Pressure to Evolve: What Sustainability Requires of the Consumer Industry

Sustainability is solidifying its position as a dominant and permanent feature across the business landscape. A reinvigorated focus on sustainability is forcing business leaders to redefine what commercial success looks like. As a result, companies across industries are facing pressure to engage meaningfully with sustainability from all sides, including setting new ESG standards for suppliers, providing investors better quality reporting on sustainability metrics, and retaining customers who are willing to pay more for sustainable brands¹.

Consumer companies face acute challenges in the areas of ESG. There is a lack of commitment from leadership and strategic prioritization of these areas. Supply chains are complex, the demand for corporate transparency is expected, and there are limited resources to build a path to leadership on sustainability. Russell Reynolds Associates’ analysis of 53 companies finds that while many have appointed a chief sustainability officer or the equivalent, few of these executives have adequate seniority, deep subject matter expertise, or resources to build an enterprise wide sustainability function.

Not surprisingly, there is a growing cottage industry of service providers that assist companies in complying with these demands. Strategy consulting firms are acquiring companies to help their clients create smarter sustainability plans, new agencies measure sustainability factors for organizations, and accounting firms have established audit practices to verify organizations’ sustainability metrics.

These new businesses and systems are acting as checks and balances.

Inside, we discuss the model for a high performing sustainability function, define a framework for identifying sustainable leaders, and present four typical archetypes of the sustainability officer.

TERMINOLOGY

ESG refers to a broad range of environmental, social, and governance criteria on which companies are measured. It is of increasing interest to investors and includes metrics that are frequently weighed in investment decisions.

Sustainability is a more holistic term, often a catch-all for corporate efforts to “do better.” It is essentially a business approach to creating long-term value by considering changing societal values, concerns about climate change and finite natural resources, and economic and political instability.

The picture of a successful company is shifting. While the United Nations’ Sustainable Development Goals (SDGs) currently provide a robust framework for addressing many of these inequities, advancement has been slow without the necessary leadership or accountability in place. As transparency and accountability become more of the norm, sustainable business leadership, sustainable practices and processes, and ESG leadership are now demanded by stakeholders across industries.

The UN’s Sustainable Development Goals are “the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including poverty, inequality, climate change, environmental degradation, peace and justice.”²

Consumer-facing companies must act quickly on sustainability strategies, given their close relationships with customers, the influence of their other stakeholders, and their relationships with suppliers. In this increasingly transparent world, customers want explicit reassurance that what they are buying is good for the planet and that the businesses they patronize are operating at the highest possible standards.3 These digitally empowered users are candidly discussing both their confidences and qualms across brands and products, often generating unwanted and unfavorable publicity for companies that fail to deliver.4

In addition to new demands from customers, consumer companies are also feeling pressure from investors and major stakeholders who increasingly see a robust sustainability strategy as an investment qualification. BlackRock CEO Larry Fink, who has repeatedly sounded the importance of ESG in his annual letter to CEOs, recently predicted that capital will be increasingly allocated to those companies with the most sustainable business models, as “sustainability is now becoming the new standard for investing.” This letter reinforces his and others’ message that CEOs and board members must make ESG a high- priority agenda item. This surge of activist investor and consumer involvement has sparked a revolution across the industry, changing business standards and forcing companies to act fast and take a stand on social issues. With this revolution comes the need for new leadership skills. In partnership with the UNGC, Russell Reynolds Associates conducted a series of in-depth interviews and analysis on a group of 55 sustainability pioneers to better understand how organizations can make sustainability core to the DNA of their leadership teams, as well as their strategic goals.

A rhetoric-reality gap

While some consumer companies are embracing sustainability and taking steps to reinvent their business operations, others are falling behind. Many CEOs say sustainability is important, but far fewer are actually taking sufficient action.

Lack of Progress Toward SustainableDevelopment Goals (SDGs)

• 700 million people are in extreme poverty
• 257 more years to close the economic gender gap at the current pace
• On track for 3.5°C temperature rises this century per current commitments
• 8 million metric tons of plastics enter our oceans every year

CEO Rhetoric around Sustainable Initiatives

• 92% of CEOs believe integration of sustainability is critical to business success
• 48% of CEOs are actually integrating sustainability in their operations
• 21% of CEOs believe business is currently playing a critical role in achieving the SDGs

_{Source: The Decade to Deliver: A Call to Business Action, The United Nations Global Compact – Accenture Strategy CEO Study on Sustainability, 2019; Leadership for the Decade of Action, UNGC & Russell Reynolds Associates, 2020.}

