1、The CEOs ESG dilemma Finding their own authentic true north on ESG can help companies navigate societys expectations and investors demands.by Peter Gassmann and Will Jackson-Moore 6 DECEMBER 2022 Gassmann is the global leader of Strategy&,PwCs global strategy consulting business.Based in Dsseldorf,h

2、e is a partner with PwC Germany.Will Jackson-Moore is PwCs global ESG leader.Based in London,he is a partner with PwC UK.A consensus has emerged in recent years that environmental,social,and governance(ESG)issues are crucially important for the corporate world.But what should companies do about inve

3、stors who wont accept lower returns in order to further ESG goals?In a recent PwC survey,global investors placed ESG-related outcomes such as effective corporate governance and greenhouse-gas emissions reduction among their top five priorities for business to deliver.But 81%went on to say they would

4、 accept only a 1 percentage point or smaller reduction in returns to advance ESG objectivesboth those that are relevant to the business and those that have a beneficial impact on society.And roughly half of that group were es-pecially unyielding and would not accept any decline in returns at all.For

5、 chief executives and boards,the disconnect with investors presents a di-lemma:can their company perform well for investors and pursue a clear ESG strategy at the same time?We believe the answer is yes,if companies find the right balance between short-term performance requirements and the invest-men

6、ts needed to meet longer-term ESG goals.To be sure,as companies invest in ESG initiatives(for example,in the technologies and systems needed to sup-port future regulations and any net-zero commitments they have made),they may face pushback and short-term share price swings.But in the long run,as cli

7、mate change increasingly affects value preservation and the ability to deliv-er sustained profits,the total accumulated value of not investing in ESG will be significantly lower than a successful ESG approach.The key is to define a 3|www.strategy-convincing long-term ESG path to create value within

8、the boundaries of the short-term KPIs that address investors performance expectations.Taking their stakeholdersand in particular their shareholdersalong the journey toward that longer-term vision is how companies can address the disconnect between short-term pressures and longer-term opportunities.T

9、he narrative of that journey must demonstrate considerable coherence,which can emerge only as companies find their best-fitting strategic stance on ESG and tie it explicitly to value creation.Companies that pursue a strategically clear stance(or true north)toward ESG can help investors and other sta

10、kehold-ers understand the boundaries or guardrails of their companywhat theyll do with regard to ESG,where theyll play,and which capabilities theyll develop themselves(versus looking to ecosystem partners to provide),while clarify-ing decisions and resource allocation.Because a good articulation of

11、your true north helps make clear the unique value your company creates for customers and society,it enables the creation of the coherent narrative investors need.Is your entire corporate strategy defined by ESG?Is your strategy to simply con-form with legal and regulatory requirements?Or is your sta

12、nce somewhere in between?Getting your ESG stance right helps you think through another key consid-eration:the business ecosystems of which you are and should be a part.Why ecosystems?Because competition is increasingly won or lost on the basis of eco-systems.These networks of companies and instituti

13、ons help coordinate multiple participants,which may offer the only way to tackle complex,far-reaching chal-lenges such as ESG(in part by helping mitigate strategic,regulatory,and other forms of risk).Ecosystems are growing ever more relevant to how companies create and capture value.Yet many of the

14、ecosystems needed to advance ESG goalssuch as those in transportation and energy,or those working to reduce Scope 3 emissions in supply chainsare only in the early stages of formation or will need to be built from scratch.To shape the development of new and existing ecosystems and access the val-ue

15、pools emerging around them,many companies will need to develop,perhaps for the first time,the ability to manage the interplay between their organization 4|www.strategy-and the ecosystems in which they participate.This ability goes beyond the ad hoc approaches to partnering most companies have taken

16、in the past.In this article,well describe how to get your strategic stance right and how to build the ecosystem capabilities you need to handle ESG risks and target emerging pools of value.The good news is that by participating in ecosystems,you dont have to pro-vide and scale all the capabilities f

17、or ESG on your own.You can access the ca-pabilities others are buildingthe complex combinations of talent,technology,processes,and insight that ecosystem partners provide.Once you do,you can look to refine the ways in which your company represents itself to investors and other stakeholders.In the ES

