How to design ESG programs that don’t get your CEOs fired? Here is the clue: Use AI.

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Introduction

At least two major activist investors (Bluebell Capital Partners, Artisan Partners) joined the calls for the removal of Emmanuel Faber, CEO of Danone (the French firm known for its yogurt products and bottled water). The board heard the message loud and clear, and Mr. Faber was removed from his position (see Figure 1). During Mr. Faber’s tenure, Danone’s stock value increased 11% – meanwhile during the same period its competitors Nestle and Unilever increased by 43% and 55% respectively. Since underperformance often leads to the removal of CEOs, that is not what is special about this firing. What makes this unique is that Mr. Faber was the icon of stakeholder activism, sustainability leadership, and ESG management.

Figure 1: Difference between March 1st and March 15th press releases (source https://www.danone.com/media/corporate-press-releases.html)

He is not alone. We have observed a recent trend of sustainability champion CEOs being toppled. For example, Isabelle Kocher of Engie and Sacha Romanovitch of Grant Thornton, both great supporters of the sustainability and ESG movement, were also ousted.

Does this signal that Milton Freidman is back and the ESG movement is dead?

I believe that is not the case.

What are ESG programs missing?

After years of research on this problem, I have concluded that the real culprit is how ESG programs are approached. The standard designs of ESG programs fluctuate between “denial and avoidance” and “check-the-box compliance”. Neither brings out the creativity and power that sustainability movement gives to a firm.

The problem happens because ESG program designs have become unauthentic and removed from business realities. They are designed to be responsive to large and powerful rating agencies and standard setting bodies and not to the needs of the business. They are not integrated with the business strategy. They lack authenticity and creativity. They have turned into large checklists designed to cater to the never-ending demands built upon the limited visions of rating agencies. More vocal CEOs try to lead with strategic visions of sustainability, but their programs turn into either lofty dreams of grandeur, or boring checklists. In the former case organizations do not buy into the programs and resist them with full force. In the latter case no one is inspired to take ESG seriously.

The question is: how can you design ESG programs that work? There are 5 steps.

Step 1: Start by analyzing your value chain

Many firms start their program designs by scoping out materiality and understanding standards. This can lead to problem programs that get CEOs fired. Start with first analyzing your business’s value chain. Look for the opportunities where you can add sustainability value by fine-tuning your value chain.

Do not start with stakeholder materiality analysis. While knowing what is important for stakeholders is important, a program designed from one-time analysis of stakeholder priorities and preferences will have a structure but it will lack flexibility. Since both stakeholders and their values are constantly shifting – such a design will lack the much-needed adaptive capability. Conversely, a program designed to be fully responsive to the changes in stakeholder priorities and preferences will lack much needed structure.

Similarly, avoid starting your programs with the sole purpose of complying with the standards. The ESG field is experiencing a standards proliferation – as anywhere you turn there seems to be new ESG standards thrown your way – and hence the starting point could not be standards. Standards are meant to be guidelines until they are not. If they become too rigid, they will lack “generally applicable” characteristic. If they are too loose, they will lack any enforceability. Unlike the financial accounting standards that are based upon theoretical foundations of how to classify transactions and report on financial performance, ESG standards lack that rigor. They tend to be practice and process guidelines.

Just as you do not design your business strategy based upon how numbers are reported in financial statements, your starting point should not be standards. Analyzing your value chain gives you the first view of ESG priorities for your firm. This means you can integrate ESG into your overall business strategy.

Step 2: Create a strategy

Once your initial analysis is complete, create a broad strategic plan that ties in an integrated ESG-Value Chain vision. This integrated value creation system does not approach sustainability as separate from the core business strategy. Instead, it views the transformation as central and core to the business strategy. The plan must have clearly defined metrics that tie into financial value creation for the firm.

Step 3: Create a broad narrative

Understand and manage broad themes and create narratives around them. Narratives show strategic intent and give meaning to initiatives and numbers. Without narratives, reporting is meaningless. Narratives are also linked to the business results.

Step 4: Link with stakeholder and standards

Now you can link the program with stakeholder preferences and any applicable standards. Again, these links are not the drivers of your plan and strategy but only a result. Doing the right thing should not be dependent upon how various stakeholders would feel about it. It should be done anyway.

Step 5: Transform your firm to the modern economy

ESG is a key ingredient in building a modern firm. As you set your strategic transformation program – make sure that ESG is well integrated into the DNA of your firm.

Using AI for ESG Management

The above 5-steps cannot be achieved without relying upon data and using the right tools. Fortunately, the advances in machine learning have given us the ability to design and manage successful and integrated ESG programs. AI/ML helps in implementing the five steps and ensures rapid and deep stay power of the ESG program.

After all, sustaining sustainability program should not get CEOs fired. The key is to identify the integrated value.

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