ESG 2.0 – The Next Generation of Leadership

Even firms with long-standing track records of successfully integrating ESG principles into their organizations are finding it more difficult than ever to stay ahead of dynamic and constantly evolving ESG expectations. Companies that have previously resisted establishing a formalized ESG policy and framework are finally bowing to pressure from their investors, consumers, employees, boards, and regulators, are now find themselves scrambling to catch up. As ESG has gone from being a functional requirement to a commercial imperative, best-in-class organizations are embracing ESG in part because they firmly believe in the financial benefits of incorporating sustainability into their corporate and investment strategies.

All of these factors have led to an avalanche of demand for ESG leadership talent, straining what was already a very thin talent pool. It is clear that next-generation ESG leaders will look quite different from earlier archetypes, as the scope of the role grows and requires a far more senior and agile executive to be considered as a credible “ESG 2.0” leader

To better understand this shift and the specific competencies and experience that firms are seeking, Russell Reynolds Associates analyzed the backgrounds of 46 senior ESG leaders from large, global organizations appointed over the past 18 months. Our data reveal that these leaders are predominantly female, overwhelmingly hired from outside of the company versus being promoted into the role, and bring cross-functional business expertise to the position.

ESG 2.0 Leaders Have Four Primary Responsibilities:

1. Create a best-in-class enterprise-wide ESG policy and framework
2. Integrate ESG policy across the organization, ensuring a consistency of messaging and execution throughout each business line/investment strategy
3. Serve as the “face of the franchise” both internally and externally, articulating to investors how ESG permeates all levels of the organization and is embedded into each business line/investment strategy
4. Engage with external partners (portfolio companies, operating partners, supply chain) to help them create more sustainable business strategies for their own organizations

ESG 1.0

The initial wave of ESG hiring began in earnest three to four years ago, when C-suite leaders began to tire of being asked questions about ESG that they could not readily answer.

This led many organizations to appoint a “head of ESG,” which usually tapped an internal employee coming out of legal, compliance, marketing, or investor relations. These ESG heads were generally mid-level functional executives reporting into compliance or marketing, and were tasked with creating a basic fundamental ESG framework designed to satisfy internal and external questions as they arose.

This minimalist approach worked initially, but investors continued to raise the bar on the level of ESG sophistication, measurement, and reporting they required, most notably reflected in BlackRock’s annual letter to CEOs heralding the importance of corporate purpose. By 2019, the “ESG 1.0” model had proven to be insufficient.

ESG 2.0

Just as ESG demands from investors, consumers and regulators began to reach a fever pitch in 2020, the world was hit with simultaneous global crises: COVID-19, climate change, racial and social injustice, and dysfunctional geopolitics. When it became clear that ESG policies and frameworks could provide a roadmap for organizations.

To emerge more effectively from these concurrent global crises, the demand for ESG leadership talent exploded. Organizations now require more credible and more senior leaders who combine ESG domain expertise with business/ P&L backgrounds, and diversity of thought and experience.

An analysis of recent ESG appointments confirms that this shift is already underway. In analyzing the profiles of almost 50 leaders from large, global organizations appointed in the last 18 months, several patterns emerge.

Many are Inaugural Appointments

Unsurprisingly, just over one-third of the recently appointed leaders in our analysis are the first to hold this position in their company, reflecting the nascency of this role in many firms and the degree to which role creation has accelerated in the last 18 months.

• 35% are the first to hold the role in their company

Almost all Were Appointed Externally, Reflecting the Growing Need for Domain Expertise

In 2021 and beyond, an ESG leader needs to deliver ESG domain expertise – the days of a repurposed functional executive being credible in these roles are over. Our analysis found that 93% were appointed externally as opposed to being promoted from an internal role, with 80% having prior experience in an ESG or sustainability-related role. It is clear that firms recognize the need to bring in specialized expertise from outside the organization to drive a transformation in ESG performance.