To effectively make progress toward the SDGs, businesses need to focus on multiple components of sustainability simultaneously, looking for ways to positively impact community, employees, environment, and governance. Successful businesses will meet the needs of as many people as possible, utilize minimal resources, and maximize stakeholder engagement.5

Sustainable business metrics should include:

• Community
  Treatment of supply chain partners
  Human rights record
  Social impact of company's products and services
• Employees
  Diversity
  Labor relations and labor rights
  Compensation and benefits
  Employee training, healthy and safety
• Environment
  Use of natural resources
  Corporate impact on Earth's ecosystems
• Governance
  Board independence
  Diversity
  Executive compensation
  Culture of ethical leadership and compliance
  _{Source: CSR Hub Dataset Definitions}
  

As companies seek to transform their operations to address sustainability goals, a logical next step would be to appoint internal leaders such as chief sustainability officers to oversee these initiatives. However, efforts across organizations are not consistent, for some their focus on sustainability equates to haphazardly assigning a title to an internal leader or putting ad-hoc committees together, for others it is assigning budgets, creating a taskforce to tackle the issue and hiring external expertise. In order to accomplish the scale of change required, all senior leaders across the organization need to bring a sustainability lens to their decision making, not just those with a dedicated remit. As part of RRA’s collaboration with the UNGC, we reviewed job specifications for 4000 roles across industries and geographies and found that only 15 percent had requirements related to sustainability. Just 4 percent had role specifications that specifically asked for sustainability experience.6 This job specification analysis underscores the fact that sustainability is not a priority in most executive hiring, highlighting the inherent gap between rhetoric and reality.

Sustainability is not embedded in leadership culture or expectations

• 15% expectations of role specifications refer to sustainability
• 4% of role specifications demand sustainability experience or mindsets

_{Source: Leadership for the Decade of Action, UNGC & Russell Reynolds Associates, 2020}

Chief sustainability officers at consumer companies

To gain a clearer perspective of sustainability leadership in the consumer industry, we analyzed leadership teams at 53 publicly-traded consumer companies ranging from multinational consumer products organizations to consumer digital, hospitality, and retail companies. We found that 85 percent of the companies had a sustainability leader, which is positive; that said, these leaders rarely reported into the CEO. Instead, sustainability leaders often wear multiple hats and stretch across functions. From a seniority perspective, the head of sustainability is typically a mid-level role for consumer companies, which is integrated within a function like marketing, corporate affairs, or supply chain. Integration with strategy is often minimal, as the role does not have direct connections to enterprise leadership. Current chief sustainability officers come from strategy, marketing, and public relations/ communications backgrounds and often report into chief marketing officers, chief communications officers, or general counsels.

With 69 percent of consumer sustainability leaders in the position for less than a year and 62 percent internal appointments, consumer-centric organizations are obviously in the nascent stages of building sustainability functions. This data suggests that many are reacting to issues as they emerge and making appointments to satisfy PR and brand concerns but may not be proactively building best-in-class functions.

Looking forward, in order for organizations to be considered best-in-class, sustainability needs to be embedded in strategy and used to evaluate new opportunities, as well as existing operations. By elevating the role and having dedicated sustainability leaders who are senior members of the firm, ideally sitting on the executive committee, organizations are demonstrating the authenticity of their commitment through action.

A new kind of leader

Sustainability leaders can be classified according to the degree to which their role focuses on internal operations vs. external stakeholder engagement.

The role’s scope is highly dependent on where the organization is in its sustainability lifecycle and where it intends to go. Companies focused on managing reputational risk may choose to have a more externally focused leader, while companies interested in improving their environmental footprint may choose to have a more internally focused leader.

Internal/Operations FocusExternal/

• Focus on partnering with business partnership and driving process improvement (e.g. supply chain)
• Common in engineering organizations and organizations focused on improving their environmental footprint
  

External/Stakeholder Focus

• Focus on external partnerships and customer-facing sustainability initiatives
• Common in organizations that are focused on managing reputational risk

Though no two chief sustainability officers are alike, several archetypes have emerged that reflect the varying nature of the role and its objectives: the Strategic Integrator, the Product Innovator, the Operations Guru and the Storyteller.

In order for consumer leaders to move their business to the next phase of growth and make progress on the UN SDGs, they must build internally and externally.

Internally: On an organizational level, sustainability leaders need to interface with a broad range of mission- critical functions and activities including strategy, product, brand, operations, and everything in between.

