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May 10, 2022

Is the rise of the chief sustainability officer helping or hindering the ESG space?

As demand for chief sustainability officers grows, companies must question what this role should entail and whether it has a real impact on ESG performance.

According to a new report by PwC, the number of chief sustainability officer positions is growing rapidly. Of the 1,640 globally listed companies surveyed by PwC, the study found that just under a third (29.8 per cent) of them had a formal CSO position.

This number is likely to increase, since 2021 saw a threefold increase in the number of CSO appointments globally compared to the previous year. More CSOs were appointed in 2021 (68 companies) compared to 2016-20 combined (65 companies).

In the UK, 37 per cent of companies surveyed have appointed a CSO at first or second management level, outpacing the European average of 35 per cent. However, internationally, France (at 57 per cent), the US (47 per cent) and India (44 per cent) lead the way, while Germany (35 per cent) is just behind the UK.

Companies from the consumer goods and products sector had the highest proportion of formal CSO roles (50 per cent), while those in the chemicals and oil and gas sectors also had a high percentage (at 45 per cent and 42 per cent, respectively). This indicates the current high level of ESG scrutiny that companies are under from investors, regulators, governments, the media and non-governmental organisations.

Carl Sizer, ESG leader at PwC UK, says: “Sustainability has long passed the point of being [something] ‘nice to have’ and its importance as a strategic priority for business is evident in the growing number of chief sustainability officers being appointed at the UK’s biggest companies.

“Having a CSO on the board sends a strong signal to investors, customers and employees that sustainability is a key consideration in both strategic and operational planning,” he adds.

Purpose of CSOs

The PwC report found that the requirements for sustainability-focused roles have also changed significantly in recent years. Previously they were at a lower level, with topics such as corporate social responsibility being addressed primarily through communications. In contrast, today’s CSOs have a much more complex job specification.

Since they manage a company’s sustainability strategy, modern CSOs require a deep understanding of all parts of the business and the interconnectedness of all ESG issues. Working with internal and external stakeholders, they must also be able to build strong alliances and networks with employees, customers, suppliers, investors and public authorities.

With the rise of corporate reporting on sustainability issues, CSOs also play a central role in helping chief financial officers understand, assess, quantify and report on ESG impacts and value, bringing them further into the organisation’s inner circle of decision-making and strategy. Nazmeera Moola, chief sustainability officer at asset manager Ninety One, says: “Given the growing focus and increasing complexity around sustainability-related issues, it is very useful for a company to have a dedicated senior executive who is responsible for overseeing all sustainability-related issues in the business.”

Nicola Stopps, founder of global sustainability consultancy Simply Sustainable, says: “A CSO will be looking across the value chain to transform how every facet of an organisation works, whether it be employees, supply chain, carbon emissions, or evaluating risk to creating clear transparent frameworks that publicly disclose data on what is being transformed.”

Effect on ESG performance

The report found that the introduction of a CSO is correlated to a company’s ESG scores. It found that globally, 98 per cent of the companies rated with top grades (A+ to A-) in the Refinitiv sustainability ranking had their own CSO or some version of a CSO. By contrast, 52 per cent of ESG laggards (grade D+ to D-) had no CSO at all.

GIB Asset Management head of equities Neil Brown says: “We have seen many examples of how CSOs, particularly in higher environmental/social impact companies (such as large miners, oil companies and banks), can drive a considerable amount of change, both to the ESG and the long-term financial performance of a company.”

However, Stopps says: “A successful CSO will be armed with real and meaningful data to shape the narrative and create change to a business. Ratings are a foundation but should not be used to determine the success of what an ESG strategy is achieving.” She adds that it is unclear – as it is too early to gauge – the true impact of having a CSO, specifically on a company’s ESG performance.

Moola also says that simply recruiting a CSO has a limited impact on any company’s ESG performance. “The appointment of a CSO is only valuable when a company is deeply committed to improving its ESG performance,” she says.

Without broad-based support – especially from the CEO – the CSO position lacks power. But with support, the CSO can “provide leadership on key sustainability-related issues and initiatives internally, coordinate sustainability activities across the business and interface with customers, regulators and industry bodies on sustainability issues”, she adds.

Asset manager perspective

Moola says in the asset management industry, CSOs’ responsibilities include the integration of ESG into the investment processes; the development of new sustainability strategies; the oversight of the company’s own transition plan; and external advocacy on key sustainability related points.

“To be able to achieve this, a CSO is likely to be more effective if they have previously led an operating division of a company. This provides them with deep knowledge on how the business operates and the internal networks to facilitate change,” she says.

Kunal Desai, portfolio manager for global emerging market equities at GIB Asset Management, says: “From an emerging markets perspective, well aligned CSOs who are responsible for and take ownership of formulating a long-term sustainability strategy can help deliver progress on improving sustainability and ESG metrics, which is an important and growing source of returns.”

His experience working with companies in Turkey, China, India and Brazil points to the power of an improved framework for material ESG decision-making when a CSO is in place. “Ultimately this can be rewarding for both companies and their investors by driving lower a company’s cost of capital as long-term material ESG improvements manifest,” Desai says.

More than marketing

With the accelerating growth in CSO positions, should the industry be concerned that this could be just more marketing and greenwashing from companies?

Stopps says: “From my experience, most companies are dedicated, thorough and want to enable sustainable business transformation. They will use a highly skilled CSO to enable this change. Smart businesses have realised that failing to act will damage their long-term viability and will be putting mitigation strategies in place.”

Brown agrees, saying: “We believe the role can be just greenwashing if the primary intent is to improve an external ESG score or spin an ESG story to investors. In our experience, we have seen less of this ‘greenwashing’ and more of the CSOs playing a crucial role in improving a company’s ESG performance.”

Stopps adds that in the past, sustainability professionals were expected to have a finite career span: the idea was that responsible business practices would become so embedded that the profession would become obsolete. “Unfortunately, this hasn’t happened and the need for a board level professional in this space is more important than ever,” she says.

She hopes CSO positions will now hold equal weight to that of finance or marketing directors, which are given major prominence, and that anyone in the CSO role is utilised as a valuable member of the board and not introduced as a box-ticking exercise.

Finally, she says, though the growth in CSOs needs to continue, it is equally important that companies also have highly skilled teams to support the delivery of an embedded sustainability strategy.

A service from the Financial Times