Need to become sustainable a lot faster and not just talk? Start by turning your ESG & CSR into Profit centres.

Just prior to COP26, my associate @Cedric Bachellerie and I published this op-ed in French in La Voix des Marques ("the voice of brands"), the magazine of ILEC (the syndicate for 80+ top FMCG / PCG global companies in France).  Having now heard what is being proposed by large companies in the COP26, it is clear this article, showcasing Sustainable Performance Management is now more relevant than ever, as CEOs and CSOs are obviously very much still struggling to find a methodology beyond the good old cost-driven CSR initiatives, which is nowhere near enough to transform large companies and their management into viable and sustainable ones.

Profit and CSR/ESG, a marriage of convenience

Beyond commitments to people and planet, challenges remain for business to truly deliver sustainable transformation: namely to activate new management methodologies to create incremental value and achieve a sustainable performance. For that to happen, data science is crucial. 

By Guillaume Orhant and Cedric Bachellerie, founders of Sustainamics*

Sustainability, ESG, CSR…. Everyone talks about it. Everyone wants to do some of it. But no one knows how to make it work for both the company & shareholders on one side, and stakeholders, generally. Hence, we hear a lot of talk and PR/CSR, but don’t see a lot of Walk. Even the 95 years old Queen Elizabeth noticed. The pressure is piling on. 

First because ALL our stakeholders (including shareholders and finance) are expecting large corporations around the corner on this white-hot topic, as they are keen to understand where to invest safely in the medium term. And second, because we’re not so sure how to go about it in a way that is compatible with the already vastly stretched financial goals we need to meet quarterly, in a structurally volatile economic environment. Indeed, we are currently unable to provide the markets (and stakeholders) with the degree of certainty (certainly of control), they crave. And their needs (a direct result of the climate crisis) threaten our very own business existence. The cliff has suddenly got very uncomfortably close to home (cf. despite the boom in data created in the past few years, the vast majority of CEOs still don't feel they know enough about the risks to which their businesses are exposed - and if they don't know, who will?)

The grave concern is that, confronted with this financial, environmental, and social crisis, people would have lost trust in the institution actually most capable of addressing it: Big Business (cf. Multinationals account for one third of the world GDP).

Hope is the engine of change, and if it’s lost to cynicism, only defeat can ensue.

Unfortunately, the current reality seems to justify our concern…. Never has Big Business made so many announcements in favour of planet and society. And yet, the trust deficit continues to widen. Throughout the world, business leaders are rated by the public as being amongst the professions least worthy of trust [1]. The gap between Big and Small Business has reached tantalising levels: in a US survey, Gallup recorded a highest-ever 57-point gap in 2020 (+22 points in 20 years). Only 19% of the public remains trusting of Big Business.

Whenever bold commitments are announced, they are immediately welcomed by a wave of disbelief. If Klaus Schwab, president of the World Economic Forum, calls for a “Great Reset” of capitalism in favour of stakeholders, he is welcomed not as the enlightened reformist he is, but like a corrupt agent of a disturbing conspiracy. 

 All talk and not enough walk?

Of course, it’s not the usual fringe conspiracy theorists who worry us. 

Gallup’s findings show this is a much more widespread phenomenon. What if we truly failed to deliver against many or all stakeholders’ expectations? 

A recent scientific paper by Harvard professors Lucian Bebchuk and Roberto Tallarita [2] studies official documentation from 130 American companies that signed the new Business Roundtable (BRT) Statement of Purpose of a Corporation in August 2019 [3]. This statement redefines the purpose of a corporation to benefit multiple groups of stakeholders, well beyond shareholders exclusively.

Their conclusions are chilling: “Overall, our findings support the view that the BRT Statement was mostly for show and that BRT Companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders.”

Ultimately, their verdict is: we talk the talk, but we don’t walk the talk. Or certainly nowhere near enough.

For any responsible (and performing) leader, such a call out, added to the current negative perceptions we’ve described, is a wakeup call that carrying on with the current “side show” of ESG/CSR/public affairs handling, and a couple of changes in the supply chain simply does not work. The slope has become much too slippery. For everyone, including business itself. 

