5. Managing ES&G Issues Within the Organization

This chapter describes how sustainability issues can and should be managed within an organization. Building on the background presented in the previous chapters, it should be apparent that, as shown in Chapter 3, the many ways in which ES&G issues affect businesses are complex, interrelated, and often of significant magnitude. Moreover, as demonstrated in Chapter 4, there is a growing understanding of the power held by stakeholders of the organization, their increasing interest in ES&G issues, and their willingness to exert their influence in pursuit of their goals. The good news in all of this is that there is now widespread (though by no means universal) understanding of the types of management strategies and practices that provide an effective means of dealing with the challenges inherent in these increasing ES&G-related demands.

This chapter begins by examining the many ways in which ES&G issues are related to one another. It suggests that in any organization of significant size, it is far more efficacious and efficient to manage these issues in an integrated fashion than in isolation. I then describe and discuss the types of management structures, policies, and behaviors that experience has shown to be effective responses to the challenges posed by ES&G issues. These structures and practices are in widespread use among leading firms in the U.S. and internationally. I conclude with some thoughts on some of the personal attributes and behaviors that I believe, based on my professional experience, are helpful in promoting the types of behavioral change that are required to move companies to a more sustainable path.

Historically, most people inside and outside of business have viewed the domains of environment, health and safety, operations management, labor relations, finance, community development, and economics as distinct and separate fields. Indeed, each has its own educational foundation, with the academic programs used to teach entering professionals the required knowledge and skills often being housed within different schools or in different colleges in a university setting. Each has its own programs of study, academic and/or professional degrees, certificates, and other credentials. There is often little or no regular contact between these schools, except on administrative matters. And each has its particular methods, techniques, tools, and, as noted in Chapter 2, set of beliefs and lexicon. This is one major reason why the organizational “stovepipes” that are so often cited as barriers to collaboration and improved performance are so pervasive.

I believe that a coherent ES&G or sustainability program can and should help build bridges between the disparate functional domains that exist in most companies. Indeed, for any sustainability program to reach its potential, establishing these connections is a necessity. A key leverage point for doing so is common interest in many of the endpoints that are of concern to professionals working in these different fields and functions. The most obvious example is the duality of many EHS issues. For example, common operations such as chemical and other material use, pollution control, and waste generation and management have both environmental and health and safety aspects. And it is often the case that focusing on a performance improvement in one area achieves a gain in the other as well. (For example, reducing material use through a process efficiency improvement generally results in lower worker exposure as well as reduced waste generation.) These types of “win-win” situations are commonly encountered in the EHS arena. Such outcomes also have helped lead to the confluence of environmental and health and safety functions over the past couple of decades in many corporations and within the EHS profession itself. So this is old news, at least to some involved in the sustainability conversation within and about many companies.

In a similar vein but to a lesser extent, the general domain of pollution prevention and its many offshoots has produced hundreds of successful examples of situations in which a firm reduced its environmental and/or health and safety (H&S) footprint and also reduced its costs (captured a financial benefit). The magnitude of these initiatives and their EHS and financial impacts varies widely. But there can be no doubt that well-chosen investments in material use reduction, pollution control efficiency, waste reduction/recovery, and other strategies to reduce adverse environmental impact often create net financial value. Perhaps the most prominent of these approaches, at least among the general public and in certain professions, is energy efficiency. Here the idea is to install equipment and/or building components that may have higher initial procurement and installation costs¹ but also have lower operating costs. This saves money and energy and offers the collateral benefit of reducing direct and/or indirect (from electricity production) pollutant emissions. These approaches have proven to be effective under a wide range of conditions and have become established to the point that they are now components of U.S. national environmental and energy policy.²

Nonetheless, such approaches are often viewed as highly situational and of limited overall impact to the organization’s operational and financial success. Consequently, they tend to be tactically managed and deployed within most firms. I address this issue, and the barriers that it places in the path of sustainability efforts, in the final section of this chapter.

This brings us back to governance. Historically, management of EHS issues has been viewed as strictly a tactical issue. There are several reasons for this, the most important of which have their roots in the belief that EHS issues confer risk, liability, and costs rather than opportunity. And because costs and liabilities are undesirable features of the corporate landscape that are to be minimized as much as possible, there is little opportunity for substantial, ongoing value creation by focusing on them. This belief is rational, or at least it was in the early days of environmental and health and safety regulation. Recall that prior to 1970, no law (at least on the U.S. national level) precluded or prohibited the emission of pollutants into the air or water or the disposal of virtually any type of waste material on the land wherever local zoning ordinances would allow these activities. Therefore, the initial wave of regulations limiting these releases and disposal practices had the immediate effect of internalizing what had always been an externality. Costs to comply with the new regulations were in many cases significant.

The situation today, however, is vastly different. All major companies now are generally subject to waste management, pollution control, disclosure, and other requirements,³ as discussed in Chapter 3. In response to the implementation of these new requirements over the past several decades, business has done what it always does—adapted and innovated. Right behind or alongside the deployment of new requirements came the entry of new companies. They offered expertise to not only meet the new constraints, but, over time, to redesign and retool production processes so that they emitted fewer pollutants and less waste and/or generated effluents at lower rates or that required less treatment. In some cases, they found ways to help their clients exit the regulatory system altogether by bringing the level of a regulated activity below the applicable threshold. From that point, it was simply a matter of time before firms came into being to help other companies outsource many of their environmental and/or H&S management functions, automate and streamline their regulatory reporting processes, and assume other “non-value-adding” tasks. Such new enterprises and services proliferated during the 1990s and are now a stable feature of the EHS management landscape.