• 93% were appointed externally, reflecting the shift away from internal promotions into this role

Many Bring Multi-Functional Business Experience and a Diversity of Perspective

At the same time, best-in-class ESG leaders are business people first, with hands-on industry experience that will enable them to be credible with the internal line of business leaders. Just under 40% of recently appointed leaders have prior experience in financial officer roles, while another 26% have experience in corporate strategy. In contrast to earlier trends in the ESG 1.0 era, demand for legal and marketing experience is low among recently appointed leaders, with only 11% having prior experience in legal, regulatory or compliance focused roles, and only 4% coming from a marketing or communications background.

Next-gen ESG leaders are senior executives who are fluent across the suite of ESG dimensions with an industry- specific commercial acumen. These individuals must also possess the ability to successfully influence across an incredibly diverse set of stakeholders, including the C-suite and board of directors, line of business leaders, institutional investors, legal & compliance, regulators, external partners (portfolio companies, operating partners, supply chain) and internal colleagues. Given this mandate, it is no wonder that more than a quarter of recently appointed leaders have prior experience in three or more functions, providing them with a multi-faceted perspective on how ESG priorities get translated across the business.

Strong Female Representation at the Top

The ESG function has also managed to avoid the cultural and structural barriers that have limited the number of female executives ascending to senior roles – 70% of recently appointed senior ESG leaders are female. This may result from the fact that, as a relatively new role, the paths to ESG leadership remain varied and multi-faceted, allowing companies to expand the aperture of their search for the best talent.

As companies seek greater gender diversity in the C-suite, it would appear that the ESG function will be an important pipeline of talent, particularly given their cross-functional expertise and visibility into both the operational and strategic aspects of the business.

70% of the newly appointed senior leaders are female

Attracting Best-in-Class ESG Leadership

Next-generation ESG leaders will look very different from their “ESG 1.0” predecessors. In trying to identify and recruit this talent, it is crucial that:

• ESG be perceived as a core component of the organization’s business strategy
• ESG is a stated priority for the C-suite and board
• The head of ESG reports directly to the C-suite

An absence of these criteria will make it difficult (if not impossible) to attract best-in-class ESG leadership. Where is your organization in its ESG journey? See appendix for our self-assessment tool.

Key questions for determining where you are in your sustainability lifecycle:

• Strategy: How is sustainability viewed by your senior leadership – a commercially accretive imperative or an issue to be managed?
• Ownership: What level of ownership do your senior leaders take in driving your sustainability initiatives? Is your leadership culture an enabler or a hurdle in this regard?
• Reporting: What sustainability goals have you set, and how do your stakeholders view the ambitiousness of those goals and your ability to measure and report against them?
• Senior executive talent management: How does sustainability factor into your leadership talent decisions? Is it a key competency when selecting, promoting and rewarding leaders?

Nascent

• Reactive – reacting to issues as they emerge and managing them through a PR and brand lens
• Head of ESG is a mid-level role and/or responsibility sits within a function like marketing or corporate affairs; integration with strategy is minimal
• No or limited reporting; if it exists, reporting is backward-looking and lacks measurable goals
• Sustainability, purpose and values are not core to talent management frameworks

Evolving

• Proactive – sustainability is increasingly seen as a source of competitive advantage and/or risk mitigation
• Appointed senior ESG Leader with a dedicated team, who reports to the CEO or other ExCo member; increasing integration with strategy
• Annual sustainability report with clearly stated goals and progress made against them
• Focus on values and purpose underpins talent management frameworks

Best-in-Class

• Strategic – sustainability is embedded in strategy and used to evaluate new opportunities; existing operations are overhauled to make them more sustainable
• ESG Leader is a senior member of the firm, sits on Ex/OpCo and reports to the CEO; sustainability goals are embedded in objectives of C-suite leaders
• Sustainability reporting is embedded in the annual report
• Explicit focus on sustainability experience and mindset in selection and development; sustainability outcomes linked to remuneration for executives

The article was first published here.

Photo by Noah Buscher on Unsplash.