Having worked for decades in many multinationals ourselves (a few of which have signed the said BRT statement), our experience of business leaders is not at all one of people driven by duplicity or self-interest. Quite the opposite. What unifies us is rather an energy and a passion for success, recognition, and impact: we want to do well. Yet, if proving we did well is rather simple in the domain of financial performance – numbers don’t lie and they’re independently audited – in the domain of ESG or CSR commitments, we struggle to express our accountability and performance with the same standards of proof. This may come from the fact that avoiding the negative is far less motivating to us than spreading the positive, on one hand; and that the key performance indicators (KPIs) of ESG/CSR success are too often arguable and almost never correlated to the crux of the matter in business: money (an actual ENABLER of ESG/CSR).

As a result, the only way known to us to manage business sustainably is to run our CSR efforts in a parallel track, disconnected from the core of business (which stays focused on maximizing profit for the shareholders). These standalone CSR programmes are managed as cost centres to be funded by the profit created from the “real business”. They amount to a “cost of doing business” or table stakes that benefit a bit of goodwill with some stakeholders, but with no real accountability towards the business’ performance, or its own vital sustainable transformation.

Marks & Spencer’s annual report is a good example of this phenomenon: despite the promise of its name – Plan A Report – the company’s CSR strategy is featured as a standalone topic, subordinated to 5 Strategic Priorities 3.

There is another way

So, what can we do? If that’s a puzzling question to you, then you’re in good company. While 76% of CEOs place ESG/CSR as a top priority, 42% admit they struggle to tell a compelling story about it (KPMG global CEO Outlook 2021). This is not surprising: this is a very new discipline.

Another way to manage business can actually bridge the gap between our will to do good and perform, and our delivery, between our talk and our walk, and reassure stakeholders by delivering actual incremental growth and profit. Indeed, instead of running two parallel missions – profit and ESG/CSR – each with its own separate annual report, it is possible to adopt a management toolbox that allows:

1-   To tie profit and ESG/CSR in one strategy, within a self-nurturing mechanism of value creation (not a cost!). And therefore, to define ESG/CSR commitments no longer as a negative motivation (doing less bad) but as a positive motivation (doing well for both profit and the stakeholders, as a sustainable competitive advantage).

2-   To provide quantifiable and auditable evidence of ESG/CSR performance, indisputable by any stakeholder – including shareholders and investors. And therefore, to turn ESG/CSR commitments into evidence-based profit centres.

As early as 2014, a seminal paper (shockingly still little known in business circles) by professors from Oxford, Harvard, and LBS, studying 18 years of performance (1991-2010) among 180 US companies, revealed a significant link between best practices of sustainable management and superior financial performance (up to an annual increase of profit by 4.5% - see graph below). The 27 sustainable management practices studied at the time of the research match perfectly today’s criteria of ESG as well as the 4 forms of Capital proposed by the 2008 Stiglitz-Sen-Fitoussi commission (including 6 Nobel Prize of Economics winners), and later adopted by the OECD to measure sustainability: Social Capital, Human Capital, Natural Capital, and Financial Capital.

Sustainable Performance Management

The good news is that we now know how to activate this tremendous competitive advantage thanks to Sustainable Performance Management (SPM) and thanks to the breakthroughs in Data Science – the benevolent sibling of ‘Big Data’.

By adopting cutting-edge tools to measure human, social, natural, and financial capitals, shared between the stakeholders of its value network (namely all the relationships that produce value in an ecosystem), every company can:

1. Discover causal links (if any) between CSR initiatives and desired results (impact and profit), to benefit itself and its value network (practice that barely exists in our businesses today).

2. In turn, benchmark and quantitatively rank those initiatives according to purpose, impact, and profit, in order to prioritise.

3. Allowing to integrate them into the core management control system (in augmented management P&Ls and dashboards, for instance) to direct allocation of resources and future investments.

In short, to truly manage sustainable performance, beyond the current narrow CSR scope, disconnected from the core strategy of the company. 

We call this holistic practice “Sustainable Performance Management”. Because of its novel nature, it is still rarely applied in today’s business. But when it is, the win-win results are almost always significant, and bring hope in Big Business’ ability to regain the trust of its stakeholders, and to create long-lasting positive impact, together with further growth and profit. 

Why would anyone not want that? 

