Chapter 1
Headwinds hinder high hopes
External pressures are slowing many companies' sustainability progress, but those continuing to take action are capturing value.
COP26 in 2021 made incremental progress, but it represented a watershed for the private sector as increased engagement yielded a belated, but enormous, re-orientation of capital toward climate action. As Macquarie Asset Management CSO Kristina Kloberdanz explains, “after COP26 I couldn’t imagine a better place to be than in asset management, matching capital with the commitments made.”
Two years on, the mood among many company leaders is shifting as grapple with constrained budgets. The EY DNA of the CFO study showed that sustainability programs are rated the most important long-term investment priority for CFOs but are also the most likely initiative to be cut or paused to hit short-term earnings targets.
The current geopolitical turbulence, together with persistent inflation and considerable pressure on supply chains, are all potential factors leading to our finding that one in five companies have revised their climate commitments in the last 12 months.
Is there a reassessment of sustainability progress at an organization level going on?
Widening gap between pacesetters and observers
To find out, we examined how companies have progressed since the EY 2022 Sustainable Value Study. Compared to last year, there is a growing polarization of organizations, with the gap between “pacesetter” companies (those taking the most action on climate change) and “observers” (those who have taken the fewest actions) widening significantly. For example, 95% of pacesetter organizations continue to have public climate commitments, yet among observers this has dropped from 94% to 67%.
Reduction targets are also 25% higher among pacesetters than observers, and the impact could be lasting: just 7% of observers are increasing spending this year compared to 50% last year, whereas 76% of pacesetters plan to invest more capital to meet their climate commitments.
While observer companies are clearly not doing enough to achieve the ambition set by the Paris Agreement, even pacesetters show signs that their progress is plateauing, with significantly fewer organizations fitting the definition of pacesetters compared to 2022 (7% vs. 32%).
Keeping commitments and capturing value
Most organizations face an important challenge: they have made climate commitments (80%) and now must undertake the hard work to meet them.
Kloberdanz explains how she arrived at Macquarie as CSO with many expecting her to deliver the next big pledge. “I told people I was probably going to disappoint them, because the next big commitment wasn’t another commitment – it was delivering on what we said we were going to do.”
Pacesetters remain committed to their sustainability targets, and they are exemplifying the value to be realized from making progress on their commitments. Eight in 10 are capturing higher than expected financial value (vs. 45% of observers). They anticipate more of their initiatives will have positive financial impact, which brings support both internally (from the C-suite) and externally (from investors).
Chapter 2
Power to the C-suite people
Just as CFOs ensure corporate decisions consider financial implications, CSOs can ensure decisions consider sustainability implications.
CSOs (in their various guises) have played a major part in elevating sustainability in corporate agendas. EY analysis of corporate data from the Forbes Global 5002 indicates that organizations with a CSO are more committed to sustainability, have more ambitious emission reduction targets (54% vs. 44% of organizations without a CSO), and have reduced their emissions 3.6% over three years (vs. a 5% increase in companies without a CSO).
Far deeper reductions are needed and require transformative changes to organizations and their business models: a clearly defined vision, identification of risks and opportunities and robust governance structures. Operational models must be adapted, portfolios adjusted, and supply chains more actively engaged.
CSOs can’t do this alone — they need to empower the whole C-suite to effect business change, drive value and produce results.
Searching for satisfied CSOs
The CSO role may once have amounted to what Robert Eccles and Alison Taylor, in a recent Harvard Business Review article,3 refer to as “stealth PR executives.” Not anymore. “The CSO role is finally becoming strategic,” they wrote, as the focus moves from “feel-good corporate social responsibility to hard-nosed sustainable value creation.”
CSOs are being tasked with identifying the sustainability issues that have a substantial impact on an organization’s financial performance and risk profile, but even those in the most committed organizations are struggling with inadequate cross-functional collaboration and a slow pace of progress. These factors are helping drive worrying levels of CSO dissatisfaction — only 17% of CSOs and equivalents in our survey are “highly satisfied” in their roles, and 42% are not committed to staying with their current employer. This jeopardizes further progress and poses considerable risks to the future continuity and strategic planning of sustainability programs.
