakeholders. Commitments must therefore be paired with organizational change efforts that empower day-to-day decision makers like this regional manager to work towards and be held accountable to these commitments.
This is business transformation at its purest. Just as a company undergoing a digital transformation would invest in reorganizing their operations, so too must ESG leaders deploy all the change management tools at their disposal to successfully embed ESG priorities into the fabric of the business. Companies committed to ESG must thus create a culture and operating system in which ESG goals are prioritized. Leaders can start by:
- Acknowledging the challenges. While employees are often aligned to the values underpinning ESG commitments, they may have legitimate concerns about how this will impact their day-to-day work. Leaders should seek to meet employees where they are by acknowledging the challenges, confusion and anxiety that an ESG transformation may create while simultaneously tapping into employees’ desires to work for a purpose-driven company.
- Modeling the hard tradeoffs. We know that ESG commitments require tradeoffs, and that not every decision can be a “win-win.” Leaders prioritizing stakeholder concerns over short-term business results should be transparent about these tradeoffs. They should openly communicate the “why” behind these decisions and show their teams how prioritizing ESG factors will create sustainable business value over the long run.
- Reworking the system. Leaders should go beyond just communicating the change—they must design new systems, processes and decision-making structures that embed ESG into the fabric of the business. This means assigning ownership and accountability for ESG to those closest to the decisions that will impact ESG outcomes, and reworking incentive structures accordingly.
- Empowering decision-makers. Managers and employees tasked with factoring ESG concerns into their day-to-day will need new tools, resources, and sources of information to make the best decisions possible. Companies should invest in these resources and pair them with training to support managers in their transition to a multi-stakeholder approach to decision-making.
ESG should be a transformational, change management effort that touches every part of the business. Otherwise, managers will experience confusion over their role in implementing an ESG strategy, teams will continue to operate business as usual and ESG commitments will go unfulfilled. But leaders who commit to reworking norms, cultivating new behaviors and building new processes will create an environment in which ESG becomes part of the culture and a north star that helps orient all decisions. This, in turn, will position their organizations to lead on ESG and take a meaningful role in addressing the biggest environmental and social issues of our time.