Most mid-sized and large companies have a CEO, COO, CFO, CTO, CIO, CMO, and a CHRM (or some other title that covers the HR function). In recent years, many have added a CSO – Chief Sustainability Officer, but others are not yet familiar with the term. Some may wonder what the role entails and may even question why it exists. In this article, we explain the role of the CSO and why a company may want to add the position.
Responsibility for sustainability can be scattered
The Gartner Group’s insightful article titled “Does your Organization Need a Chief Sustainability Officer?” discusses why the CSO position has become part of the C-suite in many corporations. The firm’s 2021 Gartner ESG Benchmarking Panel Survey found that a majority of companies (58 percent) have more than one entity with oversight responsibility for their organization’s ESG program. The most common mentioned are:
- The board of directors (52 percent)
- The executive committee (40 percent)
- An ESG-specific committee (ESG committee [50 percent]; sustainability committee [24 percent])
The Gartner Group separately surveyed 704 companies in 2022 and found that while over a third (35 percent) have either a Head of ESG or a Head of Sustainability, the responsibility for leading ESG programs is often scattered across individuals in various roles, including the Head of Human Resources, Head of ERM, or Head of Strategy (or no one at all, in the case of a handful of survey participants).
While it is clear that once a company reaches a certain size it needs to fill a number of traditional C-suite roles, it is not clear that every company needs a CSO, or, if so, how that person’s role would be structured. We’ll trot out an overused phrase that really does apply here: this is not a “one-size-fits-all” issue.
ESG and company strategy
The Gartner Group suggests that senior management and the board should consider the extent to which sustainability is central to the company’s strategy. We add to that by saying that firms should look at how Environmental, Social, and Governance (ESG) issues impact the company’s success. This is partly a function of the industry in which the company operates, which we delve into briefly below. It is also important to consider what competitors are doing – you don’t want to be the only one in your peer group that does not have someone responsible for coordinating sustainability-related activities. If you are, it might signal to investors and customers that your company is overlooking something important.
Let’s consider how sustainability and strategy are related. In some industries, the “E” in ESG is clearly related to strategy—energy companies, utilities, transportation and logistics, and manufacturing firms come to mind. However, reducing both carbon emissions and the use of plastic and other wasteful packaging is coming up at shareholder meetings in every industry. To skeptics who say that devoting time and effort to such things is not really management’s responsibility, we note that companies can realize meaningful cost savings by reducing energy use and waste.
For other industries, “S” (Social) may be seem to be more front-and-center. Financials and consumer products companies must be able to recruit and retain an engaged, diverse workforce to nurture their brands, understand their customers, and support the communities where they operate. But, “S” affects all industries, from tech firms (the recent exodus at Twitter is a good example), to airlines, to health care firms. Many issues that fall under “S,” such as gender pay gaps, labor relations, and boycotts crop up almost everywhere.
It is safe to say that “G” (Governance) matters in every industry, as it touches everything from avoid embarrassing headlines and scandals, to enforcing company policies against exploitation in a supply chain, to protecting data privacy issues that are relevant across all industries.
Asking “does E, S, or G matter to our strategy?” reminds us that they all matter, to every company in any industry. From that perspective, it may make sense to include a CSO in the C-suite. Companies should reflect on the following: Is anyone formally responsible for paying attention to these things in a coordinated way, or are we just winging it?
Despite the fact that industries might emphasize “E,” “S,” and “G” issues differently, we see sustainability issues touch almost every department regardless of industry, including operations, R&D, marketing, finance, risk, investor relations, IT, and human resources. It is likely that, without a CSO or similar role, no one is looking for opportunities or identifying risks regarding a firm’s activities in this arena, across all of those functions.
The CSO/Head of ESG Reports to…?
Deloitte and the Institute of International Finance (IIF) published a report in 2021 titled “The Future of the Chief Sustainability Officer” that shares the results of a global survey on the CSO role. They found that, while fewer than 15 percent of survey respondents had a CSO, nearly half had a Head of Sustainability or equivalent and 12 percent had a Head of ESG. Under 25 percent reported having no equivalent role in the organization.
Where does this person fit into the org chart? A reporting line that goes straight to the CEO indicates that the company sees sustainability as an essential part of its business strategy. The Gartner Group reports that 42 percent of chief sustainability officers and 34 percent of chief ESG officers or Heads of ESG report to the CEO. One-third of the Deloitte/IIF survey respondents report to the CEO, while many others report to the Head of Communications or Marketing. Reporting to the Head of HR or Strategy is also fairly common. According to Deloitte and IIF, CSOs who report directly to their CEOs say this is “the cornerstone of effectiveness” in the role. However, the report also states that many CSOs “prioritize access to a committed CEO ahead of formal reporting lines.”
Qualities of an Effective CSO
As noted above, the head of sustainability has to be able to work closely with others across many different functions in an organization. That suggests “soft skills” may be just as important as a working knowledge of various ESG disclosure standards and regulations. This individual will likely have a fairly small staff but will be called upon to stay on top of issues in sustainability within an industry, analyze data about your company’s programs, monitor regulatory developments globally, and educate people across departments regarding the importance and benefits of sustainability and how it relates to shareholder value-creation. Certain types of businesses may also need this individual to have expertise in specific areas, such as supply chain due diligence.
This person should also be comfortable keeping up with rapid change. Every day there are new things happening in the ESG/Sustainability space (we know, because keeping up with these things is at the heart of the data and analytics we deliver). CSOs also play a sizable role in terms of corporate governance. They help to ensure that the CEO is aware of any ESG-related issues that could pose a risk to the company and help make sure all relevant stakeholder interests are appropriately represented.
Investors and asset managers are looking at how an organization manages sustainability risks and opportunities. Is the effort well-organized and proactive, or haphazard and reactive? We believe companies should have someone with a CSO’s responsibilities (regardless of the person’s title) to help the organization achieve its goal of being sustainable over the long-run.
To learn how OWL ESG can help you to understand a firm’s exposures to various ESG risk factors, the sorts of things that a Chief Sustainability Officer could help to address, contact us.