The CSO dilemma
In addition to the current economic and geopolitical climate impeding progress, CSOs often find themselves operating within organizations where some of their C-suite counterparts are (still) pressing for short-term actions and results. Only 54% of respondents have the authority to hold C-suite peers accountable for their performance on sustainability initiatives. This puts CSOs in a difficult position: they are held responsible for achieving corporate climate commitments, but their company’s business unit leaders are not accountable to them for achieving the necessary results on climate action.
As one of the executives we interviewed noted, for many CSOs, it is critical to “develop an ability to influence without strong organizational authority. You cannot assume that you will just set the direction that everyone follows. You need to be willing to negotiate, to broker, to listen.”
Transformational CSOs
The required skill set of the CSO role is beginning to change. “You need to have someone who has a very thorough business understanding,” says Dr. Lutz Hegemann, President, Global Health & Sustainability at Novartis, because “you don’t want a sustainability strategy and a business strategy – you want a sustainable business strategy.”
You don’t want a sustainability strategy and a business strategy – you want a sustainable business strategy.
Using statistical modeling, we identified a set of “transformational CSOs,” those empowered by the CEO to be transformation leaders, from our sample. Compared to other CSOs, these leaders have more resources at their disposal (such as a dedicated budget and team) and exert greater influence internally. In addition, transformational CSOs are more satisfied and less likely to be considering leaving their role in the next 12 months. They are the exception rather than the rule, however, with just one in five organizations employing one.
In our analysis, transformational CSOs are driving progress by:
- Turning their climate commitments into actions, having taken 1.4x more actions on average than organizations without transformational CSOs (27 actions vs. 19 actions, out of 32 assessed)
- Committing to climate impact reductions, with half set to spend more next year and 71% agreeing their organization would pursue a climate initiative even if it reduces near-term performance (vs. 50% without transformational CSOs)
- Driving higher emissions reductions, with an average GHG reduction of 21.2% relative to their baseline compared to 18.8% for the organizations without transformational CSOs)
- Delivering higher than expected value, across finance, environment, society, customers and employees
Transformational CSOs are experienced in leading change at scale, as companies look for sustainability leaders who have the operational background and clout to drive business strategy and implementation. As Pilar Cruz, Cargill Corporate Senior Vice President and Chief Sustainability Officer, argues, “the role of CSO has always been focused on engagement, but is undergoing a rapid transformation. Today, CSOs play a significant role in setting company strategy and actively engage with shareholders, investors, and customers. This pivotal change necessitates a deeper background in commercial, operations, finance, and business transformation.
Actions to take to facilitate CSOs as agents of change
The role of the CSO continues to evolve. Who is chosen to lead an organization’s sustainability agenda and how they are brought into the role influences their ability to have a meaningful impact.
- Select (or develop) a CSO with a deep understanding of the business model. Empower them so their imperatives are understood as being core to business value.
- Give CSOs a strategic seat at the table (i.e., reporting to the CEO and access to the board) and the ability to drive accountability for sustainability initiatives across the entire business.
- Strengthen internal collaboration by creating governance structures that drive cross-functional teaming collaboration, such as business-level sustainability councils chaired by the CSO.
- Empower the CSO to help set sustainability strategy and goals; build the capacity of the sustainability function to collaborate with the business on executing the strategy.
- Have the CSO take point to ensure that the organization understands and is prepared to meet emerging policy changes and new reporting obligations across the domains where the organization operates.
Chapter 3
Leveraging policy to drive progress
Leading companies use changing regulatory requirements to accelerate sustainability programs, improve transparency and drive performance.
Although government policies and regulations are sometimes thought of as inhibiting sustainability programs, they can also have significant positive impacts. Policies such as the US Inflation Reduction Act, which includes strong incentives, can spur action. In our study, 52% of organizations view the availability of government subsidies and incentives as an accelerator to their sustainability programs.
Global organizations operate in a multi-speed, highly complex and evolving regulatory environment. While it might be tempting for them to focus on the geographic domains with the slowest-moving regulatory changes, or to approach reporting as a tick-the-box exercise, companies embracing the spirit of reporting frameworks to drive underlying business changes are realizing meaningful value from the effort.
