Value-add or vanity?

Stakeholder demands for observable action and detailed information about the scope and impacts of decision-making, are creating new space around the executive committee table for chief sustainability officers. We speak to CSOs and governance experts about how boards can ensure an appointment once made isn’t in vain, and the level of performance directors should expect to make the position meaningful.

Boards are trying to quantify their role in combating climate change risk, prompting a rise in the number of chief sustainability officer (CSO) appointments in Australia, although some predict the role will roll up into the CEO portfolio as sustainability practices become embedded. According to a new report from Deloitte and the Institute of International Finance, there are three tipping points for those organisations yet to appoint a CSO — when the external environment is changing more quickly than the interior of the organisation, so it needs someone to help it adapt; when external stakeholder scrutiny and expectations on the organisation are intensifying and it has not yet found a way to deliver within its current structure; and when the firm acknowledges that ESG risks are substantial enough to be strategic. Charged with the task of solving environmental challenges, CSOs often have a strategy background and set out to both explain the need for and inspire change.

The challenges of translating complex scientific, technical and human capital issues to the business context has seen a broadening of the CSO role. In many cases, they have been elevated to the executive leadership team, reporting directly to the CEO, explains Directors Australia board and governance specialist Jane Crombie GAICD.

“In addition to managing the risks inherent in the ESG landscape, opportunities that CSOs might consider include reputation and brand enhancement, technical and product innovation, use of sustainable inputs such as renewable energy, and enhanced customer, supplier and employee engagement,” she says.

The evolving CSO remit is vast and just as important as COO and CFO roles have traditionally been for boards — and they should be core to many businesses, notes EY Oceania CSO Mathew Nelson.

“Aside from driving the company’s sustainability goals at an executive level, CSOs also need to be the voice of key stakeholders, helping determine what will and what won’t have long-term impact,” he says. “Elevating the CSO to the executive level ensures that ESG outcomes can be embedded into day-to-day decision-making and puts an organisation’s sustainability goals at the forefront of the executive agenda.”

The Climateworks Centre underscores this urgency, warning that net zero commitments need to incorporate a commitment by or before 2050, and that many companies are underestimating the pace of change required to reach net zero or net zero emissions.

Leading the change

CSOs have been addressing the urgency of decarbonisation and the impact of the energy transition as the pressure organisations face from investors, regulators, customers, suppliers and employees intensifies. The lack of a settled national policy has been consistently cited as a key inhibitor to the effective management of climate change risk by investors, directors and other business leaders. However, change is mounting, with a wide cross-section of business, investor and conservation groups — including the AICD — issuing a joint statement supporting the passage of the legislation.

There may be more CSO appointments after the passing of the federal Climate Change Bill 2022 in August. The Bill legislates the national commitment under the Paris Agreement to cut greenhouse gas emissions to 43 per cent below 2005 levels by 2030 and to reach net zero by 2050. It ensures accountability through an annual progress update to parliament by the Climate Change and Energy Minister, and empowers the Climate Change Authority to provide advice on future targets.

The federal government is now consulting on proposed revisions to the safeguard mechanism, which covers the emissions of the 215 largest industrial emitters, contributing 28 per cent of current emissions. The revised mechanism will begin on 1 July 2023. The full consultation paper can be accessed at bit.ly/3fMGzv0

Rough terrain

Navigating this new government policy terrain will be a tough ask for the nation’s cohort of CSOs. Having meaningful impact and aligning that with company purpose while meaningfully committing to ESG targets is complex for companies to navigate, according to PwC energy transition lead partner Varya Davidson. She notes that the stakes are high, with access to capital increasingly tied to a company’s ability to present a robust ESG narrative. “A company’s ability to communicate these commitments is having a fundamental impact in terms of their financial performance,” she says.

Not all companies are successfully addressing sustainability issues, says Davidson. “At one end, you’ve got boards that are like a deer in the headlights, even though they are aware that there are significant shifts happening. But the translation of that is challenged and limited because they don’t know how to step into that space. At the other end of the spectrum, there are signs of progression and innovation, with scorecards tied to KPIs and ambitious targets designed to stretch an organisation being communicated.”

Greening the corporate landscape

A PwC report reveals just 14 per cent of companies have an active CSO in the Asia-Pacific region, mostly employed by companies selling consumer products, chemicals and the oil and gas sector, in that order. With an average take-home salary of $235,000 at the senior end — and a national talent shortage — these are tough hires to find.

The Deloitte report highlights the variables in the position, pointing out that there’s no established blueprint for the CSO role, with a range of career backgrounds and mandates in play. The role may have evolved from the corporate social responsibility officer, but it’s now as far away from that role as it is from the chief technology officer. And it will continue to evolve as organisations have a long way to go before sustainability is fully embedded in every function, process and person, the report says.

WA Eastern Metropolitan Regional Council CSO Wendy Harris GAICD urges boards to consider the benefits of a CSO hire. “Having a CSO at the table provides the opportunity to view things through a different lens during discussions,” she says. “Often, in government agencies, business, industry or the NFP sector, the organisation is focused on building the business, realising a profit, and creating returns for the shareholders/board/council — which is often done in silos. CSOs generally have a good understanding of circularity, which in itself can be a source of innovation in identifying new business opportunities that can be embedded in an organisation.”

