ESG - BUSINESS LEADERS AND CONSUMERS WANT IT, SO WHERE'S THE PROGRESS?
ESG and sustainability continue to remain top of mind for both business leaders and consumers. And survey research conducted by global strategy consultancy L.E.K. Consulting indicates both groups are committed to becoming more sustainable – and are willing to pay a price and make trade-offs for it.
In fact, according to an L.E.K. Consulting survey of over 2,700 consumers in the UK, U.S. and Australia, more than half report they're turning their backs on unsustainable products and services – while 55% report they may change brands due to ESG considerations and 56% said they're willing to pay up to 40% more for sustainable products.
And the hunger for sustainability is the same inside organizations. The majority of large companies around the world have made net-zero carbon emissions commitments, and 54% of executives say their companies should address ESG issues – even if doing so reduces short-term financial performance, according to an L.E.K. survey of 400 C-suite global leaders.
But there's also a large gap between the desire for progress and the capacity to make it happen, says John Goddard, Partner at L.E.K. Consulting and Vice Chair, Sustainability.
"Unless the disconnect can be resolved between this desire for sustainability and organizations' current capacity, there is danger both for companies and for society – financial costs, reputational damage and continued harm to the environment," said Goddard.
There are a number of roadblocks – on the corporate side – that have to do with how sustainability is implemented, particularly in terms of the trade-offs that leaders think should be made for longer-term ESG gains. According to L.E.K.'s survey of C-suite leaders, nearly three out of five (58%) executives report there are significant differences of opinion within their leadership teams on how to balance short-term priorities with long-term ESG goals.
And the majority say their companies have yet to figure out how to:
Align executive remuneration with ESG
Create effective KPIs to track progress toward ESG goals
Make substantive progress in understanding the financial risks and opportunity posed by climate
Integrate ESG factors into how capital is allocated
Notably, nearly half of C-suite leaders report that they believe their companies' current products and services don't meet the needs of a more sustainable future – an added concern, particularly given the findings of L.E.K.'s consumer survey.
Why is sustainability difficult to put in place?
"There are several potential reasons why ESG is seemingly so difficult to implement for companies, but the good news is that all of them can be addressed and resolved. It will take focus, some mindset shifts and a bit of time," said Goddard, who noted the following hurdles:
Internal company barriers: According to the survey of executives, the chief barrier to organizations' ability to deliver on their long-term sustainability ambition is a lack of strategic alignment among internal and external stakeholders. For example, when it comes to executive accountability and remuneration, 43% of executives say this is the area where they are least prepared to deliver against ESG goals.
Incorrect perceptions of ESG-related costs: Myths persist about the cost of net zero, but a new study from the University of Oxford – based on price data on both renewables and fossil fuels and modelling how they may change – finds that a rapid green energy transition is likely to result in trillions of dollars of net savings, as the cost of solar and wind power continues to drop.
Real sustainability initiatives vs. greenwashing: Companies are concerned about "greenwashing" – jumping into initiatives they believe are sustainable but aren't. Greenwashing can have significant consequences – take the recent crackdowns on companies in Europe. A contributor to "greenwashing" is probably the state of ESG measurement, which is often non-standard, imprecise and misleading.
ESG can be perceived as too difficult: Some suggest that the ESG framework itself is incoherent and muddled – that the environment, social concerns and governance are hard to address together – and that measuring and assessing them is a murky undertaking.
Where to focus for real ESG progress
While it's not easy and requires new decision-making frameworks, leading organizations are making strong progress. Here's what they have in common, according to Goddard:
Integrating sustainability into strategy. Successful companies don't manage sustainability as a discrete set of activities – their major strategic choices embrace a clear vision of both their financial and sustainability goals.
Sustainability education. ESG management is a new discipline and few executives have studied sustainability. The most evolved companies looked externally for support building ESG and sustainability knowledge and education into their most senior ranks.
Establishing organizational awareness. "It's not enough to just have senior leadership up to date and thinking about sustainability. It can only be achieved if awareness permeates the organization," said Goddard. Internal communications, training, web resources and similar initiatives can help the ESG emphasis cascade through nearly all levels of the company.
Brand and purpose. A company's purpose and brand values must explicitly embrace and align with sustainability goals if they are to be met.
Establishing the right culture. While culture is linked to purpose – or at least should be – one dimension of culture that is particularly important is a sustainable mindset. When that's the case, sustainability gets baked into R&D and product development. That, in turn, helps future-proof the company's offerings.
Assessing sustainability benefits when it comes to the corporate portfolio. Successful companies will take ever more holistic approaches to investment and capital allocation, factoring sustainability impact into their decisions.
More strategic supply chain management. Whether emissions, labor practices, raw material sources or countless other variables, supply chain management must strive to be as sophisticated as possible, given the impact the supply chain has on an organization's ability to achieve ESG goals.
"To begin to put all of these items in place, and ensure strategic alignment throughout the organization, senior management and boards must establish an unambiguous and ubiquitous common language for the company's sustainability initiatives. Equally important, leadership will need to precisely choose sustainability goals – and identify the choices that will make those goals achievable," said Goddard.
With strategic choices in hand, leaders will need to analyze and articulate financial and non-financial benefits, ensure the organization is agile enough to respond to new demands and establish KPIs that truly enable accurate measurement of progress.
"Playing to win, as difficult as it will be, has never been more important – both for the long-term value of the company, and for the long-term future that will result from a more sustainable planet and a more equitable society," said Goddard.
About L.E.K. Consulting
We're L.E.K. Consulting, a global strategy consultancy working with business leaders to seize competitive advantage and amplify growth. Our insights are catalysts that reshape the trajectory of our clients' businesses, uncovering opportunities and empowering them to master their moments of truth. Since 1983, our worldwide practice — spanning the Americas, Asia-Pacific and Europe — has guided leaders across all industries, from global corporations to emerging entrepreneurial businesses and private equity investors.
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