ESG in Conversation: What Does It Take To Be a Sustainability Leader in 2023 and Beyond?

Morningstar Sustainalytics

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Episode Summary

Host:

Curtis File, Editorial Manager, ESG and Sustainable Finance

Featuring:

As conversations around climate change and social issues have taken center stage, both corporations and investors have started to adapt. Increasingly, companies are factoring sustainability and environmental, social, and governance (ESG) risk assessments into their decision making – including hiring purpose driven professionals that can establish their organizations as leaders in sustainability. A recent study showed that the number of companies appointing chief sustainability officers jumped from 9% in 2016 to 28% in 2021.¹ At the same time, many investors are looking to green their portfolios, or at least take steps to leverage ESG data to adopt more sustainable investing practices. But while it is clear that sustainability is important, many of these roles and data are new. So, where can we look for leadership?

In this episode of ESG in Conversation, we’re exploring the question: what does it take to be a sustainability leader in 2023 and beyond? You’ll hear from Joseph Hill, London Techstars alumni and CEO of Zephframe, about the sustainability challenges facing start-ups. You’ll also hear from Eileen Buckley, VP of Corporate Responsibility at Stryker, about the importance of integrating sustainability across an organization. Gabriel Presler, Global Head for Enterprise Sustainability at Morningstar, also joins in to discuss the role investors play in sustainability leadership.

Key Moments

00:05	Trends in Sustainability Leadership
01:39	Sustainability Leadership for Start-ups
07:15	A Holistic Approach to Corporate Sustainability
10:27	Role of Investors in the Adoption of Sustainable Practices
11:27	Sustainability Data and the Importance of Communication

