ESG Is the Next Frontier — a Conversation With The Conference Board’s Paul Washington

ESG is on everyone’s radar, but many companies don’t understand what is and isn’t important about it or what to pay attention to. 

Paul Washington leads The Environmental, Social and Governance (ESG) Center at The Conference Board, a non-profit think tank that provides cutting-edge research, programs and access to expertise on corporate governance, sustainability, citizenship and philanthropy. The Center has a membership of over 180 public and private corporations with well over 1,000 actively engaged executives. Members receive weekly alerts and access to a broad suite of world-class offerings, including multiple publications as well as roughly 40 webcasts and podcasts on ESG topics that help improve individual, team and enterprise performance. The Center’s platform provides corporate leaders with the opportunity to have confidential discussions with other thought leaders and to address their most pressing challenges with a global perspective. 

I spoke to Washington to get his unique perspective on the state of ESG among corporations and what’s next in integrating ESG best practices into how companies do business. 

Related: HP CIO Ellen Jackowski Explains Why ESG Is Essential to Corporate Sustainability

There’s so much information out there about ESG. Some is great, some not so much:

One of the challenges is that climate isn’t talked about in human terms. People find that hard to relate to. You have to humanize the environmental side. Also, so much of what’s said about climate change and the role companies play is conveyed with a scolding attitude. That’s why we’ve suggested that if you’re talking to your board of directors or trying to engage a company on climate, you talk about climate’s impact on the company first, then about the company’s impact on climate. The first is universal and gets them engaged on a human level. Then you can ask “If that’s the impact climate is having, what can we — as a company — do to help?” This is something for everyone to be involved in, and you’re not going to get it by lecturing or hectoring. 

Companies often struggle with getting started, and consultants in the ESG space have often come from academia and nonprofits. They may not understand how companies work. They sometimes view companies as monolithic enterprises, but they’re not. There are different departments, individuals and personalities, and you have to avoid only preaching to the converted to get other people on board. Even if you have advocates within the company, they need the tools and information to persuade and inspire others. 

When and how did your organization begin engaging on ESG topics?

The ESG Center was formed in mid-2019, but The Conference Board has been focusing on these areas for decades. It’s a successor to what was known as the Governance Center, which was founded in 1993, and The Conference Board was originally founded as a neutral convener in 1916 to address labor management strife, to address an S issue in ESG. It grew from there. 

I think of today’s iteration of the ESG Center as unique. We’re a nonprofit, nonpartisan think tank serving both the business community and society. We’re not writing long papers for an academic audience, nor do we write partisan papers. We’re here to provide trusted, actionable insights for our members, for the business community at large and for society. Our secret sauce is that people trust us.

We also have global scope and scale and multiple disciplines. We’re in Europe and Asia as well as in the U.S., and ESG Center is just one of several think tanks at The Conference Board. When you combine all that we bring to the table — great research capabilities, databases, survey capabilities — and bring our members and others together, we create practical insights that you literally cannot get anywhere else in the world.

For example, The Conference Board published a report in November on what the shift from stockholder to stakeholder capitalism means to the C-suite. We not only conducted an empirical survey of executives around the globe, but then convened CEOs, generals counsel, CFOs, chief communications officers, chief strategy officers and others to talk about what it meant for them in practice. It’s a cutting-edge report that provides very practical business insight.

We also conducted a round table on the intersection of sustainability, compliance, and risk management. We had 168 attendees around a big virtual table, and the key takeaway was that there are factors causing these areas to come together. Whether it’s supply chain issues, human capital, or climate, you need distinct perspectives of compliance, risk management and sustainability brought to bear. You want convergence, but you don’t want to lose the distinct nature of each of those areas. Like any good relationship, you have to know where there’s common ground and where there’s divergent ground. You can’t just paper over differences. You have to understand them because those differences are often strengths.

Related: Why ESG Conscious Companies are Resilient Companies

I particularly admire that you’re bridging industries and functions. That’s a much-needed departure from how a lot of consulting operates.

The ESG Center has 184 members. We span every industry, every category. The really interesting work is often done at the intersection. If you’re just living in your own sustainability bubble and not talking to people at different levels and in other disciplines, you’re not going to have the same impact.

One of the things we’re working on is trying to understand where the sustainability function is located in organizations. What have you found?

Our report, Organizing for Success in Sustainability, provides survey research showing where the function sits in Europe and in the U.S., as well as based on the size of the organization. It provides really good insights regarding who it reports to, how large it is and even how a small organization can transform a company if they do it right.

Sustainable organizations will evolve over time. The ideal is where the sustainability function is embedded in the business and provides a coordinating goal, but it can sit in a lot of different places. 

There’s been an evolution from sustainability, from the CSR wave, to ESG. Are we moving to a comprehensive overtaking by stakeholder capitalism? Or is ESG just another stage on the way to something else?

I think there are two trends. The first is the shift from stockholder to stakeholder capitalism. Where companies previously focused on customers, employees and others as a means to an end for creating profits for shareholders, with stakeholder capitalism they care about the welfare of other stakeholders as a legitimate goal in and of itself, and every company will decide where it wants to be along that spectrum. We published a report in November showing that 90% of global C-suite executives believe that shift is underway, and 80% believe it’s underway at their company.

