Why ESG is a game of risk and reward for a COO
With a company-wide brief and broad shoulders, the modern COO looks the perfect fit to pick up the slack on ESG. But are they right for the job? And would they even want it?
The job of a successful COO is a constant balancing act, juggling the demands of day-to-day operational efficiency goals within the strategic arc of longer-term objectives. The remit is as extensive as the responsibility is significant – with authority, comes accountability.
Faced with growing financial and legal obligations in respect of environmental, social and governance investment (ESG) criteria, plus associated regulatory requirements, companies might naturally turn to their multitalented COO for help. But going forward, is the COO the right person for the job?
At first glance, the fact that ESG impacts nearly every department makes allocation hard. If not exactly new, ESG remains a relatively immature function in many organisations. As a result, the ownership picture is still evolving, in terms of company structure and job titles.
As the mists begin to clear, though, one member of the C-suite is often left in the frame, says Dr Andrew Coburn, founder and CEO of climate-analytics company Risilience.
“ESG strategy permeates the organisation and almost always requires some level of business transformation. What we are increasingly seeing, however, is responsibility falling to the COO. Their connection to the supply chain – where a large amount of ESG focus falls – as well as their company-wide influence, can make them an obvious choice.”
An ability to drive organisational transformation is pretty much a prerequisite for the role of COO and this, combined with their broad brief, makes them seem a perfect fit.
But the motivation behind their seemingly natural selection is not always as purely meritocratic as it might appear, argues Claude Brown, partner at law firm Reed Smith.
“If they’ve simply had ESG dumped on them because no other board member put their hand up, they’re clearly not the right person. If the COO has been tasked as part of a well-considered ESG strategy and implementation plan, then they’re absolutely right for the job. All the same, any COO entrusted with ESG responsibility will need some form of training.”
Legislation is driving culture-change
Even if the COOs themselves might possess the attributes and oversight necessary to constrain the scope-creep of ESG, the sheer size of the management task can still prove a challenge to resources, particularly as the criteria continue to mushroom and morph.
This can be especially true for younger or smaller organisations that not only have less in-house capability, but also tighter budgets for buying in expertise and skills. There is no quick fix, explains Michael Grant, COO at Metrikus, a smart-building efficiency platform.
“Collecting everything needed for ESG reporting is very time-consuming, so larger companies either outsource to consultancies or have an internal sustainability department. Some policy might be mandatory, but much of it is more of a ‘nice-to-have’ time-zapper – and most firms just don’t have the capacity for this.”
Putting in place a steering group, such as a sustainability committee, is one way that smaller organisations can make the most of the personnel available to them and share the time cost of navigating a sea of ESG options stretching out far beyond compliance.
As the market matures, though, more of the so-called optional extras will fall within the purview of statutory guidelines. Legislation is both here, and happening.
With effect from April this year, the UK became the first G20 country to enshrine in law mandatory requirements for its largest companies and financial institutions to report on climate-related risks and opportunities, in line with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD).
In the built environment sector, the net of statutory disclosure is already tightening around climate, carbon and energy, with the ripple effect felt at every level. Globally, nationally, regionally and locally, regulatory drivers are increasingly dictating company obligations.
In the UK, the government introduced the Streamlined Energy and Carbon reporting (SECR) requirements in 2019. Over in New York, Local Law 97 (LL97) will mandate annual Greenhouse Gas Emission reporting by 2025.
Everywhere, the pressure is on. And the person under pressure is, typically, the COO.
Challenge also brings opportunity, however. So, for the COO, the size of the ESG problem is also potentially matched by the size of the prize, both personal and professional.
Published late last year, an annual report on ESG in executive pay revealed almost 60% of FTSE 100 companies now factor ESG into their C-suite incentive plans. This figure rose significantly year on year, with less than half so inclined in 2020 (45%).
An upward trend is no surprise given that the one-year growth rate of ESG fund launches in the US (80%) more than doubled that of non-ESG equivalents (34%). There is money to be made (and lost) in ESG, not just reputation.
Both investors and companies know a strong ESG proposition creates value. So, as the remit of COOs effectively covers the entire value chain, their need for 360-degree visibility and intelligence is paramount, explains Dan Scholey, chief operating officer at Moneyhub. “ESG must be measured to be understood. Future COOs will have to focus closely on assessing their company ESG performance, using data collected from within the business, but also from clients or customers. When we open up data, we open up possibilities,” he says.
Built upon shared data, this drive for openness and transparency will not only support operational best practice but also anticipate the onset of professional rules and standards.
The impending introduction by the Financial Conduct Authority of a Consumer Duty is a case in point. As explicitly stated, its aim is to shift the mindset of firms, not just safeguard the rights of customers – there is a deliberate push-and-pull dynamic in play here.
From building to banking, and proptech to fintech, the writing is definitely on the wall.
That said, fears of greenwash are making ESG headlines, of the wrong kind. These may prove mere teething troubles in a growing-up phase for ESG. Or, they could herald a full-blown market backlash. Either way, ESG is fast becoming a game of risk and reward.
New analysis even goes so far as to suggest ESG faces a ‘make or break’ moment, as the industry comes of age. Its credibility is clearly in question, as shocking first-quarter survey results reveal fewer than 1 in 5 people (19%) believe business is fully committed to ESG.
Shareholders and stakeholders are beginning to bite back, legally, warns Brown.
“There’s already a wave of ESG-related litigation sweeping the business world, and in Europe we’re even seeing challenges brought on human rights grounds. Significant reputational and financial damage could lie in store for those who fail to meet their ESG promises. If a COO has been given oversight, they must ensure actions match words.”
Ultimately, then, the burning question any COO should perhaps be asking themselves on ESG is not whether they are right for the job, but whether the job is right for them?