A leading authority on integrated reporting, Robert Eccles joins Mandi McReynolds to explore how the role of the chief sustainability officer is evolving. They discuss the concept of trade-offs and resolving conflicts of interest between stakeholders as well as the deepening connection between finance and ESG.
Transcript
Mandi McReynolds
Hello and welcome to ESG Talk, your go-to-source for insights and advice from leaders in environment, social, and governance. I’m your host Mandi McReynolds. Today I’m joined by Bob Eccles, the world’s foremost authority on integrated reporting and sustainable business. In addition to being an award winning author, Bob is currently a visiting professor of management practices at Said Business School at the University of Oxford and was previously a tenured professor at Harvard. Bob, thank you so much for joining us on the show.
Bob Eccles
Hi Mandy, how are you doing?
Mandi McReynolds
Really well. Well, let's dive right into it for our listeners and viewers. In a recent article for Harvard Business Review, you co-authored with Allison Taylor, you discussed how the role of the Chief Sustainability Officer is changing. You wrote, historically, Chief Sustainability Officers, CSOs, have acted like PR executives. Now, however, some of the CSOs are spearheading integration of material ESG issues, so environment, social, and governance, into corporate strategy. We'd love to have you elaborate on this and tell us why you are driving and seeing this shift happen.
Bob Eccles
So maybe I can start by talking about Animal Farm. Did you read the book, Animal Farm? You remember Animal Farm?
Mandi McReynolds
I did.
Bob Eccles
So on Animal Farm, all animals are equal, except some animals are more equal than others. And that's kind of what the story had been for chief sustainability officers for many years. They were on the farm, but they were an unequal animal. And to continue the imagery and mix metaphors a little bit, you had the C-suite, the CEO and the CFO, sitting on the top floor and they had grand offices and great views and big budgets. And the CSO was kind of down there in the boiler room with a little office and they begged to get one and a half FTE so they could publish an annual sustainability report. And there was this kind of nuclear detente between the CEO and the CSO, where it's another metaphor, the CSO didn't ask for too much in terms of resources and the CEO didn't trash sustainability. And in fact, for a long time, it wasn't called sustainability, it was called corporate social responsibility. And I think that was well-meaning, but it was also indicative that it was kind of a sideshow. It's like, okay, here's the company and it's doing the work with the more equal animals and it's making money. And then you've got a CSO to make sure that it's not doing any really bad things and make sure kind of people in the neighborhood like you. And for a long time, that was really what the role of the CSO was. It was a lot of stakeholder engagement. And I'm not demeaning the stakeholder engagement. I think it's important, but it really wasn't core, what was going on in the business. And that was indicated by the disconnect between sustainability reporting and financial reporting. And although I joked about a little bit, relatively limited resources. And I think in a lot of cases, you still see that to be the case that the CSO had. And so that was kind of life for a long time. And then it changed. And what's interesting about it is it's changed and it's changing rapidly in certain industries, and I'll get into that, over the past couple of years. And the way this whole thing came about, my friend who's a senior editor at HBR, Harold comes along and he says, well, you know, we're kinda looking for some articles. So we went out and we interviewed, I think it was 26 CSOs and 32, 33 asset managers. And it was interesting because in my work, you know, I'm pretty well connected in the investment community, asset owners and asset managers and public equity and private equity. I'm chair of KKR Sustainability Expert Advisory Council. I didn't tend to move in the CSO world all that much, because a lot of my work is more in reporting and kind of on the sustainability reporting. It was a little bit more with CFOs. And so I interviewed a bunch of CSOs and it was interesting because they were in a range of industries and in a range of countries. And what we found was this evolution in the role over the past couple of years. And I think it's being driven by a couple of things. And some of the stuff is more global and some of the stuff is more US specific. I think on a global basis, what you saw was the International Sustainability Standards Board get set up by the IFRS Foundation a couple of years ago. And I think it was in June, they issued their two standards. There was IFRS S1, general requirements, and S2 on climate. And you had the Green Deal with the EU taxonomy and the Corporate Sustainability Reporting Directive and the European Financial Reporting Advisory Group sets up the Sustainability Board to set up European Sustainability Reporting Standards, all these acronyms. So you had the ISSB coming out with a set of standards, which they can't require. They're a