Regulatory reach
The EY Corporate Reporting and Institutional Investor Survey shows that 99% of investors use ESG disclosures as part of their decision-making but 76% feel that companies are highly selective in the type of information that they provide.
Companies in every sector have been subject to greenwashing accusations. Some have reported their GHG emissions and net-zero plans in detail and been subjected to intense scrutiny as a result.4 Such scrutiny has led to concerns about a rise in greenhushing, as companies shy away from making statements and reporting on targets for fear of reprisals.
Guardrails would help. New reporting rules are expected to increase transparency, consistency and comparability, helping to restore trust among investors and consumers alike.
- In the UK, there are impending requirements to develop a climate transition plan and disclose it under the Transition Plan Taskforce framework.
- In the US, the Securities and Exchange Commission has proposed new federal rules on climate-related disclosures, while the state of California has enacted three rules requiring large public and private companies operating there to make broad-based climate disclosures.
- In India, the largest listed companies are required to provide “reasonable assurance” on ESG metrics.
- The International Sustainability Standards Board, established by the International Accounting Standards Board (IASB) in 2021, has released its first two standards that could form a global baseline of sustainability disclosures to meet both investor and public policy needs.
The rules are not without critics. According to some investors, the SEC’s proposal will stifle innovation and limit ambition. Supporters of such regulations, however, speak of “level playing fields” and harmonized reporting.
As Jonathan Gill, Global Head of Sustainability Advocacy & Strategy at Unilever notes, “the shift to sustainable business is addressing risks and creating new opportunities; mandatory and standardized disclosures will increase comparability of company data, enhancing understanding of performance and potentially valuation.”
Multi-speed regulation favors brave businesses
The current complicated, multi-speed regulatory environment creates a lot of pressure on businesses. Yet only 22% of survey respondents think of regulations as barriers to their sustainability initiatives. Less than three in 10 feel regulatory requirements are detrimental to their ability to work on future-focused strategy. As reflected by companies adapting to the EU's Corporate Sustainability Reporting Directive (CSRD), reporting requirements – voluntary or mandatory – are not just about exposing compliance but driving companies to plan and act.
Regulation does not hinder action
22%Only one in five COSs see regulations as barriers to their sustainability initiatives
In fact, our interviews with CSOs show that some leading organizations are using regulations to gain competitive advantage. Reporting integrates issues around business planning, budgeting, data, measurement, and connecting with the board. As reporting requirements expand, they will also drive sophistication in an organization’s understanding of their data and how to use it to improve performance and accelerate action in key areas.
Companies operating in multiple domains may stand to benefit by moving their business at the pace of the most regulated geographies where they operate.
Competition and collaboration
Sustainability is everybody’s business. Our survey shows that CSO collaboration with both CEOs and CFOs is largely effective (fewer than one quarter say improvement is needed with either), but closer coordination with other C-suite leaders is required. The greatest need for better collaboration is with Chief Human Resources Officers (45% feel moderate or significant improvements are needed), Chief Risk Officers (38%), and Chief Technology or Information Officers (36%).
Collaboration gaps are much smaller among transformational CSOs, who have let go of some areas of compliance, spending far less time on it than other CSOs, as they look for expertise both internally and externally.
Internally, as Eccles and Taylor noted in their HBR article, organizations require collaboration from individuals across various business units and functions where sustainability is critical to success. For example, the finance team is proving increasingly important in non-financial reporting, making tight links to the CFO and Group Controller crucial. Expertise on environmental, social, and economic aspects is increasingly needed in everything from biodiversity, geopolitics and human rights to carbon accounting. CSOs will need to draw on such expertise from within their functions as well as from other parts of their businesses to manage increasingly complex sustainability agendas.
Beyond appreciating the need to collaborate internally, companies have also quickly realized the benefits of working together in a bid to avoid duplication and to innovate faster, for example on collection and reporting of scope 3 data, sustainable packaging innovations and regenerative agriculture.5
Even competitors should be collaborating. Research by law firm Linklaters shows 93% of businesses in the UK, US, France, Germany and the Netherlands want to work closely with peers when pursuing sustainability goals, but fear infringing competition laws.6 Regulators have begun to issue guidance to help businesses collaborate on genuine sustainability initiatives – particularly climate change.
