Why ESG is a game of risk and reward for a COO

The job of a suc­cess­ful COO is a con­stant bal­anc­ing act, jug­gling the demands of day-to-day oper­a­tional effi­cien­cy goals with­in the strate­gic arc of longer-term objec­tives. The remit is as exten­sive as the respon­si­bil­i­ty is sig­nif­i­cant – with author­i­ty, comes account­abil­i­ty.

Faced with grow­ing finan­cial and legal oblig­a­tions in respect of envi­ron­men­tal, social and gov­er­nance invest­ment (ESG) cri­te­ria, plus asso­ci­at­ed reg­u­la­to­ry require­ments, com­pa­nies might nat­u­ral­ly turn to their mul­ti­tal­ent­ed COO for help. But going for­ward, is the COO the right per­son for the job?

At first glance, the fact that ESG impacts near­ly every depart­ment makes allo­ca­tion hard. If not exact­ly new, ESG remains a rel­a­tive­ly imma­ture func­tion in many organ­i­sa­tions. As a result, the own­er­ship pic­ture is still evolv­ing, in terms of com­pa­ny struc­ture and job titles.

As the mists begin to clear, though, one mem­ber of the C‑suite is often left in the frame, says Dr Andrew Coburn, founder and CEO of cli­mate-ana­lyt­ics com­pa­ny Risilience.

“ESG strat­e­gy per­me­ates the organ­i­sa­tion and almost always requires some lev­el of busi­ness trans­for­ma­tion. What we are increas­ing­ly see­ing, how­ev­er, is respon­si­bil­i­ty falling to the COO. Their con­nec­tion to the sup­ply chain – where a large amount of ESG focus falls – as well as their com­pa­ny-wide influ­ence, can make them an obvi­ous choice.”

An abil­i­ty to dri­ve organ­i­sa­tion­al trans­for­ma­tion is pret­ty much a pre­req­ui­site for the role of COO and this, com­bined with their broad brief, makes them seem a per­fect fit.

But the moti­va­tion behind their seem­ing­ly nat­ur­al selec­tion is not always as pure­ly mer­i­to­crat­ic as it might appear, argues Claude Brown, part­ner at law firm Reed Smith.

“If they’ve sim­ply had ESG dumped on them because no oth­er board mem­ber put their hand up, they’re clear­ly not the right per­son. If the COO has been tasked as part of a well-con­sid­ered ESG strat­e­gy and imple­men­ta­tion plan, then they’re absolute­ly right for the job. All the same, any COO entrust­ed with ESG respon­si­bil­i­ty will need some form of train­ing.”

Legislation is driving culture-change

Even if the COOs them­selves might pos­sess the attrib­ut­es and over­sight nec­es­sary to con­strain the scope-creep of ESG, the sheer size of the man­age­ment task can still prove a chal­lenge to resources, par­tic­u­lar­ly as the cri­te­ria con­tin­ue to mush­room and morph.

This can be espe­cial­ly true for younger or small­er organ­i­sa­tions that not only have less in-house capa­bil­i­ty, but also tighter bud­gets for buy­ing in exper­tise and skills. There is no quick fix, explains Michael Grant, COO at Metrikus, a smart-build­ing effi­cien­cy plat­form.

“Col­lect­ing every­thing need­ed for ESG report­ing is very time-con­sum­ing, so larg­er com­pa­nies either out­source to con­sul­tan­cies or have an inter­nal sus­tain­abil­i­ty depart­ment. Some pol­i­cy might be manda­to­ry, but much of it is more of a ‘nice-to-have’ time-zap­per – and most firms just don’t have the capac­i­ty for this.”

Putting in place a steer­ing group, such as a sus­tain­abil­i­ty com­mit­tee, is one way that small­er organ­i­sa­tions can make the most of the per­son­nel avail­able to them and share the time cost of nav­i­gat­ing a sea of ESG options stretch­ing out far beyond com­pli­ance.

As the mar­ket matures, though, more of the so-called option­al extras will fall with­in the purview of statu­to­ry guide­lines. Leg­is­la­tion is both here, and hap­pen­ing.

With effect from April this year, the UK became the first G20 coun­try to enshrine in law manda­to­ry require­ments for its largest com­pa­nies and finan­cial insti­tu­tions to report on cli­mate-relat­ed risks and oppor­tu­ni­ties, in line with rec­om­men­da­tions from the Task Force on Cli­mate-Relat­ed Finan­cial Dis­clo­sures (TCFD).