standard set or not a jurisdiction, so countries would have to mandate the use of ISSB. But the EU is a political, you know entity. And so it has said that all companies in Europe doing business in Europe above a pretty low threshold have to report according to the CSRD. So that raises the game big time for sustainability reporting. So just like you've got financial reporting, a set of standards, and you have assurance on them, and the EU is asking for assurance. And it was going to be the same thing with sustainability reporting. So I think that's one thing. I think a second thing is that there's been a lot of talk about how sustainability can contribute to corporate performance. But it's mostly been sort of good feelings. And I don't think it's been substantially demonstrated in a lot of cases by companies. And they'll have a few token slides in their capital markets day and their quarterly calls. But they were starting to feel like, OK, we need to be able to make the case for how sustainability contributes to financial performance, just like companies have to make the case for mergers and acquisitions, for going into new markets, for R&D investments. And so I think that would be a second factor. And then all of that coming together led to people recognizing that the CSO role needed to be more important, but for it to be more important, it had to change. Had to change in terms of resources, it had to change in terms of capabilities, and it had to change in terms of the types of people that it's got in that role. And it had to change in terms of how it thinks about materiality. And then there's concomitant changes that have to happen on the CFO side. So it's just like if the CSOs need to become fluent in financial talk so that they can demonstrate the relationship between sustainability and financial performance, and the CFOs have to do so as well.
Mandi McReynolds
Bob, you’re a great storyteller and I love the background and context about the evolving role of the CSO and CFO for that matter. You also wrote that investors’ interest in sustainability has elevated CSOs and tied the role more closely with chief financial officers. Let’s unpack that for our listeners.
Bob Eccles
And there you see again, over the past couple of years, it's very interesting, this evolution where just like there's the lesser equal animals in the corporate side, animal farm applies to the asset manager side where the most equal animals were the portfolio managers and they were the boys and girls that got paid a lot of money and they got to make portfolio allocation decisions and pick stocks and short stocks and do what they want to do. Then you have the less equal animals and the kind of ESG and the stewardship group when they did the proxy voting. And for a long time, there was absolutely no engagement by the people that were in the stewardship group, let's call it, and the company. And just like there wasn't much engagement, and if there was, it was kind of like a tick-the-box thing. The same thing with the CSOs. Then what you started to see is the CSOs talking not only to the stewardship people, but talking to the portfolio managers. And just like the CFOs need to raise their game and the portfolio managers need to raise their game because they need to take a point of view on what they think the material issues are. And you go from these conversations where you have the sustainability person talking to the CSO and it's like this ticks the box exercise. Do you do TCFD reporting or are you a member of PRI? You know, da da. Well, it wouldn't be PRI, it would be global compact. And there's probably nothing in that conversation that goes over to the portfolio manager. That is starting to change, right? So historically, CSOs have not engaged with investors and they didn't know how to talk to investors. And so what you see when I said in terms of the role is changing. So there's some CSOs that have kind of developed over time. And I think they've done a great job at that. In other cases, what you see is that it’s very interesting and this is a signal of how the CSO role is sort of becoming like one of the equal animals. They're coming out of investor relations, they're coming out of product development, they're coming out of R&D, you know, they're coming out of operations, they're coming out of procurement, they're coming out of functions that would be regarded as much more core to what the company does than, you know, historically the way people talked about corporate social responsibility. Now one implication of that and Alison and I have some snarky things to say about materiality matrices, as you probably know from meeting our piece. It's like the everything is material matrix. And I'm like, huh, you got 20 things in the top right hand corner. And these are all quote material.
Mandi McReynolds
It’s wonderful to see that companies are embracing a new sort of CSO, but I want to drill down into what you said about materiality. You’re right, not everything can be material. And to build on that, sometimes we have to make some hard choices. Another part of your article that stood out to me is the notion of trade-offs. Can you define the concept of a trade-off, in the context of sustainability, for our audience?