Currently, we appear to be on the front edge of a dawning awareness that there is an upside to a more sophisticated view of EHS issues and their influence on the business enterprise. Interestingly, this change is being driven by both investors (discussed in depth in Chapters 6 and 7) and consumers. Increasingly, managers of consumer-facing businesses are learning that their customers care about the content of the products they buy, how and where they are made, and the behavior of the companies with which they do business. We also must recognize the influence of major intermediaries, none of which is currently more prominent than Walmart. This company has established the goal of sustainability for itself, taken the life-cycle perspective I advocate here, engaged with its stakeholders up and down the value chain, and focused on its role and competitive advantage in the retail market space. By doing these things, Walmart is using its market power to drive behavioral change in hundreds (if not thousands) of consumer goods manufacturers and other suppliers. Although this example is unusual in both its nature and significance, it illustrates the growing expectations of American society, the scrutiny applied to business, the nearly universal and instantaneous access to information (and misinformation), and the importance placed on branding. All these issues affect company revenues, or the “top line” of business, which is a subject of abiding interest to any CEO or other corporate leader.

As discussed in some detail in Chapter 3, companies and many other noncorporate entities have both episodic and ongoing obligations (formal or otherwise) to conduct certain ES&G activities and/or achieve specified levels of performance. In many cases, these obligations are multilayered. That is, they may have a legal basis (in whole or in part) and an additional component that expresses a societal need or expectation. In many cases (and there are seemingly more every day), customer, supply chain, or other commercial influences may be felt as well. On the flip side, which in my view receives too little emphasis, these issues and evolving expectations also confer opportunity. Adroit management of one or more ES&G issues can materially improve the chances of attracting new customers (from competitors), increasing margins, and, in some cases, developing entirely new segments, categories, or markets. Thus, ES&G issues should be viewed fundamentally as having a dual nature. This implies that a close examination of each issue or set of issues is warranted prior to forming any firm conclusions about whether an ES&G expectation or trend is a threat or an opportunity. Moreover, because of the multifaceted nature of these issues, it is important to recognize that their relevance may be greater than is generally recognized and that their magnitude and importance to the organization’s fortunes may be unexpectedly large, particularly in the medium to long term.

The importance of and interconnections among the issues and, hence, magnitude of the challenges inherent in effectively managing them is directly proportional to the organization’s size and complexity. Very small businesses and nonprofits may have few if any truly significant ES&G issues that require substantial senior management attention or formal management structures. More commonly, however, and certainly for publicly traded U.S. companies and sizeable government agencies, a more formal and consistent approach is required. With that said, even small organizations can benefit from many of the principles and approaches described next.⁴

Regardless of organizational size or complexity, what is needed to sort out the nature of complex ES&G issues and their organizational implications is clarity, structure, and discipline. These attributes can and, I believe, should be expressed through establishing and operating a number of well-defined and widely accepted management structures and practices that have been developed and implemented by those in the EHS field during the past 15 years or so. This is the focus of the next section. Although in my experience these practices have largely been applied to the active management of EHS issues, they touch a number of significant social issues (such as labor relations and relationships with surrounding communities and other stakeholders) and also have a strong governance component. Accordingly, I believe that they offer the best and most comprehensive approach to managing ES&G issues in a coherent and seamless manner.

So prior to embarking on any initiative to pursue sustainability, it is important to view ES&G issues through the lens of each organization’s basic purpose for being, defined mission, vision for the future, objectives and commitments, and strategy. As suggested in Chapter 2, many organizations and teams within them have started their sustainability efforts with a collection of ES&G issues and priorities that may have impelled action or otherwise were viewed as being of the highest priority. I would not take issue with the importance of remaining responsive to both stakeholder concerns and business-relevant events that may occur unexpectedly. But I believe that a much more effective approach is to adopt a broader perspective in which the tactical ES&G issues of the day are set into a more expansive framework. If constructed appropriately, this framework flows from rather than conflicts with the organization’s existing strategy, priorities, and values.

Accordingly, rather than starting with an examination of specific ES&G issues or how they can be managed more effectively in a coordinated way, I suggest the opposite approach. Assuming that they exist, I advocate starting with the organization’s mission statement, core values, long-range objectives, and business strategy and then mapping the ES&G issues into them (fitting the specifics into the bigger picture). If these types of documents do not exist, a new dialog around sustainability could offer an excellent opportunity to formalize the organization’s existing norms and work practices and to begin charting the course toward its desired future. Using this type of top-down approach provides an opportunity to identify the ES&G issues that speak to or are aligned with core operational issues (such as water supply/quality to a manufacturer of soft drinks) and to develop an early sense of their relative magnitude compared to other large-scale organizational issues. This also may help illuminate more subtle trends that may have a significant impact on the organization in the future, such as customer concerns about the life cycle environmental impact of the firm’s products. Thus, one thing that drops out of such an analysis are the ES&G issues that may pose the biggest opportunities and threats to the organization and that are worthy of further evaluation.⁵ At the least, implementing the approach I suggest helps ensure that the sustainability strategy and implementing structures and activities are in harmony with the overall direction of the firm or agency and hence are more likely to be embraced up and down the organization.