18、G world,as elsewhere,winning narratives help mo-bilize investment and ecosystem participants in commonly beneficial directions.Momentum is building as major ESG success stories develop.Look at Neste,an oil refiner and marketer based in Finland that has made a big push into re-newable fuels.It formed

19、 a high-profile partnership with McDonalds and built an ecosystem around itone company collects the oil used by McDonalds for frying,along with other animal fat waste;another transports it to Neste,which processes the materials into diesel fuel that it then sells to a trucking company partner.Neste

20、has since established similar partnerships to collect used cooking oil,including with DallasFort Worth Airport.Neste also invested 1.4 billion(US$1.37 billion)in a refinery in Singapore to increase the companys output of renewable fuels by as much as 1.3 million tons a year.Such investments have By

21、participating in ecosystems,you you can access the capabilities others are building.5|www.strategy-let Neste revamp its brand and develop the narrative needed to be seen as a sus-tainable company that is pioneering ways to turn food waste into a feedstock.But your own success story starts with defin

22、ing your strategic stance toward ESG.Thats where well dive in first,before helping you think through your eco-system approach,the capabilities you need,and the narrative youll construct to represent it all.Finding your true north ESG has been building as a key topic for nearly 20 years,at least sinc

23、e the topic was mentioned in a 2006 United Nations report on principles of responsible in-vestment.Attention has intensified as evidence of climate change has increased.The growing attention and urgency not only raise concerns about the E in ESG but also add to interest in whether companies are bein

24、g responsible social citi-zens and applying governance practices that conform with both the letter and the spirit of government regulations.The need to focus on ESG will only mount.As more governments have com-mitted to net-zero targets,regulators are stepping up pressure for businesses to be more s

25、ustainable.Investors likewise say they prefer to put money into busi-nesses with a strong ESG profile(even if investors arent yet willing to sacrifice much return to do so).Increasingly,customers,employees,and potential em-ployees are evaluating companies on ESG criteria,urged on by activists and ot

26、h-er social forces.As time has passed,companies have realized that an emphasis on ESG issues isnt just an excuse for scolding them.Widespread interest in the environment and social and governance concerns also opens up enormous opportunities.If your company invented a polymer that could be used in a

27、ll plastic containers for consumer products,which would greatly simplify recycling,then you could win in a massive market.Youd also get a reputation as a superb corporate citi-zen,which would help not only with customers and investors but with the tal-ent you want to attract,and youd garner favorabl

28、e attention from government regulators.But you first have to figure out what your authentic identity,your true north,6|www.strategy-is in terms of ESG.Your true north,in the general sense,is what you believe is the unique core value that you bring to a set of customers.This value isnt a short-or eve

29、n a mid-term plan or a new product initiative.Its a sense of where you fit for a decade or for multiple decades.You need to take that same sort of long-term view about ESG and decide how closely its considerations align with your true north.To find your true north,decide which of four ESG stances fi

30、ts you.Are you,for the long haul,a conformist,a pragmatist,a strategist,or an idealist?“Whats your strategic stance toward ESG?”shows these archetypes along a spectrum(see table,next page).Once you have defined your ambition level for ESG,you can consider which issues to focus on.Waste reduction and

31、 circularity?Fostering biodiversity?Fair rights?Digital cybersecurity?Selecting the right ones requires coming to terms with the current and potential future impact of external factors on your indus-try.Even deciding that youre,say,a pragmatist can have major implications.If youre a fossil fuels com

32、pany,for example,you might be considering a scenario in which environmental concerns will reduce demand for oil,and in which new materials could even render oil and gas companies reserves obsolete over the next several decades.A pragmatist in that industry would be exploring alterna-tives even now.O

33、therwise,the company could end up developing an awful lot of oil and gas“reserves”that will never come out of the ground.Idealists such as Patagonia and Honest Tea will be acting sooner and more aggressively than others.Though Honest Tea obviously needs to focus on the taste of its products,its seco

34、nd core tenet is to be environmentally responsible and to create economic opportunities for its suppliers,many in developing coun-tries.Patagonias mission statement is:Were in business to save our home planet.That goal affects everything from how the company sources,makes,ships,and sells its product