Bob Eccles
You know, people have kind of limited capacity. They have limited bandwidth. How many things can you pay attention to? So probably in my youth, I'm a smart guy. I went to MIT, got a PhD at Harvard, smart boy. Yeah, probably in my prime, I could pay attention to seven things and make trade-offs on seven things. Years go by, I'm 72, some cigars, some whiskey later, maybe I can do five on a good day, maybe it's three. But that's about it, right? Because there's trade-offs. There's trade-offs between environmental stuff, there's trade-offs between environmental and social things. And so what we're arguing for in our piece and what we're seeing happening in these companies is to have much greater discipline and say, what are the three to five material issues that are really existentially important.
Mandi McReynolds
I love that summary real quick. And I think you talk about in this article, the four major changes to the CSO role. And so to summarize for our audience, it's really looking at the right people in the role, looking at the right resources, determining what's material, and then this evolution of how the CFO role and the CSO roles work in tandem together. And I want to take for a moment for our audience, and, dig a little deeper and the trade-offs that exist, these conflicts of interest between stakeholders among environment, social and governance issues. Can you give us one really strong example of a trade off?
Bob Eccles
Mining is an interesting example. Because you need a license to operate to get into a community so that you can dig the minerals. And in doing so, you are creating jobs. But you're also creating carbon emissions and you're creating potential problems with the water table and so forth. And so one could say, well, we are going to slow down the rate at which we're opening new mines. So we're going to slow down the production process. And so we're going to need fewer people. So that's going to be fewer jobs that are created. And I think often what you find in the generic case is that there's things that you can do that will have kind of positive environmental benefits, but they can be at a cost of jobs, right? So people that are coal miners, you just can't flip a switch and all of a sudden say that you're gonna work in renewable energy. And so that would be an example of that and kind of more generally in terms of how to think about this. I think the key thing, the way you assess materiality, is does the issue rise to the level of importance that it fits into the capital allocation process? Is it something that it's a significant enough amount of money and it's capital, not just a cost, and you're needing to think about what is the time frame in which you're making this investment and how do you think about what the benefits are going to be? And historically, there's been really no relationship at all between the sustainability function and strategy and capital allocation, you know, at the corporate headquarters.
Mandi McReynolds
And building on that capital allocation, I think if our listeners want to see an example, you can look at the Workiva ESG impact report on page 11, where we look at then what's the relevancy to our stakeholders. So changing it from that traditional all dots are equal, not all dots are equal, there may be more relevance to a different group of stakeholders and beginning to demonstrate that visually. Also demonstrating what's considered a risk, or which could be capital allocation, what's considered the cost to your business, that capital allocation, to what are the opportunities? Because to some industries, there can be revenue generating activities, that it becomes a more applicable place for that component.
Bob Eccles
I think another interesting example, you know, when you think about in terms of mining, so everybody's like all excited about the energy transition as they should be and getting away from internal combustion engines and we're going to get into electric cars and all that stuff, so many people can afford them. But you need, you know, minerals and mirrors to do that. And so a mining company that is expanding its production, its carbon footprint is going up. So it's creating jobs, so there's no trade-off and its carbon footprint is going up. But then when you've got these whole kind of net zero targets and stuff that people are supposed to set, and trying to use carbon emissions as a proxy for transition risk, it doesn't always make sense. Because if you think about a mining company, it's probably a good sign for its future stock price that its carbon emissions are going up. I mean, it should do it in a responsible way, and blah, all the things we know about. But you know, it's contributing to the energy transition. The way things are measured, it's not getting credit for the reduced emissions by having more electric cars and not having internal combustion engines. But if you just look at the company itself, and they'll be getting pressure from NGOs, its carbon footprint is going up.
Mandi McReynolds
And as we look at that dynamic, what's interesting in your article is you really push into this idea that the CFO and CSO need to have a strategic relationship. You go as far to say, maybe the CSO should report to the CFO. So as we think about these two groups working together, how do you think they could work together on global regulation to drive an impact for both business and society forward?