1. Strategy: Sets overall sustainability objectives with strategy in accordance with corporate purpose and mission
2. Operations: Applies sustainability lens to operational processes and decisions, including risk mitigation
3. Brand: Articulates connection between sustainability strategy and corporate purpose to build stakeholder trust
4. Product: Identifies opportunities where sustainability lens can yield new products, markets, or customer segments

Externally: Sustainability leaders need to address three major challenges.

1. Building renewed trust: Setting a standard with suppliers, customers, and stakeholders
2. Promoting the value of sustainable business: Opportunities for attracting capital investment
3. Navigating the rapid pace of change: Integrating sustainability into company culture

By engaging relevant stakeholder groups, identifying new opportunities, leveraging existing expertise, and shifting mindsets, consumer companies will be able to start making prominent steps towards a more sustainable future.

Typical archetypes of the chief sustainability officer

The Strategic Integrator
Description
Track record of strategy of P&L ownership, integrates priorities across product, operations and brand

Strengths

• Strategic visionary capable of managing short-term priorities while pursuing long-term vision
• Brings holistic understanding of how sustainability efforts across the organization are mutually reinforcing

Typical Talent Pools

• Strategy
• BU Leaders

The Product Innovator
Description
Experience growing sustainable product or service line in response to customer needs and sustainability priorities

Strengths

• Embeds sustainability lens into product and service innovation
• Disruptive innovator who challenges traditional approaches to eliminate tradeoff between profitability and sustainability

Typical Talent Pools

• Strategy
• BU Leaders
• R&D leaders
• Marketing or Product

The Operations Guru
Description
Track record of transforming operational practices in support of sustainability strategy

Strengths

• Systems thinker who thrives on solving complex problems
• Strong results orientation who will enable leaders across business to set and meet sustainability KPIs

Typical Talent Pools

• Supply chain
• Operations
• R&D leaders

The Storyteller
Description
Experience using data and emotion to tell a sustainability story that connects with stakeholders and builds brand loyalty

Strengths

• Deep understanding of customer/stakeholder lens on decision-making
• Able to connect tactical sustainability strategy to broader corporate purpose and brand

Typical Talent Pools

• Marketing and Communications
• Government/ Corporate Affairs

To deliver the financial and social value that sustainability efforts can yield, it is important that leaders across the organization bring a sustainability lens to their work – not just those with an explicit mandate such as a Chief Sustainability Officer. This begins with the adoption of a sustainable mindset: recognizing that business is not a commercial activity removed from its broader society and environment, but instead is inextricably intertwined with both. To succeed, consumer companies must hire, promote, and develop sustainable leadership across functions and roles. To make progress, leaders might consider tying executive compensation to sustainability goals or requiring leaders to articulate a distinct sustainability strategy in each function.

RRA Framework for Identifying Sustainable Leaders

Multi-Level Systems Thinking
Sustainable leaders incorporate the larger business, societal and environmental systems around them to inform decision-making

Long-Term Activation
Sustainable leaders set audacious sustainability goals and drive concerted action and investments in the pursuit of them

Stakeholder Inclusion
Sustainable leaders don’t manage stakeholders, they include them and actively seek to understand a wide range of perspectives

Disruptive Innovation
Sustainable leaders possess the courage to challenge traditional approaches and cut through bureaucracy to drive innovation

_{Source: Leadership for a Decade of Action, UNGC & Russell Reynolds Associates, 2020}

Sustainability is not a quick fix; rather, it is a systemic change. In order for businesses to reap maximum rewards, sustainability must be woven into the fabric of the organization and frame all of its operations going forward. Whether organizations are considered nascent, evolving, or best-in-class, the standard is always rising. By having the right leadership, organizations can put themselves in the best position to operate effectively, proactively, and of course, sustainably.

AUTHORS
Greg Hodge leads Russell Reynolds Associates’ Consumer sector Knowledge team. He is based in London.
Seema Threja Kathuria is a senior member of the Russell Reynolds Associates’ Consumer sector and leads Consumer’s ESG Practice. She is based in Chicago.
Katelyn Schoenholtz is a member of Russell Reynolds Associates’ Consumer sector Knowledge team. She is based in New York.

_{Leadership for the Decade of Action, UNGC & Russell Reynolds Associates, 2020.
Sustainable Development Goals, United Nations
Sustainability for Consumer Business Companies: A Story of Growth, Deloitte
Ibid, 4
Leadership for the Decade of Action, UNGC & Russell Reynolds Associates, 2020.
Ibid, 6}