A seat at the table

UK sustainability consultancy firm Salterbaxter has just launched in Australia as pressure builds on companies to put net zero plans into action. CEO Skye Lambley MAICD warns that there’s a tendency to measure performance against last year, or against key competitors, which she says is “a bit like marking our own homework”.

Lambley notes that there’s much more organisations can do in order to drive the shift from incremental transformational change. “Companies are obsessed with form over substance when it comes to sustainability that can often give businesses an inflated sense of progress,” she says. “Businesses should be looking to adopt best practice when it comes to reporting standards and frameworks, rather than waiting for regulation to force their hand.”

In order to get the most out of a CSO, boards need to set the right mandate for the role and empower that person to do what needs to be done, says Lambley. “Be open and expect to be challenged, because that’s what any CSO worth their salt must do. And give them the access, tools, time and resources to do the job properly.”

Completely restructuring operations, infrastructure and processes is a complex and costly exercise — let alone the cultural shifts and human capital required to embed and drive change through a business and its supply chain. “The middle of the road is an expensive place to be when it comes to sustainability performance. It feels safe to be part of the pack, but when intent and real progress don’t match up, businesses fail to unlock the reputation and financial benefits of their sustainability efforts,” says Lambley.

However, it’s not an easy job. Pitfalls include being perceived by company peers as being an internal activist who rides on the coattails of a message. Burnout through impatience is a common issue. “Unless you’re politically savvy, you’ll get eaten alive,” one CSO told Deloitte. “It takes persistence and time to move the needle,” said another. “If you get a ‘no’ once, you have to keep trying”.

A clear remit

When recruiting for a CSO, boards should be clear on the remit and goals for the position, says climate and sustainability consultant James Tilbury, co-founder of Impact Ventures. He says a CSO needs to be fluent in both business and sustainability — and be able to translate between those two domains. “This might sound obvious, but CSO roles vary a lot more between organisations than other executive positions,” he says. “CSOs need to have deep sustainability expertise while also being able to clearly articulate the relevance of sustainability trends to corporate strategy. They also need to be good at stakeholder management and change management.”

Boards also need to make the time to focus on understanding what holistic sustainability is, and the CSO should be providing this information in the context of the organisation, which will differ by sector, adds University of Tasmania CSO Corey Peterson. “Directors should be seeking clarity around what sustainability means to their organisation and sector, and how that is monitored and measured to assess performance,” he says. “They should also query how the CSO role is integrated into compliance and risk management activities and how that’s aligning with KPI management.”

Companies such as Woodside Energy and Sydney Airport are producing standalone sustainability reports that reference the UN sustainability development goals. Other boards incorporate sustainability into their annual report. The approach depends on the organisation’s context, according to Crombie.

Transitional role, or here to stay?

And not all organisations need a CSO. “If a board is early in its sustainability journey, a starting point could be a sustainability policy,” says Crombie, adding that identifying the sustainability elements relevant to your organisation is important. “Those that apply to a listed resource company will differ from those that are relevant to a not-for-profit in the social services sector.”

Whether the CSO role is more of a transitional phenomenon is less clear. One school of thought suggests if organisations are on the right trajectory, then ESG and sustainability considerations are part of the broader remit, particularly with integrated reporting, where decisions are worked through a long-term value-creation lens.

However, Crombie believes the role is here to stay. “Climate change is the headline issue for sustainability goals,” she says. “It’s going to require a long-term focus for boards to effectively deal with this issue and it won’t be transitional. It’s far more likely to be a permanent part of the corporate landscape.”

CSOs are adamant that there’s plenty of work to do. “The role will continue to grow in prominence as organisations develop their muscle and capability in this area,” says Viridian Advisory CSO Michael Ehrentraut GAICD, while noting there are views that as capability is established and reporting frameworks and disciplines put in place, the role might be incorporated into the remit of the CEO or COO as a business-as-usual approach.

“As regulators continue to crack down on greenwashing, it’ll be interesting to see how many companies are called out that don’t have empowered CSOs actively preventing exposure to financial, operational, or reputational risk by working within the C-suite to ensure the company’s words and actions align,” says Nelson. “Sustainability is core to future organisational performance. With the speed and scale of business transformation required, and the acceleration of stakeholder demands for transparency, having the right expertise at the executive level is critical.”

CSO and the board

Over the next few years, it seems likely that boards will need to scrutinise a much broader array of information in order to discharge their duties, according to Deloitte/Institute of International Finance research focusing on the financial services industry.

At the lower level of maturity, there are firms with little more than a steering group dedicated to sustainability. At the higher end are firms with an established board-level ESG committee, formal sustainability mandates, common capital value accounting systems, and an ESG strategy signed off by the board.

Increased complexity requires increased CSO interaction with the board, Deloitte says. This involves approval of the sustainability strategy and ensuring its broad integration against targets and budgets. The board also oversees ESG-related risk ownership and ensures there’s an effective program in place to identify, assess, manage, monitor and disclose ESG- related risks, the Deloitte research highlights.

