Scepticism and backlash against environmental, social and governance (ESG) initiatives, in the US in particular, may currently dominate the headlines — ESG was a prominent topic at the World Economic Forum in Davos. But that has not stopped organisations from making and deepening their commitments — to sustainability in particular. That was reflected in CEO comments made at Davos and in direct surveys of leadership. And Europe’s commitment to sustainability continues unabated.
The pressing question for leaders is not whether to commit to sustainability but rather how to translate that commitment into concrete action. Lack of alignment — internally and with outside stakeholders — is the major barrier. But increasingly, leaders and organisations are breaching that barrier and finding a way.
Consumers, investors, regulators and the labour force all are driving demand for action on sustainability
There is little if any doubt remaining about the degree of commitment — ESG is an essential element of business strategy and organisations have concrete business reasons to prioritise it. They are acting to satisfy consumer and investor demand, comply with regulations, and maintain a competitive advantage in the war for talent.
In L.E.K. Consulting’s Consumer Sustainability Survey 2022, nearly half of consumers reported they had switched brands as a result of environmental or ethical concerns. Additional L.E.K. research indicates that products marketed as sustainable now deliver more than half of overall market growth, although they make up less than 20% of the overall market.
For investors too — contrary to some recent headlines — sustainability is a priority. Approximately 89% of investors incorporate ESG into their investment approach. Thirty-five percent of global assets under management (AUM) — approximately $40 trillion — have a sustainable posture and more than $2.5 trillion AUM have a pure ESG focus.
Of course, much of the impetus towards ESG action — and reporting — is driven by regulation. This continues to be true in Europe, where the EU’s Corporate Sustainability Reporting Directive takes effect in 2024, but also in the US, where the Securities and Exchange Commission (SEC) is moving to formalise enhanced disclosure. But that is far from the only driver. Strong sustainability goals and policies can provide competitive advantage in the war for talent — a critical success factor in a labour market that has been tight and, after a possible and likely mild recession, may well be again.
Leaders and organisations are taking action — and they are serious about their commitments
Leaders understand, agree and are taking action. Eighty-two percent of the FTSE 100 have committed to net zero by 2050. Over 700 of the 2,000 largest publicly traded global companies have made net zero commitments.
The L.E.K. Global Corporate Sustainability Survey 2022 reflects this. Global leaders see ESG as a growth driver. Of the 400 global leaders surveyed, 51% reported that their organisations are focused on ESG as a growth driver and 20% are taking an innovation-led approach to ESG.
They are deadly serious about their commitments — more than half (54%) reported they are willing to sacrifice short-term financial gain to achieve sustainability goals. And they are committing funds — companies’ major focus for investment over the next five years is “sustainable services/products and their distribution.”
All is well, then, on the sustainability front, yes? Unfortunately, not exactly. Leadership is focused and engaged — that much is clear. But the path from commitment to action is long, tangled and filled with barriers.
They are struggling to turn commitment into action
The harsh reality is that too many leaders and organisations are struggling to make good on what they have promised and what they hope to achieve. Companies are struggling to do enough. Consider emissions. Of 82 FTSE 100 companies that have set net zero targets, only 40 have committed to the Science Based Targets Initiative, the authoritative gold standard. Roadmaps are in short supply. Nearly half of the world’s most valuable companies lack clear guidance or action plans to hit their net zero targets.
What stands in the way?
The No. 1 barrier to the ability to deliver on long-term sustainability ambitions, according to the Global Corporate Sustainability Survey, is the lack of alignment across key stakeholders. Less than half (45%) of the executives surveyed reported they have an executive team and board that are strongly aligned on ESG priorities. Almost equally daunting is the difficulty of balancing the interests of different stakeholder groups. Nearly half (47%) of the leaders surveyed reported their organisation struggles to balance the needs and demands of, for example, communities versus stakeholders.
