Executives need concrete sustainability goals
To make meaningful progress on sustainability goals, companies need to directly tie executive performance and compensation to achieving these goals. Only when sustainability targets carry similar weight to targets such as revenue or profit growth will we see executives making a concerted effort to prioritising these objectives.
Corporate social responsibility (CSR) initiatives have been largely self-regulatory, putting the onus on the company to hold itself responsible for its actions and ensuring that these actions have a positive impact on the environment, employees and communities. This will change with recent political and regulatory developments such as the European Union’s Non-Financial Reporting Directive and the parliamentary counter-proposal of the Responsible Business Initiative in Switzerland.
Although many companies have CSR initiatives as part of their corporate strategy and business operations, such initiatives must have tangible outcomes and impact, rather than mere ‘feel good’ declarations peppering annual reports and corporate websites. How can this be achieved? Integrating CSR into a company’s end-to-end business operations and strategy is a good initial step, but without clear indicators to measure and targets to report on there will not be accountable actions. Because what is not measured is not done.
To be most effective in the long-term, CSR activities need to be tangible and achievable. This is where the next acronym, ESG, comes into play. ESG stands for Environmental, Social and Governance and quantifies the societal, ethical and sustainable impact of a company. It includes things like measuring a company’s carbon footprint to ensuring diversity in the workplace and sets out clear frameworks and targets to measure and ensure accountability.
Even if a company has a clear CSR strategy and concrete targets, how can it ensure that executives prioritise such objectives when traditional targets such as revenue or profit growth are used to measure their performance? By including CSR targets to define successful performance and in turn the related benefits such as compensation, promotions and similar tangible ‘carrots’.
Incentivising intent and action
Deloitte Switzerland and the Zurich based Center for Corporate Reporting (CCR) ran a survey earlier this year of business executives in Austria, Germany and Switzerland. The survey found that although two-thirds (66%) of business executives answered that sustainability was part of the company’s business strategy, more than half (55%) of respondents confirmed that measuring ESG performance was not part of the remuneration scheme of executives and board members. Making progress in such a strategically important area is challenging when key decision makers only prioritise sustainability after achieving their non-ESG objectives.
Some executives may be intrinsically motivated. However, the simple reality is that a busy executive pressured to deliver results can only accomplish sustained and forward-thinking efforts to achieve CSR and ESG targets when there are clearly defined personal objectives with the accompanying extrinsic incentives to do so. Therefore, including sustainability targets in the assessment criteria for executive remuneration is an important element that needs to be more widely considered. Companies may need to adapt or enlarge their assessment criteria so that achieving ESG targets do not conflict or run counter to the financial targets the individual is also accountable for.
A Deloitte analysis of the publicly available compensation reports of 265 listed UK companies showed that only 84 of them disclosed how they define and measure the ESG related targets for executives. These targets spanned very general to very specific metrics. The challenge is how to define and measure targets in certain hard to quantify areas. A recently published paper from the World Economic Forum gives ideas and guidance based on a broad consensus from the major global accounting firms. The paper suggests 21 core metrics and 34 expanded metrics centred on the 4P’s: Principles of Governance, Planet, People and Prosperity.
The gold standard for green standards
According to the CCR study mentioned previously, only 18% of sustainability reports are externally audited in their entirety with 30% having certain sections audited. Moreover, only 55% of companies disclose concrete targets and progress against these targets. Treating sustainability reporting with the same rigor, quality and certification as financial reports will clearly help with credibility and ‘separate the wheat from the chaff’ when it comes to being serious about the impact a company wants to achieve. This not only holds the company accountable to achieve their CSR strategy, but also benefits the company’s actual and perceived trust and credibility. In the end, the company and all its stakeholders benefit from this.
A shorter version of this article was first published in German in the Handelszeitung on 10 December 2020.