The only way is ethics: why ESG starts with the CEO
Visionary founders can build a business on the strength of their convictions, but how easy is it for a CEO to join a well-established company and balance profit with purpose?
While the average boy in the early 1990s might have spent much of his teenhood playing football, guitar or video games, the young Tom Kay was far more interested in swimming, surfing and sailing in the chilly coastal waters of north Norfolk. Given that he passed most of his free time on or in the sea, it was no surprise to his family when he went on to study marine biology at university.
“I was always aware of the value of my connection to the sea, what it brought to my life and the importance of protecting it,” says the founder and CEO of Finisterre.
Kay started the business, now based in the Cornish surfing resort of St Agnes, in 2003 primarily to sell sustainable outdoor clothing. But he also wanted to inspire both consumers and the wider apparel industry to care more about the marine environment – and consider how their actions might be harming it.
“I wasn’t a businessman,” he recalls. “It was more that I had a passion and a belief.” It’s an ethos that, through Kay’s continuing leadership, informs Finisterre’s every move.
It’s easy to see how visionary entrepreneurs such as Kay, who lives and breathes his brand’s ideals, can build organisational cultures based on their own strong ESG values. Patagonia’s Yvon Chouinard, whose firm has become a byword for corporate sustainability, is another example of an inspiring and influential founder.
But there are also CEOs who have joined long-established multinational plcs and introduced bold and far-reaching sustainability agendas, which have gone way beyond what the company’s dedicated ESG departments had ever achieved. Paul Polman, who led consumer goods giant Unilever from 2009 to 2019, is a case in point.
“When the CEO is committed, things happen.” So says Boris Saraber, director of operations at Earthworm Foundation, a not-for-profit enterprise that works with businesses to protect ecosystems at risk from their supply chains’ activities.
“It’s critical to get CEOs activated, as they can cut through the politics and red tape to drive much more change,” he says, especially if they can be encouraged to get out of the boardroom and see with their own eyes what’s happening on the ground.
Darian Stibbe is executive director at The Partnering Initiative, an organisation that facilitates collaboration among businesses, governments, NGOs and the United Nations. For him, the role of the CEO in embedding ESG in a company is crucial primarily because it’s an organisational development challenge.
“Leadership is an essential part of that, because you’re trying to transform an organisation,” he says. “When there is inertia, especially at senior management level where people get used to a certain way of working, you need a sufficient driving force to demonstrate to all stakeholders that this has to happen.”
Setting ESG from the top
Ensuring that the whole organisation takes ESG seriously requires a cultural shift, supported by appropriate policies and processes, including how budgets are assigned, employees are incentivised and outcomes are reported to shareholders, Stibbe argues. The CEO, or a board-level director at the very least, should take ultimate responsibility for a transformation of that scale.
He adds that the downside of having a charismatic CEO who may regularly extol the virtues of ESG on the speaker circuit is that they may not achieve enough progress internally to give their rhetoric much credibility.
“If the company isn’t delivering, that’s a problem,” Stibbe says. “There is often lots of PR fluff in corporate annual reports. One way you can tell a genuine statement on ESG from one that’s less genuine is if it talks about challenges and admits to errors.’”
It’s an approach that consumers appreciate too, notes Kay, who adds: “This is not about saying we’re perfect or we have all the answers. It’s about having an open dialogue with our community, where we’re saying: ‘We’re going as hard and fast as we can in this direction, but there will be difficulties along the way.’”
There’s also a danger that the CEO may deliver on their ESG objectives but at the expense of the bottom line, because balancing purpose and profit can be incredibly tricky. Polman was widely revered during his decade-long tenure at Unilever because the firm remained profitable while he focused on improving its ESG performance. But Emmanuel Faber, CEO and chairman of Danone, was not so fortunate. In March 2021, he was ousted by investors, many of whom blamed a decline in the firm’s shareholder value on his pursuit of an ESG agenda, which included adopting the bold metric of carbon-adjusted earnings per share.
Having a CEO so inextricably linked to a company’s ethical purpose raises the important question of what happens when they leave, says Stibbe.
“Have they shifted the organisation sufficiently, so that it doesn’t simply revert to what it was before? This is like any systemic transformation: it needs to stick there for long enough, so that the changes get fully embedded,” he says.
Kay thinks that his company would actually go on to do better things without him. “The idea of Finisterre is obviously far bigger than me now,” he says.
Kay also believes that the fact the firm has been a certified B Corporation since 2018 has helped to cement his legacy by providing a solid and measurable framework from which to balance profit and purpose.
Stibbe agrees that becoming a B Corp and changing the company’s articles of association to include ESG values is a positive step that’s helpful in building momentum internally. He would also encourage any company to grant more prominence and status to its ESG team.
“I’ve heard people in sustainability departments talking about how they’re seen as a sort of mini-NGO inside their company instead of an integral part of it,” he says. “These teams should not be seen as luxury add-ons that advocate changes that others are resistant to. On the contrary, their members should be seen as high-flyers – the internal experts whom others consult, seeking the know-how to improve their work and meet their targets.”