Sustainability as a CEO and Board Imperative

Capitalizing on sustainable technology opportunities while proactively managing rising sustainability risks will require a major governance rethink. It's time for sustainability to move out of siloed departments and into the boardroom and C-suite as a central, unified, strategic priority.   

That shift is already well underway. Sustainability and climate issues are moving back into focus for senior executives globally, with more than half of CEOs reporting that sustainability is a higher priority now than it was a year ago, and decarbonization found to be the top long-term strategic priority for CEOs, according to a new survey released by global professional services firm EY. The latest corporate governance research shows nearly all major global companies are assigning board-level responsibility for ESG, with nearly half charging the CEO directly. 

The implications for boards and executives are profound. Directors will need to rapidly boost their ESG fluency and understanding, set clear sustainability performance metrics and tie executive pay to delivering on them. They must also challenge conventional business growth mindsets and capital allocation models. In a sign of the times, 2023 marked the first year ESG goals like decarbonization and DEI were featured in the majority of short-term management incentive plans among large-cap firms.

In the C-suite, cross-functional ESG councils and sustainability business partners will be vital in breaking down silos and hardwiring ESG into operations and decision-making. As ESG reporting and risk management approaches financial-grade rigor, CFOs, risk officers and legal teams will play increasingly central roles working alongside chief sustainability officers.  

Ultimately, CEOs must become the chief evangelists and architects of their companies' ESG transformations - driving culture change, innovation, stakeholder engagement, policy advocacy and industry partnerships. The aforementioned survey from EY found that 68% of CEOs are now actively transforming their business models to be sustainable. That figure must get closer to 100% for business to become a true force for good.  

Reinforcing this shift, a recent Morgan Stanley survey identified that 80% of companies see sustainability as a potential revenue and profitability driver. The survey indicated that nearly all companies now recognize the impact of sustainability on their long-term corporate strategies, with 85% of respondents reporting that they see sustainability as a value creation opportunity, including 53% who view it primarily as value creation and 32% as both value creation and risk management, while 15% view sustainability primarily as risk management. Only 1% responded that sustainability is not material to long-term corporate strategy. In a quote from Jessica Alsford, Chief Sustainability Officer at Morgan Stanley and CEO of the Institute for Sustainable Investing: 

"Sustainability strategies and core business strategies are converging, with companies increasingly seeing sustainability factors as integral to the company's long-term value creation. There may yet be challenges in developing expertise and financing models, but corporate leaders view sustainable business practices as fueling the creation of value as well as the mitigation of risk." 

Sustainability has transcended its status as a buzzword and become a critical strategic priority for CEOs and boards worldwide. As the global community grapples with environmental challenges, businesses must take decisive action to integrate sustainability into their core operations.  

And there are increasing ties between executive compensation and climate performance. Research identified that over a third of S&P 500 companies link employee compensation to emissions reduction efforts. 

Noteworthy behavioral changes 

Further, CEOs and their boards need to keep an eye on emerging attitudes on some key demographics, specifically Gen Z and Millennials, who will soon represent the largest proportion of customers, employees and key stakeholders for many organizations. 

Climate change and concerns about environmental sustainability are increasingly driving workplace and consumer behaviors for this group with more than 40% in each group reporting that they have left jobs, or plan to in the future, over climate concerns, and nearly two-thirds saying that they would pay more to purchase environmentally sustainable products. 

Things to think about 

The following are some key steps to consider as sustainability moves to a CEO and Board imperative: 

1. Elevate sustainability to an executive responsibility
   1. Strategic integration: Sustainability should no longer reside solely within siloed departments. It must be woven into the fabric of business strategy.
   2. CEO leadership: CEOs and board leaders must spearhead radical transformation, making sustainability a central priority.
2. Boost ESG fluency and metrics
   1. Understanding ESG: Directors need to rapidly enhance their understanding of environmental, social and governance (ESG) issues.
   2. Clear metrics: Leaders should set transparent sustainability performance metrics and tie executive pay to achieving them.
3. Challenge conventional mindsets
   1. Think beyond the short-term: Move beyond traditional growth models. Consider the long-term impacts and allocate capital accordingly.
   2. Incentivize ESG goals: Incorporate ESG goals like decarbonization and diversity, equity and inclusion (DEI) into management plans.
4. Collaborate across the C-suite
   1. Cross-functional councils: Establish cross-functional ESG councils and sustainability business partners.
   2. Break down silos: Hardwire ESG considerations into operations and decision-making.
5. CEO leadership matters
   1. Chief evangelists: CEOs must drive culture change, foster innovation, engage stakeholders, advocate for policies and build industry partnerships.
   2. Transform business models: A significant number of CEOs are actively transforming their business models to be sustainable.
6. Business models must evolve
   1. A force for good: Sustainability isn't just about compliance; it's about creating lasting value for shareholders, employees and society.
   2. Gen Z and Millennials: Over 40% of these generations are willing to change jobs due to climate concerns, emphasizing the urgency of sustainable practices in the workplace.

Sustainability is no longer a choice—it's a strategic imperative. By embracing sustainable leadership, companies can thrive while making a positive impact on the planet and its people.