In addition to this lack of internal and external alignment, progress is slowed by three major disconnects. First, there is the challenge of ESG transparency and reporting. Eighty-seven percent of executives said they felt pressure from investors to increase ESG reporting. But less than a third (27%) said their organisations had any enterprise-level ESG key performance indicators (KPIs) in place. And only 3% reported having a full suite of KPIs in place to cover all ESG priorities.
The second is the question of how to balance sustainability goals against short-term performance. While, as we’ve said, 51% of leaders felt ESG should be a priority over short-term performance, a higher percentage, 58%, said their leadership team disagrees on how to balance those short-term financial priorities against their ESG goals.
The third is the question of accountability. Asked to name their No. 1 concern about their ability to deliver on their ESG goals, the highest percentage, 43%, cited inadequate reward frameworks, such as leadership pay aligned with sustainability KPIs. In other words, the goals are not adequately recognised in remuneration systems and the incentives are not there.
Some leaders and organisations are finding ways to overcome the barriers
These barriers are daunting, but they are not insurmountable. Some leaders and organisations are finding ways to overcome these challenges. Not all take every step, but the best practitioners take several. They:
Integrate sustainability into strategy. That is, they manage sustainability as an integrated set of strategic choices that encompass vision and goals, where to play, how to win, how to organise, and finally, how to implement — getting it done.
Educate on sustainability. They ensure that senior leaders and line executives have the necessary knowledge and skills to execute against sustainability goals.
Create organisational awareness. Through specific programs and constant communication, they build awareness of the sustainability strategy as deeply into the organisation as possible.
Embed sustainability into brand and purpose. They ensure that sustainability is an integral element of the organisation’s brand, its purpose, and its products and services.
Embed sustainability into culture. They establish a mindset — among the leadership team and the rank and file — to commit to sustainability and thus future-proof the business.
Conduct a sustainability benefit assessment. They take a more holistic approach to investment and capital allocation by factoring in the impact of sustainability.
Extend their thinking to the supply chain. They do not restrict their focus inside the organisation’s own four walls. They understand the impact of their sustainability goals on the supply chain, and vice versa, and work to bring supply chain partners into the sustainability strategy.
To translate sustainability commitments into action, there are five imperatives
Those broad steps describe what’s necessary to begin to move the organisation past its sustainability barriers. But how to translate them into a plan of action? There are five imperatives:
Drive strategic alignment. Work to establish a common language for the sustainability initiative. Develop a vision and goals and understand and articulate the strategic choices required to achieve them.
Assess strategic choices. Prioritise strategic choices that support and accelerate sustainability goals; for example, in brand positioning and in the product/service portfolio. Analyse both the financial and non-financial benefits of each choice that helps achieve ESG goals. Engage the full leadership team in the process.
Build capabilities. Identify and address the requirements for new skills and capabilities that support sustainability goals. Build a flexible operation model capable of handling the degree of change and disruption that a fully realised sustainability strategy can bring.
Establish KPIs. Define what is required to achieve sustainability goals and set KPIs that enable measurement. Establish data capture capabilities and systems to provide tracking and reporting.
Align remuneration. Align compensation to the KPIs to reward sustainability progress and performance.
Leading transportation company National Express has created a roadmap for sustainability action
These programmatic recommendations are all well and good. But how do they stand up to real-world demands — the specific barriers, stresses and disconnects that are the day-to-day reality within a particular organisation?
National Express, the leading international transport company with operations in the UK, Germany, Spain, North Africa and the US, faced just this question in developing its net zero goals and roadmap.
In the UK, National Express started its net zero journey with a straightforward commitment — to no longer buy diesel buses. But facing a typical array of disconnects and misalignments, leadership quickly had to take more concrete steps. The executive leadership team:
Identified the investor benefits that would result from taking an environmental leadership position.
Created governance structures to enable senior leadership and board buy-in; specifically, a safety and environment board committee.
Developed a framework of commitments beyond the initial simple commitment to not buy diesel. These commitments extended across all markets.