Having developed (or assembled) and reviewed the organization’s overall aspirations and plans and evaluated the most visible ES&G issues within that context, the next logical step is to develop (or refine) an organization-wide sustainability strategy. A coherent and comprehensive strategy (along with an ES&G or sustainability policy) is the road map that should guide any internal sustainability program or initiative. Without a good strategy, goal-setting and improvement programs are likely to be misdirected or, at best, not reach their full potential. I emphasize here that the sustainability strategy must be an organic extension of the overall organizational business strategy. It must be based on the firm’s or agency’s mission, vision, and business culture as well as an informed understanding of the interests of its stakeholders (as discussed in the preceding chapter). I have found this approach to be far more effective than trying to divine or distill overall principles from a bottom-up synthesis of the organization’s EHS or stakeholder issues, or other commonly used approaches.

In addition, I strongly encourage a formulation that is appropriate to the nature of the enterprise. For corporations, the sustainability strategy should emphasize long-term financial value creation as the core precept around which environmental and social objectives are addressed. (The following sidebar describes an interesting example.) For public sector organizations, effectiveness in achieving the mission and financial stability and predictability are more appropriate objectives. This is particularly true in light of the budgetary crisis that afflicts many federal, state, and municipal organizations. Related funding limits are likely to impose significant limitations for the foreseeable future.

The absence of a comprehensive, coherent policy has hindered the development of many well-intentioned EHS improvement initiatives. To avoid such disappointments and optimize the use of the organization’s human and other resources, the responsible executives/managers should move decisively to establish a simple, clear statement of principles and commitments regarding ES&G issues or sustainability if one is absent. Organizations that have one or more existing policies should review their provisions every few years. They should make refinements, as appropriate, to reflect operating experience and lessons learned, accommodate new business goals and priorities, and address emerging ES&G issues and concerns.

As a general matter, corporate policies should be concise, drafted in language that is understandable to all (literate) members of the organization, and unambiguous. Policy statements may include long-range aspirations and strategic objectives, but it is generally best to leave specific goals and milestones to implementing strategies and tactical plans.

In terms of policy content, there is a broad continuum of belief and practice regarding what should or should not be included in a sustainability policy. I believe it reasonable to assert that a good ES&G policy contains a number of key elements that, individually and in combination, provide assurance that the company is motivated to develop and maintain a comprehensive understanding of how and in what ways ES&G issues may affect the enterprise. Furthermore, the policy should focus on appropriate ES&G effects. Finally, all employees should be involved in and capable of contributing to improving the firm’s ES&G performance.

To meet these conditions, I suggest some principles that I believe are a minimum set of policy elements to support the notion that an organization is committed to the pursuit of sustainability. Just as with my description of the overall sustainability management framework suggested in this chapter, the elements listed next are widely recognized principles and practices that are in place in many hundreds of organizations around the world,⁸ many of which are quite small. I believe that including these elements will yield a solid and workable policy that can maintain or gain the rapid support of virtually any organization’s members and its other stakeholders:

• Comply with the law and the organization’s own commitments.

• Determine and control the organization’s significant EHS effects.

• Prevent pollution at the source where possible.

• Conserve resources where feasible.

• Protect the organization’s members from harm on the job.

• Support the protection of internationally recognized human rights, and ensure that the organization is not complicit in human rights abuses.⁹

• Uphold the freedom of association.

• Avoid and prevent all forms of forced, compulsory, and child labor in work performed by or on behalf of the organization.

• Practice nondiscrimination in employment and in providing ongoing professional opportunities.

• Check progress and improve over time.

• Address stakeholder input and transparency.

Note that none of these principles requires the organization to address sustainability issues that do not apply or to which the organization does not meaningfully contribute. They also don’t require the organization to invest resources to reduce or eliminate ES&G effects unless doing so is both an effective response and financially feasible. Taken together, these provisions simply mean that the organization will develop an understanding of its EHS impacts; take appropriate steps to maintain the health, safety, and rights of its members while on the job; and do what it reasonably can to improve. The organization also will check status and progress periodically and decide whether and how it will engage its stakeholders in matters concerning the environment and the well-being of its workers and other members of the community.

At the same time, these policy elements send a clear signal that the organization understands that the environment, health and safety, and other social issues are important. The organization accepts responsibility for improving their condition and will determine what aspects of its operations pose significant effects and risks, if any. Then, any improvement efforts will be evaluated and implemented where they are sensible and cost-effective. Finally, improved EHS and broader sustainability performance over time is expected.

Several other important provisions should speak to policy application and implementation:

• The policy applies to all employees and locations.

• The policy is overseen, enforced, and periodically reviewed and improved, as appropriate, by the Board of Directors or analogous senior management.