Actions to take to master the multi-speed world of new regulations
New reporting requirements and standards may prove challenging for all organizations, but that should not delay action. Those that lean into the opportunity (especially in sectors where GHGs are hard to abate) will be the ones driving progress, delivering tangible environmental and social impact and safeguarding the future of the business.
- Delegate and collaborate internally. Sustainability reporting should not fall solely to the CSO. CSOs must work closely with other functions, like Controllership, that can provide expertise and deliver data that meets regulatory requirements for rigor.
- Partner externally. Examine opportunities to engage with policy makers, regulators, industry and cross-sector stakeholder groups to help shape future developments and accelerate investments
- Consider outsourcing or managed services to execute report compilation and drafting, allowing the sustainability team to focus on the substantive dimensions of report preparation (e.g., data, strategy, risk, organizational alignment).
- Move as fast as the fastest parts of your organization. Don't take a “wait and see” position in domains where regulatory changes are slower or stalled.
- Leverage the investment required to gather and capture data for sustainability reporting. Make this data accessible internally and easy to use to inform leaders' decision-making and to feed into scenario-planning and strategy development.
Chapter 4
Bringing scope 3 GHG emissions into focus
To keep temperature growth within 1.5°C by 2099, global CO₂ emissions must reach net zero by 2034,⁷ raising the urgency of tackling scope 3.
Companies are beginning to come to terms with their full value-chain emissions profiles. Some have published detailed breakdowns of their scope 3 emissions, which can account for on average 75% of a company’s total emissions, according to CDP.8 For those in food, mining and construction, they can represent 90% or more.
Scope 3 emissions are the hardest to curb because they sit outside the organization, and this may be contributing to the revisions of commitments we are seeing, as companies try to get their arms around how to manage this challenge. Developing a strategy for reducing scope 3 can involve supplier transformation, network design, downstream energy use, product design, consumer behavior, and everything in between.
Supply chain reaction
Businesses are struggling to know where to start with scope 3 emissions compliance, though much of the focus is external. For instance, 43% have switched or are in the late stages of switching to suppliers with low or no emissions, while only one-third (33%) have completed or are in the late stages of requiring suppliers to reduce their own emissions. Even fewer (27%) are helping suppliers to achieve this goal.
While companies are understandably raising their expectations of suppliers, a more collaborative approach may be needed. “You cannot just throw the challenge over the fence,” explains Hegemann from Novartis. "We have environmental commitments in our third-party agreements, but we are not just demanding, we also have an active support program in place where we work with our suppliers to help them reduce their scope 1 and 2 emissions."
Half of transformational CSOs have provided or are in the late stages of providing technical or financial assistance to suppliers to help them reduce emissions (versus 20% of other CSOs). Likewise, transformational CSOs are more actively driving a range of activities that will impact scope 3 emissions.
Across many sectors, leading organizations are working together to develop harmonized approaches to help amplify the reductions suppliers can make. For example, Unilever is working with peers through the Consumer Goods Forum on sustainable supply chain initiatives.9 Similarly, Novartis and other pharmaceutical companies are discussing approaches to working with and supporting supply chain partners. As Hegemann from Novartis notes, "if you can work together in order to make those sources more sustainable, then that is a good investment."
Organizations with transformational CSOs are also more successful at establishing internal collaborations required to effect change. They are more likely to recognize the need for supply chain optimization to be better integrated across the organization (58% vs. 42% of other CSOs) and are emphasizing supply chain as a key investment area. They also partner more effectively with chief operation or supply chain officers, with just 14% saying improvements in collaboration are needed (vs. 40% of other CSOs).
Data and technology
"One of the critical challenges of scope 3," notes Keith Tuffley (Vice Chairman, Global Co-Head, Sustainability & Corporate Transitions) of Citi, "is simply getting access to reliable data, which is compounded in larger, multi-level supply chains. Global companies often have thousands of suppliers, from different regions of the world, and at multiple levels."