Transcript

00:05	Curtis File: In the last ten years as conversations around climate change and social issues have taken center stage, there's been a huge change in the way people approach work, especially younger generations. Look at any job listing now and you'll probably see the same term pop up virtually everywhere.
00:23	Cathy Engelbert: Purpose Driven Agenda.²
00:25	CF: That's Deloitte CEO Cathy Engelbert in an interview with CNBC.
00:30	CE: So, we all know millennials and now the digital natives, the Gen Z or what I heard referred to as Gen D the other day, digital native. They're all looking for purpose driven, civic minded, socially responsible companies.
00:41	CF: That interview was five years ago and the trend hasn't gone away. Increasingly, companies are factoring sustainability and ESG risk assessments into their decision making. And that includes hiring purpose driven professionals that can establish their organizations as leaders in sustainability. Case in point – a recent study showed that the number of companies appointing chief sustainability officers jumped from 9% in 2016 to 28% in 2021.³ At the same time, the start-up ecosystem is seeing a rise in sustainability-oriented companies. Climate tech was the fastest growing investment vertical in Europe in 2021 – 13% of all European venture funding went to climate tech start-ups. So, it's clear that sustainability and mission driven work is important. But who is guiding the way? I'm Curtis File, editorial manager with Morningstar Sustainalytics and your host for this episode of ESG in Conversation: the podcast where we ask big questions about ESG and use interviews, research and storytelling to uncover the answers. In this episode, we're joined by sustainability experts from Sustainalytics, the health care sector and the world of sustainable start-ups, to answer the question: what does it take to be a sustainability leader in 2023 and beyond?
01:39	CF: Five years ago, Joseph Hill happened to see an advertisement for a start-up competition in Seoul, South Korea. It was a competition sponsored by the United Nations, looking for start-ups that could help achieve the UN's Sustainable Development Goals or SDGs. And then he had a eureka moment. What if he could help reduce the energy used to heat and cool buildings?
02:42	Joseph Hill: So, I essentially just locked myself in my room for a weekend and I created a PowerPoint presentation, and I submitted it to the competition. And I was one of the only conceptual level teams selected worldwide. So that's kind of the genesis of how it started. And I've just been kind of pursuing it ever since.
01:23	CF: And with that, his company, Zephframe, was born.
02:22	JH: So, we are a company that makes a building management system plug-in. And what that means is, it's a piece of software that plugs into the main building software that most modern buildings have. And this building management system controls everything in the building, from hot water to heating and cooling to lighting, security, fire – you name it. But the problem is, a lot of our building technologies have become quite efficient. But heating and cooling is one area where it's not. It's incredibly power hungry and it creates a lot of emissions. And we haven't really done anything to control that at a large building scale. So, our plug-in here at Zephframe uses AI to collect building data to ensure that circulation systems only send heated or cooled air to where people actually are, or even where they will be predictively and not to where they're not. Essentially, we’re not wasting heated or cooled air which makes a drastic amount of energy reduction and emissions reduction.
03:57	CF: His idea eventually took him to Techstars London, one of the largest pre-seed investors in the world. As the founder of a sustainability focused start-up, Joseph has learned a lot about what young companies need to do to lead on sustainability.
04:11	JH: I think a start-up that is formed in, you know, today's day and age should really focus on sustainability holistically. They should focus on where their supplies are coming from, where it's going to, and how even the people will use it in the lifespan of their product when it's in their consumer's hands. Whereas if you look at a lot of the legacy incumbent companies that have been around for a while – let's just take, for example, a hardware manufacturer that makes laptops. When you buy the laptop, they are no longer responsible for anything with to do with that laptop except for, you know, their extended warranty or whatever. But once you have it as a consumer, whether it goes into, you know, a landfill or it goes into the hands of another person as a pre-loved product, it doesn't matter to them. And I think that lack of accountability is just a horrific thing.
05:00	CF: To build a truly sustainable company from the ground up. Joseph says that founders should be asking three key questions.
05:08	JH: I think that they need to be asking, how will my company be held accountable? And this can be either self-governing or it can be done by local or large-scale government. And I think it should be a combination of both. And I think that we need to kind of ask the second question: how are we going to make sure that growth is sustainable? It's not only about sustainability for the planet, but also sustainable business growth. Because with our current way of operating, that is simply not sustainable from an actual business standpoint. And then I think the third question that we need to ask about sustainability as companies is how can we be supported more? Because just from my personal journey, I've found it very, very hard for anyone to really care about this kind of concept of what I'm doing because again, not very sexy in terms of what we're doing. We're just making kind of a generational efficiency increase for heating cooling, and no one cares about that. So how can we get the support that we need?
06:12	CF: That support in the form of dollars from investors can be hard won for start-ups. It's not always easy to communicate the impact a niche product can have. But investors are increasingly facing pressure to ensure that their money is funding sustainable growth. And Joseph says investors have to start thinking about the long-term impacts.
06:31	JH: I think that they need to be thinking about, companies going forward, whether they're incumbents or whether they're start-ups will need to have a solid sustainability plan in place. If not, then as the planet gets worse and worse, companies could be held more accountable for that. And if they aren't investing in people who care about that or who are developing in that direction, then they will suddenly have a lot of wasted money because those companies will not be feasible.
06:55	CF: Other sustainability experts agree with him. And more than just having a sustainability plan, they say…
07:00	Eileen Buckley: Sustainability needs to be part of everyone’s job.
07:05	CF: That’s Eileen Buckley from Stryker, a medical device and equipment manufacturer.
07:09	EB: My name is Eileen Buckley, I'm vice president of corporate responsibility at Stryker.
07:15	CF: Just as Joseph noted, Eileen says that corporate sustainability requires a holistic approach, and she identifies three key considerations for corporate leaders.
07:24	EB: When we think about sustainability leadership for companies, I think the first would be aligning sustainability to the company strategy and mission and good support from the top. Second, I would say integrate an innovation, so integrating this work across the organization, but also looking for ways to innovate so that it is a growth driver and a business driver. And then finally communicating on progress and really building that accountability through transparency.
07:58	CF: But achieving integration of sustainability across an organization like this requires asking your team some tough questions.
