Sustainability

Making Sustainability Count: How to embed sustainability in leaders’ objectives

 



Russell Reynolds Associates recently partnered with the United Nations Global Compact to study the characteristics and behaviors that differentiate sustainable business leaders from other top-tier executives, the findings of which were summarized in Leadership for the Decade of Action. The article below builds upon this research to focus on the question of how to embed sustainability goals into the objectives of senior leaders. Please refer to the original study for full details on methodology and findings.

Corporate commitment to sustainability is at an all-time high. Walmart has pledged to eliminate its greenhouse gas emissions by 2040.1 BP has begun its long-awaited pivot to renewable energy, predicting that the world has already surpassed “peak oil” demand.2 Microsoft aims to achieve zero waste in its direct operations, products and packaging by 2030.3 The leaders of these companies are not alone in their belief that the path forward must be decidedly more sustainable: according to research by Accenture and the United Nations Global Compact, nine in ten CEOs believe integration of sustainability will be important to the future success of their business.

Yet, despite these public commitments, significant hurdles remain in the pursuit of sustainable business. To effectively drive the transformation needed to integrate sustainability into business strategy and operations, companies must embed it in the leadership culture of their organizations – specifically, how they select, assess, reward and develop their senior leaders.

One of the key differences between companies who have authentically embedded sustainability into their strategy and those who are still only managing sustainability as an adjunct to strategy (or even worse, companies known for “green-washing”) is that sustainability manifests itself in the objectives and incentives of their most senior leaders.

Companies at the forefront of this change have driven sustainability into the core of their strategy and linked it to their organizational mission and purpose. While there is no single best method by which to create the necessary focus on – and accountability for – sustainability, companies should address three aspects of objective-setting to ensure that sustainability ambitions are effectively cascaded through the organization:

  • How priorities are set
  • How work gets done
  • How leaders are rewarded

How priorities are set

In our research studying more than 50 transformative sustainable business leaders, one of the lessons we heard most often was that, in order to be successful, enterprise-wide sustainability objectives must be clearly linked to the company’s core strategy. Sustainability must not be conceived as something that sits outside of or adjacent to the strategy, but rather a vital enabler of the strategy itself. To determine the materiality of a given sustainability objective, each should be evaluated according to both its importance to stakeholders and the potential business impact.

Some organizations choose to describe these objectives in terms of the United Nations’ Sustainable Development Goals (SDGs), while others contextualize them in terms of their primary stakeholder groups, most often employees, customers, shareholders, suppliers or even society at large. Regardless of the framework used to articulate the objectives, the process by which they are established should be inclusive of a wide variety of stakeholder perspectives to ensure that the prioritized objectives are truly material to the business, and that the company is considering all possible sustainability risks and growth opportunities. The most successful companies are increasingly choosing to focus on a few key areas rather than trying to set objectives for all issues or SDGs that a company may impact. This enables better strategic allocation of resources and, ultimately, greater impact.

In all instances, enterprise-wide objectives should be time bound, with a combination of longer-term goals and the key milestones that articulate the short- and medium-term steps required to achieve that goal. Companies may or may not choose to disclose interim goals externally, but public commitment to the overall objectives is critical for ensuring transparency and accountability.

Once the enterprise-wide objectives and timescales have been established, progress against those objectives should be regularly reviewed at the executive committee and board level, with objective input from external entities such as rating agencies and non-governmental organizations (NGOs). Critically, the CEO and other leaders must regularly speak to these objectives and the progress against them when they engage with the broader organization, making sure to communicate the business benefit of achieving objectives. This provides a single, clear framework to which others leaders can connect, and reinforces the importance of these objectives.

When Campbell’s Soup Company set out to develop their sustainability strategy, they solicited stakeholder input to understand what they saw as the most important parts of the journey from “farm to fork,” then mapped those themes to the SDGs in order to identify the areas where they could make the biggest impact while also best addressing stakeholder priorities.4

As part of Philips’ commitment to take back and repurpose its customers’ large medical systems equipment, the company added a dedicated circular economy indicator to its executive committee dashboard. According to CEO Frans van Houten, the public and prominent nature of this dashboard helped to convince internal skeptics that the company’s commitment was real – once senior leaders realized that “appearing in the red” meant you could expect a call from the CEO, the rate of adoption quickly increased.5

How work gets done

To yield both financial and social impact, enterprise-wide sustainability objectives must then be translated into individual-level objectives that dictate how work gets done. In many organizations, the chief sustainability officer or equivalent works with their C-suite counterparts to first identify the parts of the business that will play a role in implementing the objectives, and then re-engineer business processes to achieve them.