• In evaluating the ES&G significance of the organization’s activities, the policy considers all life cycle stages of the products, materials, and services it uses and provides.

I believe that it is important to apply policy requirements to all company operations and employees. The purpose of any policy, from the perspective of those who develop and issue it, is to enable (and, in some cases, enforce) the types of behavioral changes that result in meaningful improvement over time. Ensuring that policy provisions apply to all members of the organization is important. Doing so helps distribute any associated burdens fairly and also, in the current context, helps promote collaboration and the types of multidisciplinary cooperation needed to effectively address ES&G and sustainability issues across the organization. As discussed in the next section, senior management oversight and direction are crucial to securing and maintaining support throughout the organization for the investments of time and other resources and behavioral changes that are required to adopt more sustainable behavior. Many are the environmental and sustainability initiatives that began with great fanfare but then died on the vine months or a few years later when it turned out that senior management had other or higher priorities. Senior management support for and involvement in any sustainability program or initiative must continue to be tangible and visible as the sometimes-difficult work of implementing new ways of doing things proceeds during the crucial early months and years. The simplest and clearest signal of continuing support that can be sent throughout the organization is that the senior management is involved in and cares about the work being done and its ultimate result. Finally, life cycle perspectives are increasingly being applied in a wide variety of contexts, ranging from consumer goods production to “big box” retailing to ESG investing. I believe that for an organization to take a full and honest look at its ES&G footprint, it must consider both upstream and downstream aspects. In other words, it should consider the EHS aspects of the materials, goods, and services it procures, and the labor and social practices of its suppliers. It also should consider the energy, environmental, and health/safety aspects of its own products and services as they are used by its customers.

Organizations that are well along the maturity path or that want to make more rapid progress can consider some additional policy provisions and features. These may be included in the policy statement itself or articulated in implementing plans or other supporting documents:

• The organization has a senior-level officer responsible for ES&G/sustainability policy implementation.

• As appropriate, the policy scope is global, such that operations outside the U.S. are subject to the same requirements as those in the U.S. (the firm goes beyond compliance with local laws).

The first indicator provides a link back to senior management. It helps ensure that governance practices are effective and that the policy remains a “living” document that can be adapted in response to changing business conditions. The second indicator reflects an approach common in sophisticated companies, where it is recognized that the most cost-effective way to maintain compliance, product quality, and cost control is to have a common set of practices that are carried out globally.

Policy commitments also are important indicators of an organization’s overall direction and the degree to which it can be expected to seek meaningful performance improvement. An organization can go in many different directions. The appropriate choices are a function of its culture, business and sustainability objectives, and program sophistication (capability/capacity). Here are a few examples of policy commitments used by a number of leading companies:

• Public reporting of ES&G/sustainability results

• Stakeholder involvement in formulating/revising the ES&G/sustainability policy

• Auditing (internal, independent third party, or both) of ES&G results

The first two commitments speak to the degree to which the organization and its management recognize the legitimate role of external stakeholders in understanding and reacting to the firm’s ES&G posture and trends, and in providing input where appropriate and helpful. Although ES&G reporting currently is not required by law or regulation in the U.S., interest in corporate ES&G/sustainability performance information has been increasing. This interest is manifested in several distinct and important trends and events.¹⁰ The degree to which a company considers (or even solicits) external input when evaluating components of or refinements to its policy generally is a function of how it views its relationship to particular (or all) stakeholders, as well as its internal culture. Some firms are simply more internally focused, and others cultivate a deep, continuing relationship with customers. There is no “right” answer here, other than the decision about whether or how to factor stakeholder concerns and issues into the policy should be consistent with what the firm is and, more importantly, what it aspires to be in the future. The third attribute reflects the principle that periodic auditing is a necessary component of any compliance program or management system. It also reflects the growing expectation on the part of many stakeholders that ES&G data released by the firm be credible and verifiable, in keeping with the growing importance of this information.

In some situations, a corporate-wide environmental, EHS, or sustainability policy provides the general principles needed to make clear the organization’s beliefs, intentions, and commitments. But it may not be fully adequate to address rapidly evolving conditions on the ground. In such cases, it may be helpful to develop subsidiary documents or tools to augment the corporate policy and meet the needs of decision makers in a particular business or geography. The sidebar on the following page provides an example of how this can be done.

• Climate change and/or greenhouse gas emissions

• Air and/or water pollutant emissions

• Solid and/or hazardous waste generation and disposal

• Energy use/conservation

• Water use/conservation

• Material recovery

• Worker injuries and illnesses

I believe that it is appropriate for all sustainability policies to address specific ES&G endpoints, because it is now widely understood that all business (and other) organizations have an ES&G footprint, and all have at least some ability to reduce its magnitude. In keeping with the themes of this book, I have emphasized the goals just listed because they have the clearest relationship to financial performance. For example, it has been repeatedly demonstrated that activities that reduce energy or water consumption often produce direct, tangible financial benefits (cost savings) in addition to their positive environmental impacts. The same applies to health and safety improvements, particularly workplace ergonomics. This is not to say that there might not be valid reasons to specify additional endpoints, such as philanthropy or diversity, along with those just outlined. It is simply more difficult to make the case that there is a direct cause-and-effect relationship between investing in these areas and creating new financial value.