Produced detailed modelling to understand the market context, the technology solutions for different vehicle types and the economic case for net zero.
National Express, with the support of L.E.K., was able to create clear Scope 1 (direct) and Scope 2 (indirect) emissions targets for 2040, driven by a clear fleet decarbonisation strategy. Notably, the modelling work changed the nature of the metrics and targets. At the start, the focus was on intensity metrics, aligned to limiting global warming to 2 degrees Celsius. The evolving model maintained that tracking, but across a longer timeline and with an ambitious new focus on reaching net zero faster than its peers while taking regional market needs and developments into account.
Using a market-focused approach made it possible to create a dynamic action plan tailored to each market, which gave National Express much greater flexibility to act dynamically and seize specific local opportunities to decarbonise.
In each market, development of the action plan involved multiple actions:
Getting procurement to buy in in each market.
Creating a deployment plan to assess infrastructure requirements (such as electric vehicle charging) and identify opportunities to acquire specific vehicles.
Engaging stakeholders to create enthusiasm across the spectrum, not just with early adopters. Stakeholders engaged included energy providers, original equipment manufacturers (OEMs), industry bodies, and local and regional government funding sources.
Checking the economic case to ensure viability.
Maintaining momentum and driving action beyond quick wins.
Selling the benefits in order to achieve alignment and buy-in at all levels.
The action plan went beyond vehicle technology to incorporate how the business can truly minimise its adverse impact on the environment while prioritising the factors that have the biggest impact.
To ensure that the action plans extended throughout the operation, National Express created a ‘Triple P’ framework that addresses how each key area can contribute to hitting the net zero target:
Product: 90%-95% of the company’s Scope 1 and 2 emissions come from the fleet. That is the biggest focus for decarbonisation. The company operates 2,700 vehicles in the UK alone. That means that fuel efficiency, vehicle technology and embedded emissions all must be priorities.
Property: The company’s large property portfolio includes a mix of depots, coach stations and office space. For each, energy and water consumption and waste production must be addressed.
People: National Express employs a global workforce of over 44,000 people, each of whom has a carbon footprint and an environmental impact. A positive environmental culture is essential in order to drive behavioural change.
The National Express experience offers pragmatic lessons on how to take action on sustainability
That is what an effective sustainability program looks like on the ground. National Express is currently executing the early stages of what promises to be a decades-long effort and is making measurable progress.
For those that would follow in their footsteps, National Express leadership has these lessons to teach:
You don’t need to do everything at once. Some markets are moving faster than others. The company has pushed ahead in the UK, and that is reflected in the targets. Within the UK, the bus business has a closer-in target than does the longer-distance coach operations. This approach is relevant for many other organisations. Develop a timeline of achievable actions and keep to it.
Stay focused and stick to your approach. There’s a lot of information available, and many areas of operation can be considered targets. There is a constant stream of new sustainability initiatives — concentrate on those that fit the plan and don’t get distracted.
A clear governance structure can drive activity forward. It serves to identify and allocate clear deliverables and creates a forum for discussion and collaboration. An effective steering group makes it possible to keep focus despite conflicting activities.
Make it relevant. How does sustainability help the organisation — and the individuals within it — achieve wider goals? There are usually cost savings associated with more sustainable behaviours. There can also be opportunities for engagement — and sales opportunities as well. Focus on those to win broad-based support for the program.
Two things are clear: Sustainability commitments can be difficult to translate into action, but success is very achievable. The key is to move beyond broad targets and drill down on specifics — metrics, markets and KPIs. Then create the action plan — as you would in order to achieve any corporate priority — and move to execute it. The work is hard — there is no way around that. But National Express’ experience illustrates that there can be sustainability success at the end of the road.
For more information, please download the “Moving From ESG Commitment to Action” presentation by John Goddard and Tom Stables at Sustainability 2100 — Building a Sustainable Future for Generations.