The data challenge also extends to related sustainable supply chain objectives, such as biodiversity and traceability. For example, a major priority for Unilever is to ensure a deforestation-free supply chain, so it is using digital maps, satellites, closed-circuit television, and other technology to produce a much clearer picture of its sourcing and reduce the risk of commodities coming from deforested areas.10
Much, as ever, is expected of technology. A 2022 EY survey of senior supply chain executives in large corporations across the Western hemisphere showed that as companies increase their digital connections throughout the supply chain, collaboration among suppliers becomes easier. In particular, 63% of companies in that sample were accelerating the use of advanced technologies for sustainability tracking and measurement, with the top three being cloud-based platforms (80%), Internet of Things devices and sensors (63%), and machine learning and artificial intelligence (62%).
Almost two thirds of organizations in our survey (63%) said advances in AI have significant potential to optimize and reduce their supply chain emissions, as well as help identify risks. Transformational CSOs are keener to embrace data and technology: 75% see these as an accelerator to their organization’s sustainability agendas (vs. 54% of other CSOs).
Actions to take to start now on Scope 3
Scope 3 emissions can seem a daunting prospect, but businesses need to start on their journey now, even if it’s small steps at first.
- Identify scope 3 emissions hotspots. Look across your entire value chain and determine where the most material emissions are located.
- Identify risks embedded in your upstream and downstream activities and develop mechanisms to monitor and mitigate them.
- Engage with your suppliers and customers about their emissions, gather relevant data, and work to influence your partners to improve. Clearly communicate expectations, set commitments and monitor progress.
- Invest in digital tools, data analytics and information sharing to improve your ability to capture metrics, develop scorecards, set KPI benchmarks and establish governance across your value chain.
- Examine your network design to find opportunities to improve scope 3 and other sustainability outcomes through changes to your supply chain locations, routes, control, and other factors.
Conclusion
Results from the EY 2023 Sustainable Value Study show that progress on sustainability is falling short of what is needed to keep pace with global targets. Turmoil may well be the new normal for business, but tinkering around the edges on greenhouse gas emissions will not improve resilience at a time when it is needed more than ever.
However, our research also identifies important levers that can be used to help accelerate change and adopt an organization-wide, value-led sustainability agenda:
- Focus on value creation. External factors may create pressures to pull back on long-term priorities to meet short-term goals. A focus on the broad range of value that sustainability investments provide, beyond pure financials (e.g., employee, customer, societal, planetary value), can help companies stay the course during turbulent times.
- Develop, appoint and empower a transformational CSO. Look for (or develop) CSOs with strong skill sets in leadership, organizational change, and stakeholder engagement, and position them to have access to top leadership. Provide them with meaningful ownership of the sustainability agenda, but ensure they are set up to collaborate closely with C-suite and business unit peers, who will own implementation of this agenda. Back the CSO with a sustainability team that has appropriate technical skills and business acumen.
- Leverage regulatory and reporting requirements as tools for improvement. Use new reporting obligations as a catalyst for internal review and change. Strive for the same rigor in sustainability data and disclosures as for financial disclosures. Beyond meeting obligations, this can enhance decision-making and strategy development.
- Commit to collaboration. Constructively engage value chain partners, peers within your sector and across other sectors. Daunting sustainability challenges, such as scope 3, cannot be solved by one company or one sector working in isolation.
- Use data and technology to accelerate progress. Deploy technology to improve value chain efficiency, visibility, and traceability, and to increase confidence in corporate reporting. Leverage the data gathered for enhanced sustainability reporting to inform leaders’ decision-making and strategy development, and to support innovation.
While there are undoubtedly many challenges to overcome, this remains “an amazing place to be,” says Kristina Kloberdanz at Macquarie. “The influence and the scale and the impact we can make is incredible.”
With special thanks to the following members of EY Research Institute – John de Yonge, Patrick Dawson, AnnMarie Pino, Mike Wheelock, Bhavnik Mittal, Sampada Mittal, and Swathi Sivaraman – for their contributions to this article.
Summary
Companies need to continue advancing their sustainability programs if the world is going to meet targets set out in the Paris Agreement. Those companies led by transformational CSOs, who leverage changing policy requirements to their advantage, and who are tackling scope 3 emissions head on are making the most progress and deriving the greatest value from their efforts.