35、s to how it engages with employees and partners.Your true north tells you the direction you want to go on ESG and helps de-fine your volume of investment and the ESG narrative you want to embrace and communicate.Youll need clarity on these elements of your approach to ESG,even if your strategic stan

36、ce is simply that of the“conformist”rather than a more 7|www.strategy-PwC Strategy&analysisWhats your strategic stance toward ESG?ESG as a meansESG as an end“I believe in financial return and consider ESG a regulatory boundary.”“I believe that ESG is an important factor influencing the firms perform

37、ance.”“I believe that ESG is a part of the firms purpose and that it will ensure long-term success.”“I believe that ESG is my purpose,and,in living that purpose,I maximize sustainability.”The corporate strategy serves to maximize shareholder return,and the strategys ESG component ensures legal and r

38、egulatory compliance.Elements of the corporate strategy need to be assessed frequently in light of the volatile ESG environment.The corporate strategy is complemented by ESG aspects across all elements.ESG is the true north that defines the corporate strategy.StrategyRepresentativepurposestatementCo

39、nformistPragmatistStrategistIdealist Frequent assessment of compliance with ESG regulations Integration of ESG into reporting,where required Frequent assessment of ESG risk factors that have or might have an impact on the organization Identification and realization of quick-wins to meet stakeholder

40、requirements Integration of ESG into the present business model,products,processes,etc.Definition of further ambitious ESG targets Exclusive focus on business that is in line with purpose Shaping the future,e.g.,through product innovation that solves societal problems Leveraging of reputation as an

41、industry pioneer and political capital from activism to bestow legitimacy on regulatory and other assessment frameworks Publication of thought leadershipActivitiesESG is integrated into reporting and risk management.Responsibility for ESG lies within the business unit or function management.Responsi

42、bility for ESG is anchored at the board level.The CEO is responsible for ESG and steers business practices toward that committed purpose.OrganizationThe business is steered on the basis of the minimum regulatory standards.The business is steered with partial consideration of ESG KPIs.ESG KPIs,includ

43、ing ESG incentive schemes,are incorporated into steering.The business is steered according to ESG KPIs.Steering/KeyPerformanceIndicators(KPIs)8|www.strategy-ambitious one.Your true north also helps you see which ecosystems you should participate in or perhaps help develop.Finding your true north res

44、ults in a consistent set of statements that help establish the guardrails of what youll do with respect to ESG,where youll play,and which capabilities youll develop yourself(versus looking to partners to pro-vide)statements that clarify decisions and resource allocation,and make it easier to create

45、the coherent narrative investors need if you are to overcome the ESG dilemma discussed at the top of this article.Making a successful ecosystem playEven a pragmatist,like a fossil fuels company studying whether environmen-tal concerns will depress demand,cant go it alone.The shift isnt just a change

46、 in material from oil to non-fossil-based fuels,from coal for power plants to so-lar and wind.Changes in consumer behavior will also need to be taken into ac-count,requiring collaboration with a host of companies that touch consumers;products and services will need to be redesigned from the start,al

47、so requiring a range of new connections and collaborations.In many cases,the ecosystems needed to deliver on the true north that com-panies have defined dont yet exist.Consider a car manufacturer that is expand-ing into electric vehicles,on the basis of both pragmatic considerations about tapping in

48、to a burgeoning market and an array of concerns about the environ-ment;it is also mindful of the social concerns of customers,communities,and Finding your true north results in a consistent set of statements that help establish the guardrails of what youll do with respect to ESG.9|www.strategy-emplo

49、yees and of the governance practices it needs to respond ethically to gov-ernment regulations on pollution.To fulfill its ESG goals,that company cant just produce an electric car.It needs to think through upstream and downstream concerns,too.Upstream,there currently are problems with the mining of k

50、ey materials for batteries,which can occur in ways that damage the environment.These mate-rials are also provided by countries where trade relations may be complex(such as with China)or where conflicts,displacement,and economic stability are an issue(such as the Democratic Republic of Congo).That ca

51、rmaker may want to find new sources for lithium,cobalt,rare earth metals,etc.,and may even want to try to develop new types of batteries that dont need such materials.Downstream,the car company hopes to ensure that its vehicles can be recy-cledbut is aware that the components arent currently designe