So, what are we waiting for, then? Aren’t we feeling the right sense of urgency yet? What will it take? 

To grasp both the opportunity and the ambition of our approach, let’s study the case of Unilever’s #1 global soap brand, Lifebuoy. This example only partially showcases sustainable performance management in action, but that’s already a telling story.

Since 2009 and Paul Polman’s “Unilever Sustainable Living Plan” the century-old soap brand Lifebuoy endeavoured to accelerate its growth by associating itself with global health challenges, in particular Goal 6 of the United Nations’ Sustainable Development Goals (SDGs): "Ensure availability and sustainable management of water and sanitation for all". In some partnership projects, funded by foundations, independent impact studies were mandated. When studies showed an initiative to be ineffective, this one got canceled [4]; when it undoubtedly proved an initiative’s effectiveness [5], that one got broadly deployed, eventually reaching many hundreds of thousands of families throughout the world and leading to Lifebuoy being one of the fastest growing brands of the Unilever portfolio between 2009 and 2019. Through an external stakeholder’s demands, Unilever discovered an excellent driver of growth and financial performance, each new handwashing creating a new usage occasion for Lifebuoy soaps. But more importantly, the win-win success of Lifebuoy has built credibility and momentum for Unilever’s corporate Purpose and its successive leaders.  

The Time for this “win-win” is NOW

Sustainamics’ proposition for Big Business is to go further and faster in discovering win-win levers, thanks to a broad range of sustainable performance management methodologies and tools, in particular using Data Science to mix the company’s existing data (e.g. financial data) with new data collected within its wider value network (stakeholders).

We shouldn’t wait to be taunted by independent studies by incredulous external partners. We shouldn’t wait to turn our ESG/CSR commitment into drivers of further growth. Let’s lead and build our strategic capabilities to manage ESG/CSR resources and investments effectively and sustainably. Moving from Responsibility (KPIs = deliverables) to Accountability (KPIs = proven drivers of impact and profit) is not just our collective duty, it is a huge business opportunity that we can’t afford to miss. 

Alan Jope, Paul Polman’s successor at the helm of Unilever declares: “We are on the front edge of a new model of business where authentic purposefulness leads to better financial outcomes, better profits [6]”

Mandated by our times’ urgencies and needs, the discovery of such a management innovation should drive us to accelerate our transition towards a sustainable business model and to step up our management toolbox.

So, let’s get Walking. Let’s LEAD. Let’s offer help and let’s prioritise (and if we don’t have time for our CEO’s priority #1 or #2, then something is seriously dysfunctional). And above all, let’s truly transform. Today, this is the new expectation of our role, whether our scope is national, regional, or global, where no obvious solution exists yet, and everyone is searching. Our actions can truly make a difference to today’s challenges. Let’s carry our weight like we’ve always done when things matter. If we don’t, our stakeholders will not forgive us. And the business even less so.

Don’t believe us? Perhaps you’ll believe Larry Fink, not exactly a philanthropist: "Ignore stakeholders at your peril"

* Guillaume Orhant and Cedric Bachellerie accumulate 50+ years of expertise in marketing, innovation strategy and transformation, within some of the world’s largest FMCG/CPG companies and beyond. In the last 5 years, they have become experts in implementing Sustainable Performance Management in corporations.

First published on 22/09/2021 in La Voix Des Marques, ILEC's magazine.

Sources/ Notes:

[1]. Cf. Ipsos Global Advisor, 2018.

[2]. « Will Corporations Deliver Value to All Stakeholders? », August 5th, 2021.

[3]. Cf. Press release dated August 19th, 2019: Business Roundtable Redefines the Purpose of a Corporation to Promote « An Economy That Serves All Americans », on the website www.businessroundtable.org.

[4]. Cf. Julie A. Nicholson et al, « An investigation of the effects of a hand washing intervention on health outcomes and school absence using a randomised trial in Indian urban communities », Tropical Medicine and International Health, March 2014.

[5]. Cf. Henrietta E. Lewis et al, « Effect of a School-Based Hygiene Behavior Change Campaign on Handwashing with Soap in Bihar, India: Cluster-Randomized Trial », American Journal of tropical Medicine and Hygiene, October 2018.

[6]. Source : Myriam Sidibe, Brands on a Mission, 2020.