Whatever issues and long-range objectives are established as a matter of policy, it is vital for the organization to define specific targets and milestones as part of any active pursuit of ES&G excellence or sustainability.¹¹ Articulating specific goals reflects a certain level of commitment by the firm and provides a benchmark against which efforts and success (or lack thereof) can be measured and evaluated, by both company senior management and external stakeholders. In short, goals provide evidence that the firm’s performance is expected to improve over time.

I believe in “stretch” goals. This is a level of performance that requires new effort beyond the status quo. It pushes people out of their comfort zones and may even require new ways of thinking about the issue at hand. In other words, goal setting can be used as a spur for internal innovation. Indeed, this type of approach has been used successfully by a substantial number of major companies to catalyze nonlinear, or quantum, leaps in EHS performance.¹²

Whether or not a particular organization chooses to push the envelope by setting aggressive performance targets, it is nonetheless important for it to commit itself and its people to goals and then work to reach them. In the absence of explicit goals (and accompanying time frames), policy objectives can devolve rapidly into wishful thinking and unfocused, undisciplined activities that accomplish little of substance and undermine the credibility of the organization’s sustainability efforts.

The features and elements of the EMSs used by most U.S. companies are listed in the ISO 14001 standard, which can be readily obtained for a small fee. Some companies have instead used industry-specific variants (such as programs developed by the chemical and forest products industries for their members) that are patterned on the same concepts, as discussed in Chapter 3. Because a substantial volume of guidance on implementing EMSs in various types of organizations already exists, I will not devote space here to weighing in on how to implement an EMS in organizations that don’t have one. I will just make a few key suggestions concerning how to go about the EMS design and deployment process.

To make this happen, it is important to take the EMS framework and fit it into the company’s existing structures and practices. I suggest applying a deft touch, using the management system concepts as they were intended. Link existing processes that work well, improve the ones that do not, fill the gaps as needed, and get everyone in the organization to accept an appropriate share of the responsibility for making the organization more sustainable. The end result should be a system that creates less work, not more, for the EHS staff and provides opportunity and empowerment for people across the organization. More importantly, this approach enables the organization to continually improve its EHS and social performance over time, identify and capture opportunities to reduce costs and risks, and maintain and enhance revenue streams, thereby driving long-term sustainability.

Accordingly, those managing any EMS deployment process should ensure that the management system does not follow the conventional path, where it is applied using a “brute force” mentality or shaped into a compliance tool. Instead, those in charge should ensure that at key points in the EMS design and deployment process, the appropriate business-level focus is applied and maintained. These key points are identified and discussed next. All are in the planning and policy phases—that is, on the front end. If these elements are configured appropriately, the standard management system components should produce the desired outcomes if they are implemented and maintained correctly.

• Not only environmental, but also an array of health and safety,¹³ social equity, and economic endpoints

• Upstream and downstream impacts of products and services

Moreover, the tests of significance should include possible effects on employee health and well-being, possible impacts on stakeholder relationships (particularly with customers), and long-range financial considerations. Other tests also may be of interest, depending on the organization’s circumstances. The key is to make an affirmative decision about the criteria rather than simply adopting without further thought the more narrow conventional approach.

Finally, I believe that it is important to focus on opportunities. In virtually every EMS I have seen, the sole focus is reducing or preventing harm. Although this is crucial, I believe this focus is incomplete and limits the utility of the management system to drive productive change. In contrast, the ISO EMS standard takes a more neutral stance.¹⁴ Quite simply, if an organization wants a management system to help it capture value in all its dimensions, it has to design and operate the system so that it identifies and properly evaluates upside potential as well as downside risk. This brings us to the next topic.

The management system’s objectives and targets can be pointed in numerous different directions. The important thing is to carefully consider what ES&G and business outcomes are desired, and to orient the management system explicitly and in an integrated fashion toward their attainment.

It starts, as (almost) always, at the top. It is important that the organization’s most senior executives are responsible for and involved in establishing its posture toward ES&G/sustainability. In a corporation, these responsibilities rest with the members of the Board of Directors and the senior company executives charged with operating the company (typically, the Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer). Historically, the senior management within many companies and industries has not viewed EHS issues as being of strategic import, preferring to delegate their management to line managers and executives. In recent years, however, this position has begun to change in fundamental ways. The possible business impacts of global environmental issues, such as climate change, have become more clear. And shareholder and other stakeholder demands for more extensive and effective ES&G policies, practices, and disclosure have increased.

Accordingly, I recommend that organizations establish the following responsibilities and lines of authority and accountability at their most senior levels:

• A Board Committee with responsibility for ES&G/sustainability issues, or at least a responsible Board member with oversight responsibility for an executive-level committee with responsibility for these issues

• A “C-level” executive (CEO, COO, and so on) responsible for ES&G/sustainability issues

Noncorporate organizations should establish parallel structures involving their senior management and owner/member/stakeholder representatives.

These arrangements are of crucial importance and are the very heart of governance—the G in ES&G.