Bob Eccles
So you're right. I mean, I think that the CFO, in the case of PMI, Jenny reports to Emmanuel Bebo, the CFO. So I think that's a really good reporting relationship. And I think the CEO can be fine, but it's better to have a strong relationship with the CFO involved in capital allocation than a token relationship reporting relationship to the CSO or the CEO, I'm sorry, where they meet one or two times a year. The question going back to the standards. So the standards...Companies can give input into regulation, but any one company's input is just any one company's input. So they're basically takers of regulation. Companies aren't makers of regulation. So I think what's important is that companies are very aware of the standards that are being developed, have been developed by the ISSB and by FRAG in the ESRS. And I find a lot of them are really behind the curve on this because these things are coming and they're coming very quickly.
And so this is where the CFO and the CSO need to work closely together, because right now the CSO will have more the content language of what these things are that are going to be, these standards are going to be applied to. But the quality of internal control and measurement systems, and this is the kind of stuff you guys get into, the quality of these need to be raised by at least an order of magnitude, so you've got internal control and measurement systems and internal audit that's the same level of quality that you do with your financial reporting. And that's really in the bailiwick of the CFO. And so it raises this interesting question of does the responsibility for creating the report shift over from the CSO, which has historically been the case with the CFO not having his or her fingerprints on it at all, to the finance function is responsible for implementing these standards and having the systems and preparing the reports. And then it's the CSO in conjunction with the CFO who explain what these sustainability performance results mean and how they're connected to financial performance. And I think that's because, again, things are moving quickly. How that's going to sort out over time, we'll see. But somebody's budget is going to have to get bigger, whether it's the CFO or the CSO. Implementing these standards are not going to be cheap. And there'll be an investment upfront that will be cheaper over time through technology and all that. But that's, you know, staring right ahead of us.
Mandi McReynolds
Yeah, and I think as people formulate their task force, we're seeing changes. Our task force is chaired by our CFO, and we're seeing even involuntary regulation, even voluntary practices, not regulatory practices. CDP, for example, more CFOs signed off than it's been the CEO in the past or the chief sustainability officer as the highest officer signing off. And we're seeing a shift in a trend to it being the CFO. So we're watching still how the different elements come to play. But our team is already doing together with finance, legal, and the ESG team coming together, looking at gap analysis together. We're walking through together assurance and audit of our emissions and scaling to our other parts of our ESG reporting. And it's a collaborative effort across these three teams, because to your point, you need all players at the table working together as we move forward. I think you had a really interesting note where you said, you're hoping to be, you know, if someone's hoping to become a CSO one day listening, they're gonna have to start engaging executives and board members more. So what do you think is the one essential skill that a CSO five years from now is going to have to have?
Bob Eccles
So I think that's the answer to that is pretty simple. They need to have much deeper knowledge of the industry that they're operating in and the company strategy in that industry. The degree of knowledge that CSOs need to have of the industry, the competitive dynamics, what the competitors are doing, what the regulatory forces are, what their strategy is, how they distinctly stand out, what are their competitive strengths, what are their competitive weaknesses, that I think will really be the core skill that future CSOs need to have. And if they don't have that, then they're not going to be qualified to be a CSO. And that's why it's interesting. And you see a signal of that because the people that are going into this function, investor relations, R&D, procurement, product development. Those functions have been in the various little bit by industry, but those are much closer to the kind of core business model of the company than being the CSR department over here on the side taking care of stakeholders.
Mandi McReynolds
I love that direction for our audience. Well, Bob, thank you so much for helping us unpack these four core areas, thinking about how those listening in can have the right resources, prepare to be the right person in the role, seek to think about materiality differently and stakeholder engagement differently, and finally, look out for that collaboration with a CFO or the future of the CFO and CISO being very well tied together.
Bob Eccles
You did a much nicer job of summarizing the things in my article than I did. So thanks for the clarification. That was good fun. Nice talking to you. Take care.
Mandi McReynolds
To our audience, thank you all for joining us for another episode of ESG Talk brought to you by Workiva, the world’s only unified platform for financial reporting, ESG, audit, and risk. If you’re interested in hearing from some Chief Sustainability Officers themselves, I invite you to scroll through recent episodes of ESG Talk. This season we heard from a dynamic ground of CSOs at several global organizations, including Nike, Honeywell, and AT&T. And as always, if you enjoyed this episode, please rate and review us on Apple Podcasts and subscribe to future episodes on Apple, Spotify, or YouTube. We’ll talk soon.