It is at this stage that individual business units and their leaders begin to see how their day-to-day work contributes to (or undermines) the company’s overall sustainability objectives. The identification of specific sustainability key performance indicators (KPIs) helps to create focus for leaders and mitigates the risk of company-level objectives feeling too big picture or long-term. Ensuring that individual leaders can “touch and feel” them in their work and daily decision-making is critical.

Selecting the appropriate metric and scope of measurement is another essential component for translating company-level ambition to individual-level action. Companies must take care to distinguish between output (for example, the number of smallholder farmers who have received capacity-building technical assistance) and outcome (the percentage increase in those farmers’ annual incomes or yield of sustainably grown agricultural products). Confusing these two metrics can inadvertently incentivize focus on the wrong type of change, resulting in decisions made to inflate output numbers as opposed to real outcomes.

3M holds its individual business units accountable for innovating on better products for the consumer and the environment by introducing sustainability KPIs into the new product development and launch process. Beginning in 2019, 100 percent of the company’s new products (approximately 1,000 per year) are required to have a Sustainability Value Commitment that demonstrates how the product drives impact for the greater good. The company measures the impact of this commitment and publicly reports on it annually to ensure transparency.6

How leaders are rewarded

To complete the accountability cycle and ensure that the entire organization is incentivized to contribute to achieving the overall sustainability objectives, sustainability KPIs must flow through to performance measurement frameworks and the process by which leaders are evaluated and rewarded. For some companies this means tying a proportion of compensation to individual or business unit KPIs, while for others it is encapsulated in the measurement of “how” a leader achieved what they did.

The particulars of each company’s overall and individual-level sustainability objectives will determine the incentive scheme that will be most effective. Factors to consider include the urgency of the change required, the timescale of the objectives, and the level of control that the individual leader has on ultimate outcomes. For instance, sustainability objectives set in response to market demand for urgent change may necessitate linkage to annual or even quarterly variable compensation, whereas objectives that require substantive R&D or re-engineering of business processes may be better served by three-, five- or even seven-year horizons that are tied to long-term stock ownership.

It is critical that individual leaders understand that their success, and the rewards they reap, are influenced by their contributions to sustainability goals. It is this final component that provides the carrot (and, in some instances, stick) that ensures that leaders focus on the right activities and model the right set of behaviors.

As part of its sweeping sustainability program, Sharing Beauty with All, L’Oreal now links all brand and country managers’ bonuses to sustainability targets, including the contribution the brand is making to the company’s environmental or social purpose, and how well the company’s growth has been shared with employees and local communities.7

Specialty materials manufacturer DSM established an ESG-linked compensation policy for its managing board in 2010 and expanded it beyond the C-suite in 2013, tying ESG goals to the bonuses of operational and front-line managers. Since introducing the new policy DSM has consistently met and often exceeded its targets, prompting the company to increase the scope and breadth of the policy; as of 2019, 50 percent of short- and long-term compensation are tied to explicit targets related to energy reduction and employee engagement.8

Ambitious and vital goals

In order for companies to achieve the ambitious – yet vital – goals they have set for themselves in pursuit of a more equitable and sustainable economic system, big commitments must be translated into small actions. It is only by cascading the enterprise-level ambition to individual-level objectives and tying progress against those objectives to performance measurement frameworks that companies will begin to make a significant impact for the stakeholders they seek to serve. The best organizations are taking concerted steps to embed sustainability into the frameworks and processes that drive how leaders are selected, promoted, rewarded and developed. This provides a powerful signal from the top that the leadership team will back its commitment to sustainability with more than just words, and instead take the necessary steps to achieve real impact – for both the company itself and society at large.

AUTHORS

  • TOM HANDCOCK is the global head of Knowledge Management at Russell Reynolds Associates. He is based in London.
  • EMILY MENEER leads Russell Reynolds Associates’ Sustainability practice knowledge team. She is based in Portland.
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Making Sustainability Count: How to embed sustainability in leaders’ objectives