These indicators address the extent to which sustainability issues are directly overseen by the representatives of the firm’s owners (shareholders) and are directly managed by people holding positions of authority for setting overall corporate direction, establishing objectives, and deploying resources. Only in this way can interested parties inside and outside the organization be assured that sustainability issues are being treated in a fully consistent and strategic manner across the entire organization and that they are viewed as being of sufficient importance to be overseen and managed like other core business issues.

Another key role is explicit responsibility for giving life to the ES&G/sustainability policy. Some organizations have a long-standing environmental or health and safety program (such as in heavily regulated, resource-intensive industries). Such a firm may have a general understanding of who is responsible for interpreting the policy or its pertinent parts and defining and executing activities to give the policy (or portions thereof) full effect. In organizations without a fully formed EHS function, responsibility may be much more diffuse. In either case, I believe that it is important for any organization either developing a sustainability program de novo or expanding the scope of one or more existing programs to assign clear responsibility for implementing the ES&G/sustainability policy to a defined department or staff function. This is important to provide both internal accountability and credibility and assurance to important external stakeholders that senior management expects that policy provisions will be driven throughout the organization. Absent such assurance, they may conclude that even the most comprehensive policy is simply a collection of aspirational statements that may or may not affect day-to-day operations.

In any event, making sustainability happen in a meaningful way across an entire organization requires that all its members understand and accept that they have a role to play. Leading companies are putting in place structures, policies, and incentives to provide the clarity of purpose and support necessary to bring about the required level of awareness, support, and enthusiasm. The following sidebar discusses one example.

Accordingly, organizations pursuing sustainability should carefully consider formulating or modifying formal programs to ensure that they have the following attributes:

• Address direct outputs of operating the enterprise as applicable (waste, emissions, energy and water use, worker exposure to chemicals or hazardous conditions)

• Account for upstream ES&G aspects (material content, packaging, transport distance, sourcing from sensitive areas/resources)

• Consider downstream ES&G aspects (energy use and pollutant emissions in use, ease of collection/disassembly, possible community-level exposure to product/component-related emissions, material recovery post-use)

• Have a focus on eco-efficiency¹⁵

• Incorporate training components as appropriate (particularly for material use/waste reduction, quality, workplace safety, ergonomics, and wellness)

• Include performance appraisal elements (including incentive compensation) for responsible managers and executives

• Incorporate the use of incentives given to nonmanagerial employees (individuals or teams) for meeting company goals

I emphasize that environmental and worker health and safety concerns should be addressed with a unified approach when and where possible. This already occurs in many companies, but to the extent that these issues are managed separately, reframing programs to focus on sustainability provides a good opportunity to look carefully for synergies and efficiencies. There are at least two compelling reasons to do so. One is that safety programs, although not strictly speaking environmental in nature, often address issues having an environmental/human health component. The other is that the past several decades of industrial experience have shown that substantial overlap often exists between efforts to reduce pollutant emissions and to improve worker safety and health.

Finally, I’m a strong believer in the power and efficiency of markets and in the internal discipline required to manage a business enterprise effectively (see the next two chapters). Accordingly, I believe that it is important for any investments made in the pursuit of ES&G performance improvement be financially tenable and sensible.¹⁶ Accordingly, objectives, targets, and ES&G management programs should include financial data and be expressed in financial terms wherever possible. This enables the organization to make informed decisions about what to do and in what order. I cannot overemphasize the importance of using this approach, for the following two reasons:

• Investing in ES&G improvements that are noneconomic destroys the firm’s capital. Fundamentally, sustainability involves finding the appropriate balance among EHS, social, and economic issues and imperatives, so consistently devoting resources to activities that destroy value undermines the organization’s long-term sustainability.

• Because no company, other entity, or country has unlimited financial resources, investing in noneconomic activities to achieve EHS or social improvements leaves less financial capital available to pursue other activities that would provide both EHS/social and economic benefits. Consequently, such behavior produces less EHS or social benefit than could be produced with a more rational approach. If you’re moved by splashy corporate public relations campaigns touting purchases of (or subsidies for) hybrid vehicles, philanthropic activities, and other sorts of feel-good activities, consider this point carefully.¹⁷

Not every idea or opportunity can be expressed in monetary terms, or even quantified. But it is essential that those who would lead internal sustainability efforts develop fact-based analysis and be prepared to support their recommendations and ongoing activities with solid numbers wherever possible. Much of my work in recent years has followed exactly this approach. The result has been that client organizations have been able to clear away existing confusion and controversy over the importance of particular issues, make decisions about priorities, and capture opportunities. Businesses that are truly sustainable for the long term will need to exhibit this type of behavior on a continual, if not continuous, basis.

Another key aspect of effective corporate sustainability management is reporting of results. Regular reporting of management actions and performance results over time assures stakeholders (internal and external) that the company’s ES&G policies are being carried out, goals are being attained, and the management system, if one exists, is functioning as intended.

The importance of this activity has been reemphasized by recent events. One clear lesson of the recent turmoil in the global financial markets is the need for improved transparency. Even before the events of the recent past, momentum was building for greater disclosure of companies’ (and industries’) material ES&G posture. In response, many firms and trade associations now publicly espouse disclosure of their ES&G programs and performance. I believe that this is a healthy development.