In the built envi­ron­ment sec­tor, the net of statu­to­ry dis­clo­sure is already tight­en­ing around cli­mate, car­bon and ener­gy, with the rip­ple effect felt at every lev­el. Glob­al­ly, nation­al­ly, region­al­ly and local­ly, reg­u­la­to­ry dri­vers are increas­ing­ly dic­tat­ing com­pa­ny oblig­a­tions.

In the UK, the gov­ern­ment intro­duced the Stream­lined Ener­gy and Car­bon report­ing (SECR) require­ments in 2019. Over in New York, Local Law 97 (LL97) will man­date annu­al Green­house Gas Emis­sion report­ing by 2025.

Every­where, the pres­sure is on. And the per­son under pres­sure is, typ­i­cal­ly, the COO.

Chal­lenge also brings oppor­tu­ni­ty, how­ev­er. So, for the COO, the size of the ESG prob­lem is also poten­tial­ly matched by the size of the prize, both per­son­al and pro­fes­sion­al.

Pub­lished late last year, an annu­al report on ESG in exec­u­tive pay revealed almost 60% of FTSE 100 com­pa­nies now fac­tor ESG into their C‑suite incen­tive plans. This fig­ure rose sig­nif­i­cant­ly year on year, with less than half so inclined in 2020 (45%).

An upward trend is no sur­prise giv­en that the one-year growth rate of ESG fund launch­es in the US (80%) more than dou­bled that of non-ESG equiv­a­lents (34%). There is mon­ey to be made (and lost) in ESG, not just rep­u­ta­tion.

Both investors and com­pa­nies know a strong ESG propo­si­tion cre­ates val­ue. So, as the remit of COOs effec­tive­ly cov­ers the entire val­ue chain, their need for 360-degree vis­i­bil­i­ty and intel­li­gence is para­mount, explains Dan Scho­ley, chief oper­at­ing offi­cer at Mon­ey­hub. “ESG must be mea­sured to be under­stood. Future COOs will have to focus close­ly on assess­ing their com­pa­ny ESG per­for­mance, using data col­lect­ed from with­in the busi­ness, but also from clients or cus­tomers. When we open up data, we open up pos­si­bil­i­ties,” he says.

Built upon shared data, this dri­ve for open­ness and trans­paren­cy will not only sup­port oper­a­tional best prac­tice but also antic­i­pate the onset of pro­fes­sion­al rules and stan­dards.

The impend­ing intro­duc­tion by the Finan­cial Con­duct Author­i­ty of a Con­sumer Duty is a case in point. As explic­it­ly stat­ed, its aim is to shift the mind­set of firms, not just safe­guard the rights of cus­tomers – there is a delib­er­ate push-and-pull dynam­ic in play here.

From build­ing to bank­ing, and proptech to fin­tech, the writ­ing is def­i­nite­ly on the wall.

Greenwashing backlash

That said, fears of green­wash are mak­ing ESG head­lines, of the wrong kind. These may prove mere teething trou­bles in a grow­ing-up phase for ESG. Or, they could her­ald a full-blown mar­ket back­lash. Either way, ESG is fast becom­ing a game of risk and reward.

New analy­sis even goes so far as to sug­gest ESG faces a ‘make or break’ moment, as the indus­try comes of age. Its cred­i­bil­i­ty is clear­ly in ques­tion, as shock­ing first-quar­ter sur­vey results reveal few­er than 1 in 5 peo­ple (19%) believe busi­ness is ful­ly com­mit­ted to ESG.

Share­hold­ers and stake­hold­ers are begin­ning to bite back, legal­ly, warns Brown.

“There’s already a wave of ESG-relat­ed lit­i­ga­tion sweep­ing the busi­ness world, and in Europe we’re even see­ing chal­lenges brought on human rights grounds. Sig­nif­i­cant rep­u­ta­tion­al and finan­cial dam­age could lie in store for those who fail to meet their ESG promis­es. If a COO has been giv­en over­sight, they must ensure actions match words.”

Ulti­mate­ly, then, the burn­ing ques­tion any COO should per­haps be ask­ing them­selves on ESG is not whether they are right for the job, but whether the job is right for them?