In spite of the political polarization of ESG rhetoric, many companies are holding firm in their commitment to integrating ESG considerations into their business. There is broad recognition that many ESG issues are fundamental drivers of business value, and so companies are looking inward, focusing on building the right management and operating structures to make meaningful progress across issues that range from climate risk to supplier diversity.
Companies are at various stages of this evolution; while large Fortune 500 companies may already have sophisticated ESG operating models, there are many companies that are far earlier in this journey—they may have an existing philanthropy or social impact function that is suddenly tasked with a much broader range of ESG topics and/or they may have decentralized pockets of ESG-related activity across the business with limited coordination. These companies are often grappling with a fundamental set of questions:
- Where should ESG sit within the company?
- What function should it report into?
- Our ESG team is small and resource constrained. How do we drive progress across such a broad range of issues?
- Many ESG issues are handled in various places across the company. How do we align and coordinate against a central strategy?
- What new organizational resources do I need? And should they be centralized within my ESG function or integrated within the business?
There is no one-size-fits-all approach, as the answers depend on so many contextual factors. However, some guiding principles can help companies navigate these questions and develop a fit-for-purpose operating model that will deliver progress, accountability, and effective coordination.
A central ESG team should report up through one executive sponsor with the overall program.
While ownership for specific issues should be embedded across the business, program management accountability should be held by a member of the executive team who oversees the ESG function. We have seen effective ESG teams report up through a variety of functions, including HR, communications, public affairs, and strategy. We’ve also seen this function report directly to the CEO through a chief sustainability or impact officer. For companies looking for the best “home” for ESG, a good place to start is by looking at their biggest drivers of ESG value creation and identifying an executive sponsor with a close pulse on those issues. For example, a professional services firm where human capital-related topics are front and center may choose to house ESG within HR, whereas a manufacturing firm focused on sustainable production may place the function under their COO.
Ownership and accountability should be embedded throughout the business, and this starts at the top.
ESG issues cannot be tackled in a silo by an ESG team –these are business issues that need to be owned by the relevant leaders across the business. This mandate should come from the CEO and cascade across the executive leadership team, with clear executive ownership assigned to each ESG issue. Owners can then assign members of their teams to be responsible for the execution, in collaboration with cross-functional partners and in coordination with the central ESG team. Management of each ESG issue should be clearly defined, whether through a RACI table (Responsible, Accountable, Consulted, Informed) or another framework broadly understood by the business, and supported by key performance indicators and incentives.
When it comes to centralization versus integration of ESG resources, it’s a balance.
Central ESG teams generally serve a program management function, handling overall strategy development, coordination across issues, reporting and disclosure, stakeholder engagement, and partnership development. Resources embedded within the business tend to have more issue area expertise, working closely with the business to integrate new considerations into their day-to-day operations and decision-making. That said, companies earlier in their ESG journey may find it easier to centralize expertise as they develop the know-how to identify what additional resources will be needed, whereas companies further along may benefit from embedding resources within the business to drive integration efforts.
These principles should not be entirely new to business leaders—RACI tables, matrixed operating structures, accountability metrics, and other tools would be used across any other major business initiative. ESG is about business transformation at its core and should be treated no differently, requiring executive commitment and cross-functional implementation to deliver meaningful progress.