Along with that is a shift to ESG over sustainability. As you’re serving different constituencies, companies are addressing a broader array of environmental and social issues. The two shifts thus involved both the who and the what. These trends are both significant and durable, and it’s the third great wave in governance. The first occurred after Enron and WorldCom collapsed and placed a focus on board accountability. The next was after the financial crisis, which focused on shifting power to shareholders. 

The stakeholder shift is being driven by investors. The people you’d think have the most to lose are actually leading the way. When you’ve got 30% of the S & P 500 held by the same top 10 institutional investors and they’re focusing on systemic risks, they’re thinking like and about stakeholders. 

Are most companies at the same stage and place in terms of progress?

Companies go from compliance, to meeting basic expectations, to focusing on reducing risk beyond expectations, then to lowering costs. The final phase is showing leadership and seizing opportunities. Most companies we deal with are beyond pure compliance. They’re grappling with how to meet investor and customer expectations, how to mitigate risk and how to seize opportunities.

Companies will not be leaders in every area. They have to choose where they want to play. What they’re really struggling with is identifying the big risks they need to address and the big opportunities they want to seize. Integrating sustainability into strategic planning, financial planning and budgeting processes really drives both risk mitigation and opportunity capitalization. That’s what companies are working on. Even advanced ones are still trying to refine their understanding. They may do a good job at risk mitigation, but they’re still trying to identify opportunities.

The Organizing for Success report examines the need to strengthen connections between sustainability, finance, and strategy. There’s a strong connection between sustainability, compliance and legal in the U.S. but not in Europe. Both need to be stronger, because finance and strategy control are the essential planning and capital allocation functions needed to incorporate sustainability into those processes. The legal department also needs to be a collaborative, problem-solving partner. It can be very helpful in thinking through governance at both the board and management level, on how to actually seize opportunities, how to structure the board and the C-suite, and how to structure an internal sustainability steering committee. A good charter helps maximize collaboration between strategy, finance and sustainability. 

What does “good” look like when it comes to implementing ESG strategies in organizations?

“Good” generally looks like a company that has thought through each of the main challenges and opportunities. There are six issues each company faces when it comes to sustainability:

1. What issues matter?

2. How to integrate sustainability into strategy and operations? 

3. How to set and reward goals? 

4. How to organize for sustainability at the board of management level?

5. How to tell the sustainability story to multiple stakeholders?

6. How to deal with the ESG industry — the three Rs of regulators, reporting frameworks, and rating agencies?

“Good” means a company has been particularly effective on those first five and is complying with regulations but is not as worried about the rating agencies and the reporting frameworks. They may have used them as a starting point, but a company that’s really doing well has figured out what matters. They’ve integrated their business. They’ve set reasonable and stretch goals. They’ve organized themselves sufficiently, and they’re telling their story well. If they’re hitting those five things and complying with the laws, that’s a company that’s succeeding. 

Related: Predictions for 2022: Workplace, Tech, and ESG Points

What do you see as the next frontier in sustainability?

Creating a culture that provides rewards, punishments, expectations and tolerance when it comes to behavior and where sustainability is built into your ethic. Finding a way to embed the notions of sustainability into your company’s DNA so that your board, your C-suite and your broader workforce think and act with it in mind. Once that exists, you can really unleash creative energy. The solutions may need to evolve, but if sustainability is built into your culture, you’ll be able to respond and adapt.

Are most companies ready for this?

They may not be fully ready, but they’re definitely recognizing that this is the next frontier. There’s a lot of employee energy around it, and you see that in the world of stakeholder capitalism, employees are first among other constituencies. Customers obviously matter, but employees are driving a lot of what’s happening. They’re more than just activists making companies do stuff. Employers need to think of them as their sustainability resource. 

What’s keeping companies from making progress? 

One of the barriers is terminology and having a shared understanding of what sustainability is. The lack of common language within a company can be a barrier. You have to have a discussion of what terms are going to be used and what they mean. It seems silly, but if you use certain words, people’s eyes glaze over. You want to use terms that people understand and can relate to in their business and frankly, in their human, individual capacities.

The other thing you really need is an environment of trust and collaboration — with the board, among the C-suite, and among the employees — so you can talk openly about areas that are existing strengths and discuss challenges too. 

None of these issues can be addressed by a single function within the company. If you’ve got trust, collaboration, and a common language, when issues come up, they can be addressed. That doesn’t just happen. It takes real work. If you tolerate people who don’t collaborate because they do a good job in their own silo, it can derail the entire effort. One senior executive who’s not on board can derail an entire organization.

Where do you see the most opportunities as we move forward?

There’s an opportunity for entrepreneurs within and outside of companies. In addition to doing a lot of good for society and the environment, there’s a lot of money to be made in both the sustainability field and in risk mitigation. With the massive investment governments are making in climate and the focus on human health, I have a lot of confidence that if you present ESG or sustainability issues as business opportunities you can get a lot of firepower behind them and we can see a lot of progress. Companies need to move beyond their focus on systemic risk mitigation and focus on the alpha in sustainability. If you’ve got a culture that embraces it, your company will be an innovation engine in sustainability.