Boards need assurance that the organisation has the right plan in place to drive ESG performance. However, many organisations are only part- way through the process of deciphering what this means for their board-level reporting.

CSOs can also play a role in advising boards on specialist ESG topics, with some boards reporting they have struggled to acquire ESG expertise.The board will need to track performance in between reporting periods with the help of the CSO, who can help design the best approach for management information.

“Being an authority on climate doesn’t equip someone to sign off on technical accounting disclosures any more than a qualified accountant can safely interpret climate science data on their own,” the report says.

It also highlighted two main schools of thought when it comes to ESG governance and the board. On one hand are those who say the scale, complexity and speed of change means the board must set up a subcommittee. On the other hand, many CSOs interviewed by Deloitte expressed wariness of making sustainability a side-room conversation.

One CSO told Deloitte during its interviews, “If we push this into a sub- board too soon, there is a higher chance that board members and executives will miss the importance of the endeavour. Our goal should be to give executives and board members little opportunity to avoid understanding the scale of the task ahead of them.”

Building the data picture

Effective sustainability starts with a clear picture of what’s really going on and includes validation processes that give boards confidence in their oversight, argues global sustainability leader Faith Taylor.

What’s your baseline data and where do you want it to be? These are first-order questions that organisations and their boards must tackle to effectively operationalise sustainability principles, says Faith Taylor, a global authority with a long track record in the field and as a board director.

Taylor, global head of sustainability with IBM managed infrastructure services spin-off Kyndryl, says setting targets of net zero carbon emissions is becoming the “table stakes” for investors. However, she observes most organisations have yet to take basic steps in understanding their environmental and social “footprint” and building capability.

Speaking during a recent visit for an Australia-Israel Chamber of Commerce boardroom briefing, Taylor discussed how technology can support better planning, measurement and outcomes for organisations in addressing climate change, and meet environmental and social sustainability goals across their supply chains.

“The first step for any company is just getting the data, using software, or technology, getting it from data sources,” she says, identifying everything from resource use energy sensors on buildings and direct feeds from utility companies, to tracking actual invoices and human resource systems. Product life-cycle analysis is also critical, as companies need to understand where they’re sourcing your products and how they’re being manufactured.

“Getting data with integrity is critical because you need accurate information to manage,” she says. “At the board level, you want to have comfort that the data you have is ‘investment grade’ — and to make sure you have a risk management process, a compliance process that the company is pursuing.”

She says this is something she sees companies trying to deal with across the board. “It is very basic, but that’s what they’re being challenged with. [For example] why are you making this claim that you’re going to be net zero by 2040 unless you went through that process?”

Taylor notes that as a board member, she is asked what’s her oversight of the particular information — and when there are targets, what has been done to ensure the integrity of the information.

“You want to know that the due diligence has been done and to know the data is accurate,” she says. “So when I present to the board, I talk about building the data picture with the end in mind, making sure we have processes in place to screen and have a third-party review of your data. That is foundational.“

This needs to be balanced with resourcing and internal skills and capability as organisations build their goals from the baseline.

Accelerating trends

Taylor sees two themes accelerating in the sustainability area — the demand for third party validation and integrity assurance, and the growing push for standardisation in reporting. Investors are increasingly looking to companies signing up for the likes of the Science Based Targets initiative, while the International Sustainability Standards Board (ISSB) is working on draft standards for financial information and climate related disclosures.

Even if companies aren’t directly affected, they’re increasingly likely to be caught by the ripple effects of tightening regulations in international jurisdictions, which require emission disclosures of suppliers. For example, the European Union’s Green Deal legislation and Corporate Sustainability Reporting Directive (CSRD) — previously the Non- Financial Reporting Directive (NFRD).

Taylor is a recognised leader on environmental, social and governance (ESG) issues and sustainability. During 15 years at hotel chain Wyndham Worldwide, she developed the company’s ESG program, which saw the company named the sector’s sustainability leader by the Dow Jones Sustainability Index.

Deep dives on changing customer needs and seeing Al Gore’s 2006 documentary An Inconvenient Truth at the insistence of her son, made her realise that sustainability would soon be core to strategy.

Taylor joined Kyndryl in late 2021, after it was spun off from IBM. Before Kyndryl, she spent a year commuting between New Jersey and Palo Alto in California as global ESG leader with Tesla. Taylor helped the company establish its materiality and environmental baseline, and sign up to the Science Based Targets Initiative.

A Stanford University and Wharton School MBA graduate, Taylor is also on the boards of CMC Energy, a women-owned energy services business, and New Jersey Performing Arts Center Women’s Association. She was a professor at Montclair State University in New Jersey, and a founding member of its Global Human Trafficking Center.

Sustainability must be a core component of any company’s organising principles — part of its DNA — she says. As to whether the CSO needs a seat at the table, Taylor says that it depends on the board and the CEO. Some CSOs have a seat at the board level, some companies assign ESG to a committee, or create an entire ESG committee.

“The main thing is that it is elevated, because it’s a huge component of risk management, and meeting and delivering on reduction targets, as well as managing social risk,” says Taylor.