08:06	EB: So, one thing that our team asks each other a lot is how does this — whatever program, activity, investment — how does it or how will it deliver growth or value to our business or where we are heading? Another question that comes up is: have we engaged the right internal stakeholders? Going back to the change management and bringing everyone along on this journey, involving folks’ mindset as we all work to think more circular and more sustainably for the future. How will our efforts be measured? Is something we think about a lot. We want to be treated as one of our businesses. So, how are we delivering measurable KPIs in a really smart way? And then I would I'm not sure if this is five, but I guess the last throw out is: are we anticipating our stakeholder expectations, including customer expectations around sustainability, and are we going to be prepared to meet those expectations?
09:09	CF: Meeting those expectations means being genuine about your path toward sustainability.
09:14	EB: I think it's being authentic about your roadmap. Again, to me this is about driving business value. So, why are we reducing waste? There is a huge cost savings opportunity. It just makes sense from a shipping standpoint, from a customer usability standpoint. That's why you would reduce waste if you're a businessperson, right? You could say the same thing about innovation. Why would you maybe switch out to pallets that are ocean-recycled plastic? They're also more durable. So, innovation and driving growth through sustainable practices. On the other hand, I think being authentic. So, we have not, for example, put out a net-zero goal yet. We want to make sure if, or when, we do that, we know how we're going to get there. So, we want to be really authentic about that. So that's kind of what I think of. We want to be very true to our words as we put out goals, and I think that's important as we think about sustainability leadership.
10:12	CF: This type of authenticity and an appreciation for the importance of the bottom line is becoming even more important. Corporate leaders want to ensure they're making smart, business-driven decisions to ensure they integrate sustainability in a way that makes sense to investors.
10:27	Gabriel Presler: Getting companies to make positive changes for sustainability is certainly a lift.
10:33	CF: That's Morningstar's Gabriel Presler.
10:35	GP: My name is Gabriel Pressler, and I'm the global head for enterprise sustainability at Morningstar.
10:41	CF: She echoes a lot of what Eileen and Joseph have noticed in their work, but with an eye for how investors view corporate sustainability.
10:48	GP: Sustainability leaders need to work across the organization to get a clear sense of how investment in sustainability contributes to value creation. And that means they need to speak the language of their colleagues. So, for legal colleagues, the language is risk. For finance, the language is risk and value creation. For human resources, the language is employee engagement. They need to provide investors with a very clear sense of how sustainability gets operationalized across the firm. And then there needs to be, for investors, a very clear language and a shared understanding of the role of sustainability measured by ESG data and how it ties to the firm's mission.
11:27	CF: As ESG data gets better, it's becoming more important for companies and investors to integrate it into their decisions.
11:33	GP: Principles that lead to sustainable business models and durable workplaces are measurable. They are measured with ESG data. And as we said before, while we hear a lot of noise about ESG data, this data set has progressed materially in 15 years. It's comparable, it's relevant, it's reviewed, and it's getting more and more widely available. So, you can feel really comfortable taking a clear look at the material ESG issues that firms in your industry face. You can figure out which ESG issues have the potential to impact business over the long term. And you can take the time to identify the most important stakeholders and then measure and be transparent that about that over time.
12:15	CF: Once they understand the data, sustainability teams can then set strategic priorities.
12:20	GP: They need to figure out which ESG issues have the potential to impact business over the long term. You have to take the time to identify which material issues are most relevant to their stakeholders. And they've got to understand what research firms think about relevant industries and comparable firms. These kinds of materiality assessments allow us to understand the ESG issues that could have a significant effect on the enterprise value of companies. And that might be on, you know, value drivers revenue growth. The overall context in which we operate. The framework will allow businesses to build strategies in their most material areas, commit to transparency through reporting and disclosure, and then implement time bound goals.
13:14	CF: Communicating about those goals and progress towards them is becoming an increasingly central skill for sustainability professionals.
13:21	GP: Communication is a top three leadership skill for sustainability officers. It's critical that we learn how to educate and communicate internally. And that means that we're starting to understand the importance of getting the language right very soon and very fast. This is where marketers and internal coordination can help. In any age of information, we can't expect people to do the hard work of reading reports and understanding terms that are not actually uniformly defined. And then externally, this is one domain where I don't think we need to fear coopetition. Issues like equity and climate are big systemic challenges and they require whole industries moving in concert. So, the importance of communication and a shared language is just key.
14:14	CF: That spirit of cooperation is one echoed by all the sustainability experts we talk to. Whether you're an investor or a corporation or even a consumer, we're all facing a lot of the same sustainability challenges. So, perhaps the most important thing to note for leaders moving forward is that we can only solve these problems by working together. Eileen says it best.
14:35	EB: I'm really grateful to work in this profession where practitioners like myself, like Gabriel at Morningstar. You know, many of us are very or very good friends and can kind of find our way together. Because whether we're looking at technology, whether we're learning new reporting frameworks and standards or learning new technologies as new solutions come onto the market, we are on this on this new journey together. Because this is a newer space. It hasn't been around that long, but it's an important one. We're doing important work. And so, I think it's important that we come together to solve these massive issues in many cases. So, it's an exciting area and we have work to do, and we'll go farther together.
15:40	CF: That's it for this episode of ESG in Conversation. If you'd like more information about trends in corporate sustainability and sustainable investing, head over to the resource center at sustainalytics.com. There you can check out our 2022 Corporate ESG Survey Report. Stay tuned later this fall for the 2023 update, which will feature even more insights about the future of sustainability leadership. If you have any questions or suggestions for topics you'd like to learn more about. Email us at [email protected]. Thanks to Joseph, Eileen, and Gabriel for joining me in providing their insights.

References

Urso, F. 2022. “Number of Company Sustainability Officers Triples in 2021 – Study”. May 4, 2022. Reuters. https://www.reuters.com/business/sustainable-business/number-company-sustainability-officers-triples-2021-study-2022-05-04
CNBC. 2018. “Millennial Workers Prefer Purpose-Driven Companies, Says Deloitte’s CEO Cathy Engelbert | CNBC.” April 4, 2018. YouTube: https://www.youtube.com/watch?v=k38DQzqI2Ac
Urso, F. 2022. “Number of Company Sustainability Officers Triples in 2021 – Study”. May 4, 2022. Reuters. https://www.reuters.com/business/sustainable-business/number-company-sustainability-officers-triples-2021-study-2022-05-0

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