ESG can be a critical driver of growth, but the challenge lies in aligning positive change for the environment and society with growth for business. Chief Sustainability Officers (CSOs) are central to this transformation, and must be equipped with the data, insights and expertise to enable them to be effective agents of change.
Balance short-term pressures with long-term priorities
One of the most immediate challenges facing CSOs is keeping their ESG plans on track in the face of immense economic pressures.
Speaking at a gathering of sustainability leaders convened by PwC to encourage knowledge sharing and collaboration, Nick Forrest, Economics Consulting Leader at PwC UK, said: “Right now, it’s about positioning for the future. Being mindful of short-term economic challenges but not getting distracted by them.”
Forrest said fears of a recession in the UK are now subsiding, and in a positive surprise, investment by businesses was up 4.8% in Q4 2022. “So now is the time to think about what shape we want to be in at the end of this challenging period,” he continued. “That’s where the role of the CSO comes in; using this phase to invest and work through that vision of how to come through the economic slowdown strongly.”
“As we move to ‘reasonable assurance’ in the regulatory environment, the bar is being raised to try to get parity with financial reporting. So what companies are disclosing needs to be treated seriously.”
Understand government priorities
A discussion on upcoming political influences was also covered at the event, with input from PwC strategic adviser Lord Gavin Barwell. The main observation was that we are likely to see a period of relative political calm. And while economic growth and the cost-of-living crisis will be significant focus areas in the year ahead, aligning net zero commitments with those issues will also be on the agenda.
Delegates heard how the number one issue will be the growth agenda for the UK economy. While there is now more optimism about the short-term, the Bank of England’s Monetary Policy Report was quite pessimistic of the growth potential in the longer term. Chancellor Jeremy Hunt moved to stabilise the economic situation with the Autumn Statement but the challenge lies in what is done to get a better growth outlook.
On the green front, the discussion focused on how the Government will continue to try to deliver its agenda, while maximising economic opportunity. The response to the Skidmore Review of the UK’s Net Zero Strategy is anticipated to be released soon, alongside the Government’s response to the High Court ruling that the Strategy is ‘unlawful’ because it doesn’t outline how climate policies will meet legally-binding carbon budgets. The likelihood is both will be wrapped together in one response that we can expect in spring.
CSOs should be mindful that the Net Zero Strategy may be amended as part of this response.
Consider emerging green accelerants
Two significant accelerants in the green transition have emerged. The first is the response to geopolitical shocks.
At the start of the war in Ukraine, lots of people said it would put the energy transition on hold, as we would burn more coal if we could not get Russian gas. But looking at the data, that barely happened. There was a little bit of an effect in the middle of last year but actually the situation has acted as a massive accelerant for the energy transition.
It’s an illustration of how data should be central to situation analysis and business decision-making. The second accelerant is the influential role of public opinion, shaped by more frequent and widespread extreme weather events.
Meanwhile, last year the UK, EU and North America all felt the impacts of climate change in terms of extreme weather events. Public awareness in these regions is rising. We can expect pressure on politicians to accelerate the transition as more people experience its impacts.
This will likely be reflected in an escalation in demand for transparency from businesses on the substance of their net zero transition plans. CSOs should ensure they have a robust net zero strategy in place alongside integrated external and internal communications plans in anticipation of this scrutiny.
Be aware of climate-linked litigation
Linked to this is an increase in litigation focused on the credibility of business transition plans that has the potential to influence corporate ESG disclosures, but should not deter transparency.
Lynne Baber, Sustainability Leader at PwC UK, says: “I have seen a number of voter action cases so I think it will become more common. As we move to ‘reasonable assurance’ in the regulatory environment, the bar is being raised to try to get parity with financial reporting. So what companies are disclosing needs to be treated seriously.
“The flip-side is that I wouldn’t want to see organisations stop being transparent with what they are struggling with. This is hard in terms of those transition plans and so it’s a fine balance between the legal regulatory environment that encourages you to say as little as possible, versus encouraging those to start taking steps on the journey to change.”
Consider the role of ‘carrot’ and ‘stick’ regulation
Regulation around the net zero transition is coming, and it is widely expected to be implemented with a mixed ecosystem of “sticks” and “carrots”. However, while businesses need to keep an eye on evolving regulation, sustainability reporting shouldn’t just be driven by compliance and CSOs should be proactively driving improvements across this area regardless.
CSOs must be networked agents of change
It is clear CSOs face a knotty challenge, leading difficult changes for their organisations in challenging times. But their task must not be a lonely one. Collaboration and relationships will be vital. CSOs will operate most effectively when they are able to draw upon collective understanding of areas such as geopolitics, economics, law, risk and regulation, and work with colleagues, customers, investors and suppliers at the intersection of their organisation's growth ambitions and ESG commitments.
