Regulations against greenwashing and the backlash against the explicit consideration of environmental, social and governance (ESG) issues in the United States both suggest that the push to ESG may have ‘crossed the line’ and together have given pause to the patient rise of more responsible attitudes to investing.

The American backlash may extend through the term of the current presidency but will not last. In Australia the momentum has also paused, as it has many times in the past.

Yet as many investors and corporates know, incorporating ESG factors into investment analysis and corporate leadership is really a conservative extension of risk assessment that reflects the complexities of the 21st-century economy where most of a company’s value lies in its intangible assets. It may be resisted by some, but it will not be stopped.

Company boards are bound by law to consider ESG factors, and Australia has now joined more than 30 nations, representing over 50 percent of global GDP, in mandatory reporting (starting with climate-related risk and opportunities).

The risks may be obvious but the opportunities less so. In our book ESG Unlocked, we put forward a new way of thinking about ESG, one that builds on quite familiar and valuable concepts and puts them together in a recognizable way. It helps understand what ESG is, how it is used as part of creating and protecting financial capital, and who uses it.

Considering ESG through a four-capital lens brings clarity and direction to an organization’s ESG effort and ensures that investments in ESG have a traceable and welcome return. Critical to the effort is that a CEO or CFO, an ESG specialist and a board work in sync.

ESG is access to four capitals

The model we suggest is simple. Consider first a financial performance-and-access cycle: a company that can generate financial capital will be more likely to engage with investors and get access to more.

ESG is best understood as a similar cycle. However, it embraces all the types of capital that an organization relies on – financial, yes, but also human, social and natural. They are your assets. Your stakeholders have more of that capital they can share with you. Whether they do depends both on your performance and how you engage with them on that performance.

Seen this way, ESG is at worst an innocuous representation of reality. At best it becomes a powerful, holistic way for organizations to improve their performance and get access to the capital they need.

But it needs to be led by someone who sees and plays in the whole cycle, not just a part of it, with whole and direct support from the top.

An ESG ‘specialist’ in the C-suite

More recently, many large firms have recognized that a senior person with a wide brief is needed to apply an ESG or sustainability lens across the company. Being in the C-suite allows a direct say and influence on the company’s agenda. That may be their sole role, or it may be combined with another.

Unilever and InterContinental Hotels have a Chief Sustainability Officer (CSO), Schneider Electric has a Chief Strategy and Sustainability Officer (a powerful combination to ensure ESG is integrated into corporate strategies), and Siemens has a Chief People and Sustainability Officer (another powerful integration).

Most companies are not yet at that stage. Typically, the role is placed somewhere in the corporate center, often reporting to the head of corporate affairs, and filled by someone with a background in environmental management. Never say never, but value may be missed in this approach. The more that ESG is infused across the C-suite and throughout line management, the more constructive it is.

Companies that put the role in the corporate affairs department risk limiting it to one that supports the brand and responds to pesky questions from the public, media or investors. Environmental managers have done an enormous job for up to a quarter century in raising a sustainability consciousness, but their very role means the executive committee may hear only ‘toxic compliance’ and ‘recycle bins’. Now that a value-based ESG agenda is being set, people with a broader view of the organization may be more likely to lead the necessary compliance, culture and business changes.

With those caveats in mind, most companies now see the value in a sustainability officer (by whatever name) who is a good generalist to guide the sustainability effort. Nominally, they would be responsible for the ESG strategy and business case, identifying the issues and actions to take, engaging internally and externally, reporting to all the bodies that the company has committed to (or has no choice), liaising with investors and liaising with external ratings agencies.

If that’s too much for one person, the size of their team should take into account both the potential and delivered value, legitimate demands from stakeholders, available resources from other corporate functions, existing or potential environmental and social risks and perceived opportunities. For smaller companies, it may be part (and not an add on) of a senior manager’s role.

The CEO or CFO to champion the ESG effort

Whether or not the ESG specialist is part of the company’s executive team, they need genuine support from the top, one with the broadest view of the organization’s actions and priorities and the capacity to influence the executive team.

Ideally, this falls to either the CEO or the CFO – they’re the ones with the most holistic view of the company’s human, social and financial capital and how they interrelate. Too many ESG specialists still report to the head of corporate affairs, which signals far and wide that it doesn’t matter what the company does, only how it tells its story.

With the rising appreciation of ESG, those advocating for the value of a CSO claim that 66 percent of their small sample of new CSOs reported directly to the CEO. Diageo had a good model when it was getting its effort underway. With brands including Johnnie Walker, Guinness, Smirnoff and Baileys, its approach to ESG is understandably grounded in responsible drinking. The CEO chairs an ESG Committee, with another 12 members selected on rotation.

The rotation ensures all corners of the organization get direct exposure to the citizenship deliberations at the highest levels. All functional and geographic units are represented through their executive. That way, all units contribute to and learn about the major sustainability initiatives – ‘communication’ isn’t left to the communication team.

Another successful option is for the CSO to report to the CFO, as Schneider has arranged it. Having the CFO as a thought partner for sustainability actions is a real benefit. The CFO typically has superb support and inquiry skills.

Their appreciation of business value can help identify opportunities for sustainability to assist the firm’s more immediate priorities and for sustainability proposals to appeal to the executive committee. So too will the CFO’s responsibility for financial rigor.

Alternatively, ESG may be a shared responsibility. Unilever’s executive Corporate Responsibility Council ensures resources are available to the sustainability effort to identify and overcome bottlenecks and to judge where influence alone is not enough to make things happen between business units. Involved executives can also represent the firm on sustainability partnerships.

While senior executives have deep contacts with peers in their industry, sustainability offers rewarding relationships to prosper outside the industry and in other circles.

Board committees that see opportunities as well as risks

Once upon a time, it was possible to act credibly on ESG with limited board involvement. The British telecommunications firm BT and Australia’s IAG were two companies in the 2010s that had no board-level committees, with the sustainability strategy or matters raised at board level ‘at least once a year’ as a fait accompli.

That’s no longer the case. The potential impact of public policy and sustainability issues on a firm’s value makes more direct board oversight essential. Many companies, therefore, have a Board ‘sustainability committee’. That sounds good until you look at the very narrow remit of the committee: compliance with laws or managing brand or community trust.

Companies have started to recognize that strategic risks such as climate change need to be addressed in the same way as other strategic risks, not by the sustainability committee but by the Board itself.

Many allocate the role to their risk (or risk and audit) committees to ensure that ESG risks are reviewed with the same rigor as other business risks. Reports may also be assured under similar oversight as the familiar audit of the annual accounts and reports.

Dai Nippon Printing has taken a more holistic approach. The board resolved to restructure its committees in 2022, acknowledging that the “rapid changes in the social environment … that may affect our business are becoming increasingly diverse and widespread”.

Its sustainability committee is now its core strategic committee, chaired by the board president, to “manage medium- to long-term risks, identify business opportunities and integrate them into management strategies”.

There is no best way to ‘do’ sustainability or consider ESG, just as there is no best way to do marketing or to develop people. Each company will find its own path and organizational structures, consistent with how it manages every other vector of value.

Decisions such as these can only be made as investments in the company’s social and human capital, with which it can access and steward natural capital and generate financial capital.

This is an edited extract from ESG Unlocked. Authors Josh Dowse and Dr Ian Woods are independent consultants on the strategy, practice and communication of ESG. For more information, go to www.esg-unlocked.com

Opinions expressed by The CEO Magazine contributors are their own.