52、d for that.The metal cant easily be separated from the plastic in the batteries,for example,or the wall of the battery cell.The car company will need to engage with its ecosys-tem so that a vehicle flows as seamlessly as possible from a lifetime of use into a recycling process that lets its key comp

53、onents be separated and reused.The carmaker will,in some cases,need to find partners that will invent materials,processes,and materials processes that make that recycling easier.Opportunities for new ecosystems abound as companies pursue ESG goals.For example,a host of companies are working together

54、 on an initiative for low-carbon-emitting technologies(LCET)to be established by the end of 2023.Air Liquide,SIBUR,Dow,BASF,Clariant,SABIC,DSM,Mitsubishi Chemical,Solvay,and Covestro have all signed up.Even direct competitors will find rea-sons to collaborate;for instance,Allbirds and Adidas are wor

55、king together on how to reduce carbon emissions across the whole shoe process,from manufac-turing to packaging and shipping.There is even a new sort of buyers coopera-tive formingmore than 50 companies have joined in the First Movers Coali-tion to guarantee an early market for technologies that coul

56、d help get the world to net zero by 2050 but that are too expensive in their early stages to generate much demand on the open market.Other ecosystems will have to develop or continue to develop.For instance,in 10|www.strategy-transportation,ecosystems are developing relating to micromobility,electri

57、fica-tion,infrastructure for charging and refueling with hydrogen,sustainable avia-tion,and more.Consumer goods will need ecosystems for packaging,delivery,materials,and labor inputs.Agriculture requires ecosystems for fertilizers,farm equipment,alternative meats,and other proteins.And those are jus

58、t the start.How do you help these ecosystems develop and get where they need to be to support your strategic ESG stance while playing a significant or even leading role yourself?Several elements are crucial for flexibility and agile steering.Map the influences.ESG ecosystems represent dynamically ev

59、olving rela-tionships between companies and their external stakeholders.Some stakehold-ers are in your immediate environment,such as the suppliers,competitors,and customers that directly influence business operations.Others,such as NGOs,regulators,and investors,live in the broader macroeconomic envi

60、ronment.Youll want to map the overlapping,sometimes competing objectives of these external influencers,paying close attention to which relationships offer access to shifting value pools and complementary capabilities.The idea here is to gain clarity and avoid surprises.Is a critical suppliers am-bit

61、ion to design fully circular products only,which will come with certain re-quirements and expectations?Will the formation of a partnership involving hy-drogen use in your industry increase expectations of green energy use?What if the European Union announces new legislation for diversity on company

62、boards starting in 2030,or sooner?Investor movements and trends regarding ESG seem particularly fluid and may require fine segmentation to retain the optimal investor mix as investors adapt specific investment styles such as ESG rebalancing,social-impact invest-ing,and thematic focus on any of the E

63、,S,or G components.Your ESG narrative,which well discuss below,will likely need to be equally granular.For public companies,the stock price will indicate whether the companys goals are aligned with those of investors,obviously a crucial issue.But compa-nies will also have to develop a deep understan

64、ding of the needs of customers and other stakeholders.In the past,companies often relied on others for that deep understanding.A company such as Shell,for instance,was a feedstock 11|www.strategy-supplier and was far away from the end consumer,so it counted on intermedi-aries to translate consumer n

65、eeds.Nowadays,disruptions occur so fast that a company such as Shell must track and understand stakeholder needs directly.Get the capabilities you need.Many of the unresolved challenges the world faces in the ESG domain are so big and complex that no company on its own can solve them.They can be add

66、ressed only by networks of companies and institutions working together toward a common purpose.1 Thats because no single company has the resources to develop the capabilities required,nor could it scale them as quickly as the dynamic world of ESG demands.Because ecosystems allow companies to access

67、the complementary capabil-ities of partners,its critical to understand your current capabilities,what you can develop yourself,and which capabilities or value delivery vehicles youll need from your ecosystem.That means sorting out,first,which capabilities are needed to address areas of ESG relevant

68、to your stakeholders and your ecosys-tems stakeholders and,second,which of them you yourself will provide and which youll look to your ecosystem partners to contribute and deliver together with you.One place to start is with a capabilities assessment tool that can help define your table stakes versu

69、s your differentiating capabilities.Tools like these can shed light on how well aligned your people and your financial resources are be-hind your most important capabilities,and how close your company is to having best-in-class capabilities,allowing you to shed weaker capabilities with negative ESG

70、impacts and cultivate positive capabilities in which youre better differen-tiated.Then,perform the same analysis for the ecosystem youre looking to join or help develop by assessing the technologies,capabilities,and access to new value pools they offer,as well as their previously existing alliances.