To do this effectively, organizations must determine what types, format(s), content, and timing of public performance reporting are appropriate for their particular situation. Although this may sound simple, in practice it is anything but. I suggest an approach that parallels that of my strategy development guidance, in that it begins with an examination of organizational mission, objectives, and business strategy but involves intense focus on stakeholder concerns. Stakeholders typically include owners (such as, stock and bond holders), major customers/constituents, regulators, employees, suppliers, public interest groups, the general public, and, in some cases, competitors. It may be wise to survey or otherwise develop an understanding of the perspectives of each major stakeholder group. Armed with these insights, the responsible executive(s) can then decide how best to address all major concerns and desires. They also can work to develop, organize, and present the relevant information in a way that is clear, informative, and appropriate to its intended audience. As a general matter, organizations would be well advised to adopt general conformance with widely accepted organizational sustainability reporting guidelines (such as the Global Reporting Initiative) in cases in which formal public reporting is indicated.

Chapter 8 examines the topic of ES&G performance measurement and reporting in much greater depth.

Chapter 2 highlighted the importance of sustainable business behavior and some of the real and persistent barriers that inhibit more rapid and complete migration to a sustainable business model. Therefore, before actively proceeding with the launch of an organizational sustainability program, it is important to have clarity on the desired changes and what they imply, and active and engaged senior management leadership. At an early stage of the deployment process, it also is important to understand and remove structural impediments.

However, a number of cultural considerations also should be evaluated carefully and addressed as part of the program. As stated earlier, to have real and lasting impact, sustainability must become an integral part of the organization’s culture, and it necessarily must involve all the organization’s people. Accordingly, any sustainability program must address the views and interests of these parties, meaning that their representatives must be actively engaged in the process, ideally from the beginning. To be effective, a sustainability program must cut across the organization and be directed by individuals with the perspective and authority to ensure that the appropriate talents and resources are brought to bear. Hence, a corporate sustainability program will likely not be a small, compartmentalized, or short-duration initiative. Rather, it will represent a substantial organizational commitment and investment.

With the vision and broad outlines of a sustainability program or initiative in place, the next question is how to go about translating vision into reality. Based on my experience in working with a substantial number of large and small organizations, I believe that several important attributes characterize entities that successfully implement sustainability and other initiatives involving organizational change.

As noted previously, the first is that to be effective—indeed, to get out of the starting gate—the program must be led by and have the strong support of senior management. This support must be genuine, visible, clear, and continuous. Many of the tasks and activities required to plan and execute a sustainability program can be delegated to senior managers and working groups. But the formation of the initial high-level team (described next), eventual rollout of the program to the organization, and a number of activities in between and following need to be led by “C-level” executives if possible. Visible support from the top is often needed to overcome initial skepticism, resistance to new ideas and ways of doing things, and the frustrations that arise when inevitable conflicts arise among important business priorities. Many well-intentioned organizational improvement programs have foundered due to a lack of ongoing senior management support and involvement, most frequently after the initial excitement fades and the real work must be performed.

In further examining the sustainability issue or launching a program, among the most productive first steps that a company’s senior management can take is to form and maintain a high-level, cross-functional sustainability planning and implementation team or steering committee. For sustainability as a value-oriented concept to take root and reach full flower, it is essential that the organization resist the common impulse to place the responsibility for and ownership of the sustainability issue solely within a single organizational unit (most commonly, the environmental or EHS department).¹⁸ Doing so practically ensures that the sustainability initiative will break little, if any, new ground. Instead, I recommend that the initial business case analysis of, planning for, and execution of any corporate sustainability program be directed by a team composed of director/executive-level managers representing, if possible, the following disciplines: strategic planning, environmental management/compliance, health and safety, energy, marketing, operations, finance and/or risk management, investor and/or public relations, facilities, supply chain management/purchasing, and human resources. If the workforce or significant portions thereof is represented by one or more labor unions, it is important that their input be included as well. Recognizing that the effectiveness of teams often declines in direct proportion to their size, a smaller group of senior managers might be warranted. However, it is important to represent all the functions identified here in some way on the team.

I suggest that the early work of the sustainability team focus on two parallel sets of activities—one externally focused and the other internally focused. Using his or her specific expertise, each team member should be expected to lead or participate in a subgroup focused on one or more facets of the following:

• A more complete understanding of stakeholder needs, expectations, constraints, and preferences

• Organizational risks and opportunities, particularly those related to environment, employee well-being and development, infrastructure, and management structure and practices

For example, senior marketing/sales representatives would presumably lead efforts to more fully understand the perspective of major customers relative to the sustainability issue. A subgroup composed of the representatives of operations and/or facilities, energy, and environment (as well as the labor union(s), if applicable) would lead the collection and analysis of data on environmental and energy efficiency improvement opportunities and risks associated with plant and other physical assets. The information and insights gained thereby should be of great value not only for informing the nature and emphasis of a possible sustainability program, but also more immediately for identifying and capturing short-term opportunities to create new business value.

In carrying out its work, it is essential that the sustainability team or steering committee ensure that it and its members model the behaviors that are required of a truly sustainable organization. Although I would not presume to dictate to an organization or its senior managers how to behave, I would observe that becoming a sustainable organization almost certainly will require new ideas, approaches, and ways of doing business. Based on my experience, I submit that embodying the principles discussed next in their dealings with one another and with the larger organization will greatly enhance the likelihood that the team will accomplish some real breakthroughs and create the conditions required for sustainable business success.

