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November 08, 2007
CEOs Add ESG Issues to Business Blueprints
by Anne Moore Odell
A report from McKinsey & Company finds that more CEOs are including environmental, social, and
governance issues in core strategies.
SocialFunds.com --
Almost all CEOs think that society is asking businesses to step up to the plate and accept more
public responsibilities for the environment, social issues and corporate governance, reports a
study from McKinsey & Company, a leading
management consulting firm. Yet, no matter driven business leaders are to act responsibly, there
are still huge barriers to success.
 "CEOs on Strategy and Social Issues,"
released in October 2007 The
McKinsey Quarterly, ties globalization to the restructuring of the relationship between
businesses and people such as shareholders, employees, consumers, and concerned citizens. Its
authors, Debby Bielak, Sheila M. J. Bonini, and Jeremy M. Oppenheim, report on the increased
demands CEOs face around environmental, social and governance (ESG) issues and how CEOs are
responding to the demands.
The report is based on a McKinsey & Company survey, "Shaping
the New Rules of Competition: UN Global Compact Participant Mirror." The survey was first released
at the Global Compact
Leaders Summit in July of this year, alongside studies from the UN Global Compact and Goldman
Sachs.
"We believe there is a huge prize available to business and society if a tipping
point can be reached -- one in which enlightened self-interest joins hands with increased trust in
business to make way for greater mobilization of private resources against the biggest social
challenges of our time," reads the UN Global Compact Participant Mirror. "Business leaders,
especially of the world's largest corporations, have an unparalleled opportunity to lead."
More than 90% of CEOs surveyed said they are doing more to include ESG issues than they were
five years ago. This addition of ESG issues serves two purposes, as CEOs both satisfy societal
demands and create opportunities to gain market share.
CEOs of companies that participate
in the UN Global Compact took part in the survey. The UN Global Compact is elective corporate
initiative for businesses to align their businesses with human rights, the environment and
anti-corruption.
Over the next five years, these CEOs project consumers to become the most
influential group to influence businesses policies. According to the CEOs, consumers will overtake
employees as the stakeholder group with the most influence. Governments and local communities also
have a sizable impact on the way CEOs manage societal expectations. The media, non-governmental
organizations, and regulators also wield the power to influence the direction of business.
The report cites environmental concern as the number one trend shaping society's expectations
for businesses. Increasing environmental concerns were listed by 61% of CEOs, while 38% listed
greater demand for and limited supply of natural resources as the top two trends driving societal
expectations of businesses.
The rise of China and India as serious players in the global
marketplace is another reason the contract between societies and businesses is being recast. The
report's authors write: "Clearly, companies operating in these countries will be affected by local
interpretations of environmental, social, and governance norms. They will have to find ways of
demonstrating their local loyalties and, at the same time, build globally integrated systems of
values."
Climate change, employee restrictions including educational systems, and weak
public governance are the three most important ESG issues businesses must face to thrive in the
coming years, according to the report. CEOs are well aware of the difficulties of implementing ESG
policies. They must balance the short-term demands of shareholders concerning financial performance
with the longer-term ESG investments.
In addition, industry and sector regulations vary
from country to country, making it difficult for companies that apply stricter standards to compete
against companies that don't share their standards. Forty-three percent of CEOs answered that
competing strategic priorities were a barrier to CEO engagement on ESG issues. Complexity of
implementing strategy across various business functions was listed by 39% of CEOs as another
barrier to implementation of ESG issues in businesses' policies.
These and other
difficulties in actually implementing ESG issues leads to what the authors of the report call a
"performance gap." Although 72% of CEOs surveyed said that ESG issues should be incorporated into
business policies, only 50% of CEOs responded that they actually have working policies regarding
these issues.
ESG issues are dismissed even more in the management of supply chains,
McKinsey's research found. Fifty-nine percent of CEOs answered that companies should include ESG
issues as part of supply chain management, while a mere 27% answered that their companies include
the policies into their supply chains.
The report concludes: "The barriers to implementing
strategies that benefit companies as well as society often seem very hard to overcome. Yet during
our research we found that many businesses are developing creative and commercially viable
solutions for addressing issues such as water conservation, biodiversity management, finance for
the poor, and treatment of HIV/AIDS."
The CEOs surveyed for the report seem to understand
the global economy businesses operating in is reshaping the roles played by businesses. As members
of the UN Global Compact, the CEOs surveyed are already well aware of ESG trends. Perhaps a survey
of CEOs of companies that have not decided to sign onto the UN Compact would show different
results.
As consumers, employees, shareholders, and other stakeholders push companies to
act responsibly, CEOs have the role of speaking up on ESG issues for the good of their companies
and the world. A tall order, perhaps, but most CEOs didn't become the heads of companies by
stepping down.
©
SRI World Group, Inc. All Rights Reserved.
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