71、Once youve identified potential partners,choose the right partnership struc-ture with which to engage them.“Selecting the partnership structure that fits your objectives”(next page)describes four approaches.Choices about whether and where to build capabilities will vary,of course.Rgenwalder Mhle,a n

72、early 200-year-old German company that specializes in sausages and other meat products,decided to strengthen its own capabilities 12|www.strategy-to reorient customers toward a vegan meat alternative after the company began selling meatless products in 2014.In another example,BASF decided to use its

73、 ecosystem to enhance its capabilities in chemical recycling.The key will be to reevaluate capabilities within the context of your ESG strategy.This will require making the most of the latest scenario-modeling techniques while building the capabilities needed for nimble responses to a shifting techn

74、ology,regulatory,and market context.For example,many of the best solutions and approaches to ESG challengessuch as the exact path of Selecting the partnership structure that fitsyour objectivesStakeholderpartnershipComplementarypartnershipConferencepartnershipCompanyadvisorpartnershipA large and div

75、erse group of stakeholders converges around a single purposeA bilateral partnership works together on a focused taskA confederation of like-minded entities converges around a targeted issueYour company engages with an advisor,consultant,or contractor to achieve ESG goals World Economic Forum initiat

76、ives such as the Arctic Investment Protocol,a working group of diverse stakeholders promoting sustainable and equitable economic growth in the Arctic region Joint projects with NGOs such as the Ellen MacArthur Foundation on product circularity The hydrogen backbone initiative31 European gas infrastr

77、ucture companies that plan a pan-European dedicated hydrogen transport infrastructure Consultation with environmental engineers to optimize footprintsPwC Strategy&analysisExampleAcademiaGovernmentNGOsOrganizationThink tankYourcompanyYourcompanyCompany BCompany DCompany CAdvisorAdvisorYourcompanyYour

78、companyBanks13|www.strategy-decarbonization or how new technological breakthroughs might affect the mix of future energy sourceshave yet to be developed.Nor are future regulato-ry scenarios fully clear.At the same time,companies need the ability to move quickly to respond to short-term geopolitical

79、and other challenges.And then to move quickly again and again.Build the trust that makes it work.As in a marriage,trust between part-ners is fundamental.Trusting your ecosystem partners requires a profound understanding of what motivates them and why they operate as they do.Com-panies in lightly reg

80、ulated industries,for example,will have different cultures,business practices,and processes than those in more highly regulated indus-tries.You cant work effectively with organizations you dont understand.Its worth the time and effort to really get to know your ecosystem partners.After all,networks

81、of businesses are referred to as ecosystems for a reason:they resemble ecologies that are home to multiple species whose success is a collective process.Business ecosystems require shared practices and processes,face-to-face interactions(sometimes through shared office space or colocation),and recip

82、rocity.One element of reciprocity has to do with economic incentives:thriving ecosystems are those in which everyonebut most importantly,the company playing the orchestrators rolefocuses on growing the whole pie,not on securing the biggest slice for themselves.Ecosystem participants create and captu

83、re value together,even as they share risk.Making and living up to small,ongoing commitments is another aspect of reciprocity,one that plays an important signaling role to partners and ecosys-tem participants.If your company intends to play the orchestrators role,signal-ing your commitment(for exampl

84、e,by making investments that indicate your intention to play for the long haul,regardless of temporary setbacks and obsta-cles)helps attract ecosystem participants and encourages them to make com-plementary investments.Plan for the end.The average tenure of a corporate executive is about five years.

