The Rise of Chief Sustainability Officers
Mount Ngauruhoe, New Zealand - Photo by Danny Smith
When the world's largest asset manager speaks, the CEO's of publicly traded companies must carefully listen. BlackRock manages assets worth more than $7 trillion (maybe $9 trillion). In his 2021 annual letter to CEOs, Larry Fink, Chairman and CEO of BlackRock, communicated their investment aspirations going forward. Fink says a "tectonic" reallocation of capital towards sustainable assets is underway and reports that from January to November of 2020 "investors in mutual funds and ETFs globally invested $288 billion in sustainable products, a 96% increase over the whole of 2019." BlackRock is "explicitly asking that all companies disclose a business plan aligned with the goal of limiting global warming to well below 2ºC, consistent with achieving net zero global greenhouse gas emissions by 2050." Furthermore, BlackRock actively supports various sustainability-related shareholder proposals. BlackRock endorses sustainability performance reporting using the reporting frameworks developed by the Task Force on Climate Change-related Financial Disclosures (TCFD) Tier 1 (direct) and Tier 2 (indirect) emissions and the Sustainability Accounting Standards Board (SASB). These frameworks are utilized more in the USA whereas the Global Reporting Initiative (GRI) framework is predominate in Europe. Publicly traded companies are responding to this powerful market signal with significant strategic and organizational changes. Many corporations are now hiring or appointing their first Chief Sustainability Officer (CSO).
What is a CSO?
To answer this question, we must look at the evolution of how companies approach environmental and sustainability matters.
Phase I Compliance: Most companies start from a regulatory compliance perspective. Compliance is an unavoidable cost of doing business that is to be minimized and avoided. At the bottom of this category are companies that ignore requirements that are rarely enforced or present low penalties for violations. The person responsible for these compliance matters is usually lower in the organizational structure within an engineering or operational functional area with a title such as Environmental Coordinator, Environmental Manager, or Environmental Director. Sometimes these positions are combined with safety to carry an Environmental, Health, and Safety (EHS) title. Some large organizations have an Environmental or EHS Vice President; however, the focus generally remains compliance at the lowest cost possible.
Phase II Added Value: This phase is reached when a company realizes that waste and energy reductions save money; striving to comply with all regulatory requirements mitigates risk; and operating in a sustainable manner satisfies the desires of shareholders, customers, clients, and stakeholders. These companies might have a Sustainability Director or a Vice President of Sustainability. This person may be located in a wide range of functional areas within the organization. Companies in this phase often publish an annual Environmental, Social, and Governance (ESG), Sustainability, or Corporate Social Responsibility (CSR) report apart from their annual financial report (if publicly traded).
Phase III Transformation: To reach this phase, the entire culture of an organization is transformed. Everyone works collaboratively to continuously improve the organization’s sustainability performance in innovative ways. The company has moved beyond compliance. These companies tend to re-think and change how they do everything. Sustainability defines the character of the organization. Such a vision must be shared by the Board and CEO. These companies usually have a Chief Sustainability Officer that either reports to the Board or to the CEO. I tend to think that a CSO should report to the CEO rather than the Board, because it is problematic to have two chefs in the same kitchen. It can also be problematic to place a CSO within marketing, HR, or public relations functional areas. If the CSO is a marketing function, it may appear that it’s all about green imaging rather than broader organizational sustainability. If the CSO is part of the HR or public relations functions, the CSO may not be effective in transforming operational sustainability. Transformed companies are often the most profitable and successful in the marketplace.
What might a CSO role look like?
The direct or indirect functional responsibilities of a CSO might include aspects of the following:
Integral role in organizational strategic planning and performance tracking
Sustainability training for the entire organization
Championing sustainability performance throughout the organization
Identifying and monitoring sustainability key performance indicators and footprints
Functional oversight of environmental policy, permitting, and compliance
Functional oversight of health and safety
Functional oversight of an EHS or broader ESG management system
ESG and/or EHS audits
ESG incident investigation and continuous improvement processes
Annual ESG, CSR, or sustainability report
Monitoring broad external ESG trends
External stakeholder relations regarding ESG
Involvement in branding or imaging
Sustainability of the supply chain
Sustainability is now an essential aspect of any successful business model. Gone are the days of assuming that sustainability performance is incompatible with shareholder value. In today’s world, both publicly traded and privately held companies must operate sustainably to survive. Sustainable companies are usually “firing well on all cylinders” as engines of positive change and financial performance. “Sustainability” can be defined as the ability to endure. Chief Sustainability Officers are a strategic investment to that end.