By “walking the talk” in the way suggested here, those leading (and, hopefully, catalyzing) the internal sustainability effort will communicate that the firm and its senior management are committed to business behaviors that are sustainable in the long term. They also will demonstrate that it really is possible to fundamentally improve the organization’s capabilities and performance along multiple dimensions. Finally, they will create the conditions needed for individuals throughout the company to contribute their time and talents toward the firm’s success.

Firms that can harness and channel the talents of their people in this manner can reap significant competitive and financial benefits. This topic is explored in some depth in the next two chapters.

2. See, for example, the National Action Plan for Energy Efficiency—Vision for 2025: A Framework for Change (USEPA/USDOE, 2008) and Executive Order 13514—Federal Leadership in Environmental, Energy, and Economic Performance, issued in 2009. It stipulates dramatic improvements in the energy efficiency of federal government building space operation, motor vehicle use, and other agency activities (Federal Register, 2009).

3. I note here that there are numerous exceptions, the most extensive of which are the common exemptions afforded to small businesses and, to a major extent, agricultural operations. In addition, the regulations contain thousands of general and specific exceptions for particular types of industrial operations and materials. Nonetheless, it is generally understood that controlling pollutants and waste is required of all businesses and most other organizations.

4. See Soyka, Peter A., 2010. “Governing Green: Enabling the Sustainable Organization.” Board Member, vol. 19, no. 3. Pp. 10–14. May–June, for a brief discussion of how small organizations can take some important steps on this path.

5. Note that the same issue may offer opportunities in some respects and pose threats in others, or do so under an alternative set of conditions.

6. Given the evolution of corporate EHS and sustainability programs over time, some organizations maintain separate environmental, health and safety, climate change, and/or sustainability policies. But during the next few years, it is reasonable to expect that in most organizations, consolidation will occur.

7. To continue the analogy, the policy provides the location of the roads and other features that form the landscape between the current position and the desired destination, and the strategy represents the chosen route to reach that destination. The policy illustrates the available and desirable routes as well as constraints that limit the available choices.

8. Indeed, several of these provisions are policy requirements of the ISO 14001 standard for environmental management systems. ISO 14001 has been implemented at thousands of corporate, small business, government, and other organizations worldwide. Other provisions are derived from the United Nations Global Compact, which is discussed further in Chapter 6.

9. Note that this principle and the three that follow are most relevant in jurisdictions outside the U.S. but are prominent concerns for U.S.-based multinational corporations.

10. Examples span a wide range and include both long-standing efforts such as the Global Reporting Initiative and more targeted investor-led initiatives such as the disclosure campaigns of the Carbon Disclosure Project and Investor Network on Climate Risk.

11. Note that for a number of the suggested policy objectives (such as compliance and no use of compulsory or child labor), many companies have an explicit goal of zero. So any occurrences are treated as exceptions to acceptable operating practice, with appropriate corrective action taken when and where they take place.

12. Not so many years ago, companies such as DuPont established the then-outlandish goal of “zero waste.” This induced radical rethinking of the firm’s activities and led to a number of innovations that might not have occurred otherwise. Although neither DuPont nor anyone else has attained zero waste at a corporate level, ongoing experience and sharing of best practices have enabled many organizations to achieve no net waste at one or more locations.

13. I acknowledge that a significant number of companies operate either dedicated health and safety management systems (often certified to OSHAS 18000) or integrated EHS management systems. My point is that an approach that considers all dimensions of how the organization views “sustainability” is fundamental to designing a management system that will produce the desired results.

14. The ISO standard makes clear that an environmental impact is “any change to the environment, whether adverse or beneficial, wholly or partially resulting from an organization’s environmental aspects.” (ISO, 2004 at 2) (emphasis added) The standard goes on to say that the purpose of the EMS is to manage these [adverse and beneficial] aspects and implement its environmental policy, which must include a commitment to continual improvement.

15. For our purposes here, I use the working definition of eco-efficiency refined and articulated by the World Business Council for Sustainable Development (WBCSD). The WBCSD has identified seven success factors for eco-efficiency: 1) reduce the material intensity of goods and services, 2) reduce the energy intensity of goods and services, 3) reduce toxic dispersion, 4) enhance material recyclability, 5) maximize sustainable use of renewable resources, 6) reduce material durability, and 7) increase the service intensity of goods and services (WBCSD/UNEP, 1996).

16. I do recognize that there may be circumstances in which an investment required for regulatory compliance purposes may not meet typical corporate investment criteria but must be made regardless.

17. For an example from my previous work illustrating this phenomenon, see Buc and Soyka, 2009.

18. Note that in my earlier commentary, I advocated a clear leadership role in driving sustainability for the EHS function rather than any of the communications-related functions. I emphasize here that all are important, all have crucial expertise and perspective to offer, and all should be represented on the implementation team. That said, I believe that it is crucial that the subject matter knowledge of the EHS representatives be given significant weight in the group’s deliberations and actions.