85、The average duration of a strategic alliance is only four.Before making an alliance,companies should assess the alignment between the strategic ESG stances of each of their potential partners,and of all of them together.Wise 14|www.strategy-partners will consider the circumstances that might lead to

86、 dissolution,which can include a changing business environment,the emergence of new potential partners,and the development of new capabilities by one or more of the part-ners themselves.Having made this consideration,they should look to agree up front on what mechanisms govern under which circumstan

87、ces,and when the alliance can be dissolved,as well as what will happen to any assets and people once the partnership is no longer in effect.Nurture your ecosystem culture.One of the most difficult elements of building an ESG ecosystem has to do with constraints in your own companys organizational cu

88、lture.Though companies are accustomed to working within their own four walls and having considerable control over resources,ecosystems require different levels of transparency and collaboration,some of which may run counter to your companys established approaches and dispositions.You may need to sha

89、re data that you long considered proprietary.You may choose to include employees from partners on your internal teams or send some of your employees to work in their officesknowing full well that some of your talent-ed people may leave you,at least for a time,to work full time for that partner.All o

90、f this may seem counter to your existing organizational culture.ESG requires nurturing culture across and beyond institutional boundar-ies to bring together a network linking and connecting government,business,philanthropy,academia,and civil society,such as the India Climate Collabora-tive,which was

91、 launched by corporate leaders in that country.Ecosystems that combine publicprivate partnerships require joining different organizational cultures,such as the sustainability-focused advisory firm Systemiq did when it brought together public and philanthropic capital to address a lower-carbon food s

92、ystem.The power of authentic narrativePwC research shows that the companies that reallocate capital more frequently tend to perform better than companies characterized by higher levels of inertia,so the bias should be toward action.If you wait,youll have more certainty,but you may have missed out on

93、 the best opportunities.15|www.strategy-But we realize that many early investments wont pay off.We also remember the starting point for this article:that investors are loath to take a haircut on their returns even as they say they support ESG agendas.A coherent narrative is the way to start to tie a

94、ll the pieces together.You need to begin with your authentic identity.You should then craft a narrative based on the needs of your stakeholders,likely beginning with those investors who are leery of lower returns but extending broadly to include customers,employees,communities,and government interes

95、ts.The narrative should include facts and targets,but you have to get to the emotional core as wellthe urgency,trust,value,transparency,and hope of your ESG strategy.Though you will be tempt-ed to overpromise,there cant be any saydo gap.Greenwashing will be spotted soon enough,and youll lose your cr

96、edibility.Note that narratives work at multiple levelscraft yours for investors,em-ployees,stakeholders,and,crucially,those that need a coherent vision for where things are headed if they are to join the ecosystem and commit their resources and capabilities.Note,too,that your narrative will likely l

97、ead you toward a change in how you think about doing business.Instead of short-term profits,youll focus more on long-term value,which will include environmental and social value,not just financial performance.Your narrative will need to retain some flexibility.In a fast-moving world,all businesses f

98、ace uncertainty.But the ESG environment is particularly fluid.Investors are loath to take a haircut on their returns even as they say they support ESG agendas.16|www.strategy-Regulations are shifting.Technology is developing.Markets are nascent.And ecosystems are emerging.As the world changes around

99、 us,the needs of your stakeholders will change,too.So youll need to be prepared to adapt your prod-ucts and services,along with the capabilities that support them and along with the ecosystems that both help you develop those capabilities and help you deliv-er your products and services to the marke

100、t.Investors will still have their requirement on short-term returns,but youll be able to explain how some series of initial investmentswith potentially signifi-cant returnsfit into a compelling story line,with clear and acceptable effects on short-term performance expectations.And youll have created

101、 a road map to help you sequence an aggressive approach to the opportunities of ESG,one that will reward not only your investors but all your many other stakeholders,while delivering far greater value to society as a whole.1.For more on why ecosystems are well-suited for addressing complex global pr

102、oblems,see Paul Leinwand and Mahadeva Matt Manis Beyond Digital (Harvard Business School Press,2022).The authors would like to thank Sebastian Geibig and Thilo Wenig from PwC Strategy&,and former Strategy&colleague Ruirui Zong-Rhe,for their contributions to this article and its underlying research.2

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