Pursuing ESG: How CHROs Deliver by Creating Enterprise Value

You want to create a better world for future generations—and you want to create enterprise value. Can you really do both?

Environmental, social, and governance matters are all over the news all the time. Everyone is now looking to you, as the senior HR officer of the company, to lead the kind of change that will address many of the related "people" issues. But before the lure of doing good traps you in a grandiose "change the world" conversation, consider this. Every burden society puts on your company or your role should be scrutinized thoroughly before you agree to take it on.As I've said before, only three things in the CHRO role cannot be challenged: the laws and regulations you must rigorously abide by, the human imperative to respect the dignity of your employees, and the responsibility to drive company performance.

That said, ESG presents leaders with a hodgepodge of issues. You don't have to treat it as such. Not all aspects of E, S, and G need to be priorities for all companies. Few organizations will want to, or even can, lead in all areas. Tradeoffs between the three dimensions can be hard to make. Best to unbundle ESG—carefully.

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UNBUNDLING ESG

A special report of The Economist last year concluded that ESG should be boiled down to one thing: carbon emissions.* I beg to differ. I believe CHROs, together with their CEOs and CFOs, should boil ESG down to one or two aspects that will create the most value for their company.

If you can't explain to yourselves how ESG can create value, then you may be able to explain how it potentially destroys enterprise value. Value destruction happens when customers and consumers start avoiding you because you aren't seen to be making a contribution to a larger challenge we all share, such as environmental destruction.

If you can't do either (that is, if you see environmental, social, and governance factors as being entirely neutral in terms of their impact on value), then you can stop thinking about them. Not because you don't want to talk about equality and sustainability, net-zero, and decarbonization but because you've determined ESG will not impact company performance positively or negatively.

As the head of CEO Works Europe, for example, if I made a grand statement about an ESG policy, I'd be talking nonsense. We are a four-person operation: there are practically no carbon emissions to our business; we generously treat people with utter decency; and, among our small and diverse team, governance issues that plague large corporates, such as fairness and transparency, have no relevance. On the other hand, when I, as the CHRO of ING Bank, revised the company's leadership development to support the delivery of its strategy, 55,000 employees benefitted, as did our brand cachet in the talent marketplace.

If the G3 of your company (the CEO, CFO, and yourself) agree an aspect of ESG will be essential to either creating new value or avoiding value destruction, then make it intrinsic to your value agenda.

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BACK TO STRATEGY

You can make a credible business case, grounded in value, for your company to take advantage of opportunities related to social inequality, climate change, environmental degradation, or stakeholder reporting. Now you must go back to the strategy table to figure out how to take care of both long-term risks and short-term performance.

Treat this aspect of ESG as you would anything else essential to enterprise value. Establish it as a "value hotspot," a place in the organization where value creation will occur or where value destruction will be mitigated. Ask yourselves:

• What specific value can we deliver at this hotspot?
• How can we deliver as much as possible, as fast as possible?
• What metrics will be relevant?

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Since this is a hotspot, minimizing the time it takes to deliver the value will pay off handsomely. Apply precision and selectivity, then set the pace. Simplification and focus are the name of the game. Identify the?fewest possible initiatives?to create the most possible value in the least amount of time.

"Think big, start small, and move fast." —Sandy Ogg

Make sure unnecessary?risk?doesn't get in the way of execution. The more totally unfamiliar "new"?work?being pushed through the organization, the more risk. To de-risk value delivery, use pieces of "old" work to whatever extent you can. I can think of more than one company that did not discard its innovation initiatives when COVID hit; in fact, it doubled down on its existing digital transformation to support its enterprise revenue growth.

Identify the few critical?roles, existing or new, that will do the heavy lifting in each ESG-related initiative. As CHRO, you may already know from experience what the deliverables (what we call "Jobs To Be Done") must be for each role. I recommend using a simple memory aid to define each of those Jobs To Be Done in the context of value: How Much, What, When, and How. That is, how much value must the role deliver, what must be done to deliver it, by when, and how.

The aim here is to create value that can be adequately measured by a set of transparent, relevant metrics. While a profusion of new sustainability metrics has been developed in the last few years, the lack of standardization has created much confusion. On what should your company pin its progress? The answer will depend upon what is deemed most relevant and important to your industry. In addition, three of the four distinguishing role characteristics—What,?How Much,?When, and?How—can also be used as complementary metrics when reporting on the progress of your ESG initiatives.

You may question why all of this is not the work of a Chief Sustainability Officer. The reality is your company, like many others, may not have a CSO. Perhaps that is one of your new critical roles. Whether it is or not, you can be confident in assuming this work related to ESG and value creation. For the allocation and deployment of talent to create enterprise value will always sit squarely with the Chief HR Officer.

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NOTES

*??"ESG should be boiled down to one simple measure: emissions," The Economist,?July 21, 2022. Accessed online March 22, 2023, at https://www.economist.com/leaders/2022/07/21/esg-should-be-boiled-down-to-one-simple-measure-emissions.