Who is really in charge of ESG?

Regulatory updates such as the tightening of the UK Corporate Governance Code¹ and mandatory reporting on Scope 3 greenhouse gas emissions² mean there is increasing pressure on mid-market companies to embed ESG into their business models.

Yet there is little consensus about who should be responsible for meeting this challenge. According to new research from Investec, which surveyed 500 companies in the UK,* chief executives, chief sustainability officers (CSOs) and a C-suite collective are most likely to lead on ESG among companies who are developing or implementing a strategy.

For those companies that say responsibility is shared across the C-suite (24 per cent of those surveyed), ESG is more likely to be seen as business critical and fundamental to how business should operate than companies where the CEO or CSO is in charge.

So, is there a right — and wrong — candidate for the job? Or is the task of embedding sustainability too complex and costly for a single person?

Pooling resources

Given that ESG affects financial performance and influences supply chain and reputational risk, the CFO — who leads strategy at just 7 per cent of organisations surveyed — can play a pivotal role.

Concepción Galdón, vice-dean for business with purpose at IE Business School, says that companies should consider combining responsibilities. “As a medium-sized company, you need to be very pragmatic and use existing resources and channels,” she says. “Combining a sustainability role with the role of finance chief, for example, is smart because you can use existing processes to capture financial data. You are adding new variables to existing budget conversations.”

For schoolwear company Banner, combining roles helps to avoid strategic and operational conflict. “Being in charge of finance and sustainability means we can take a balanced view of the two, which is hugely helpful to the organisation,” explains CFO Ian Webb. “It drives out any binary views that it’s one versus the other.”

Should companies appoint a sustainability chief?

In the Investec research, 18 per cent of mid-market companies say the CSO takes responsibility for ESG. This compares to the 37 per cent of listed companies in the UK that have a CSO.³

Appointing a CSO is becoming more commonplace. According to an EY survey of Fortune 1000 companies, eighty-one per cent have one or an equivalent position within their leadership hierarchy,⁴ which could be because stakeholders are starting to expect it.⁵

But should mid-market companies follow this lead? In a Deloitte study of financial services firms, some respondents thought they were ‘too small’ to appoint a CSO, implying that the role may be required as the firm grows.⁶

Direction from the CEO is a must

When a business appoints a CSO or combines roles, it should consider reporting lines. When the CSO reports directly to the CEO, it tells regulators and investors that the company considers its sustainability goals to be a strategic imperative.⁷

For a quarter (26 per cent) of the companies in Investec’s research that are pursuing an ESG strategy, the chief executive is ultimately responsible.

Callum Bell, head of direct lending and co-head of private equity client group at Investec, says that the C-suite is a key factor in the adoption and success of a sustainability strategy across an organisation. “The buy-in of the chief executive is key,” he says. “Like any strategy, when it has buy-in from the top it has better prioritisation and focus to enable a successful implementation and to best capture growth opportunities. There will be an increasing trend of hiring chief executives who can point to a proven track record of embedding ESG into their strategy.”

What is the role of the board?

The company board is ultimately responsible for long-term success, so it needs to have oversight of ESG strategy and play an active role, ensuring that sustainability is an integral part of discussions with the CEO and executive team.

More than half (54 per cent) of FTSE 500 companies now have a board-level committee focused on ESG.⁸ This approach allows ESG considerations to be overseen by a smaller group of board members who have relevant knowledge and skills. This pooling of knowledge and best practice can come from other sources, too. For smaller companies, it may not be non-executives who provide this counsel, but industry groups, local networks and peer organisations.

The chief executive, finance chief and CSO are all sensible candidates to lead ESG, depending on the company’s needs and size. But even with a single leader in place to lead progress, each senior manager will need to play an active role in embedding sustainability throughout the organisation.

Banner’s Ian Webb agrees that every part of the organisation should focus on ESG. “One of the most impactful parts of driving our agenda forward is having a team of colleagues who are advocates for green initiatives,” he says. “Every manager in our organisation has a sustainability goal in their annual objectives and appraisal, so it’s woven into what we do.”

Ruth Leas, CEO of Investec Bank plc, says the bank has tried to make ESG part of the ‘exercise’ of daily activity, whether that’s liquidity requirements or return on equity. “It’s integrated into the way of thinking,” she says. “This behaviour has been paid forward across the leadership team and is reflected in the nature of the leaders we look to hire.”

There is no single path, but mid-market companies can build on existing infrastructure and operations to give themselves the best chance of success.

“The approach will differ depending on the company,” says IE Business School's Concepción Galdón. “But you should use what you already have wherever possible. ESG needs to be connected to the nature of who you are, and it needs to travel right through your business model and value chain.”

* The majority of companies surveyed by Investec have an annual turnover between £10mn and £250mn.

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