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The Rising Tide of Chief Sustainability Officers
By Will Linkenheil

HandsOver the past 20 years, the inclusion of sustainability practices in business has become widely prevalent. With this increased focus on sustainability, companies have created a new position dedicated to the cause: Chief Sustainability Officer (CSO). These executives focus on their company's sustainability strategies and run the company's internal sustainability committees; they usually report to the CEO, and sometimes to the Board of Directors.

The first CSO in the United States was appointed at DuPont in 2014. As of late 2014, there were thirty-six public companies in the U.S. that had a CSO. Fully 12% of Fortune 1000 companies "report that their company has a C-suite or other senior level title/position dedicated solely to sustainability," according to a 2010 study by Gibbs and Stoell. So, while they may not have someone with the title of CSO, many companies have a senior sustainability-focused employee simply called a director of sustainability, sustainability officer, or vice president of sustainability. If you include employees answerable for sustainability that are outside of senior management, "more than two-thirds of executives (69%) say their companies have people responsible for sustainability."

An effective CSO can successfully implement a variety of improvements including: resource efficiency, a reduction in the ecological footprint of the company, or a shift of focus from compliance to creating a positive impact on society and the environment.

Today, CSOs are not merely EHS Officers (Environmental, Health, and Safety), where this role was once pigeon-holed, but an innovative force for incorporating sustainability into operations, business practices, and even board decision-making. In addition to preventative care, the "CSO not only monitors but also improves performance," according to Harvard Business School professor, George Serafeim, who researches the financial implications of sustainability in companies.

Numerous stakeholders are driving the shift of focus from compliance to sustainability. The majority of people are starting to expect more from a business than to merely provide a product at an affordable price. Meanwhile, investors have become more likely to finance a business that is socially and environmentally sustainable.

Not only is sustainability a priority for external stakeholders, but also for employees. Consequently, sustainability priorities must be implemented in order to attract top talent. In fact, the What Workers Want study by Net Impact found that 45% of graduate and undergraduate students would take a 15% pay cut for "a job that makes a social or environmental impact." Net Impact also reported that 60% of respondents, consisting of college-educated individuals of all age groups, consider having a "job with impact on causes important to them" to be essential or very important.

Why Investors Care

Sustainability is about the long-term. One responsibility of the CSO is to instill a system that values long-term business strategies and generates revenues and profits over time-well beyond the quarterly earnings calls that most public companies host for analysts. Prudential Financial's 2013 Proxy Statement, for example, included a "long-term value creation model," largely due to the work of their CSO.

BlackRock CEO, Larry Fink (head of the largest asset manager in the world), sent a letter earlier this year to the CEOs of Fortune 500 companies urging them to resist "the powerful forces of short-termism." He believes that the current concentration on short term-earnings is detrimental to long-term growth. Unilever and Coca Cola, for example, have stopped providing quarterly earnings report guidance in an effort to encourage stakeholders to focus less on short-term financials.

Investors value the presence of a CSO in a company because they foster a strong sustainability strategy and culture. Through preparation and foresight, CSOs can reduce risk, help differentiate the company, and improve financial health. According to a Harvard Business School study, companies with a strong commitment to sustainability offer higher average returns while creating less damaging effects on society and the environment. The CSO of Skanska USA, one of the largest construction companies in the United States, reported that "during the Great Recession, the construction companies that were leaders in 'green building' were the only ones to continue to grow," which supports the idea that sustainability efforts lead by effective CSOs can provide some financial insulation during turbulent periods.

It is essential to set meaningful sustainability metrics and priorities that are clear when met. Linking executive compensation to long-term sustainability performance helps to align executive interests and company sustainability priorities. The Gaining Ground report from Ceres observed that "only 24 percent of large U.S. companies assessed linked executive compensation to sustainability priorities in a meaningful manner." If C-Suite executive compensation continues to be based solely on short-term financial performance, there is little doubt but that short-term thinking will continue to take priority over long-term sustainability.

CSO Responsibilities

Ikea's CSO, Steve Howard, noted that the "role of the CSO is evolving as companies' sustainability strategies are evolving." Because the position is still maturing, every CSO has unique and dynamic responsibilities. However, almost all studies performed by Ceres specify that one fundamental duty is to aid in the development of strategy.

The CEO and Chief Financial Officer (CFO) look to the CSO for long-term guidance on threats, risks, and prospects. This requires reviewing management risk assessments, policies on risk, advising on sustainability targets, and monitoring environmental and social performance. CSOs must focus on the areas that have the largest impact due to the nature of the organizations operations. For example, the CSO of the major Australian oil and gas company Santos, prioritizes worker safety, climate change, water contamination, and water use.

The manner in which CSOs incorporate sustainability considerations depends on the corporate culture of the organization. For a cohesive culture such as IKEA, the CSO takes a monolithic approach by implementing company-wide systems. On the other hand, Elizabeth Heider describes how Skanska USA was formed through acquisitions, creating a "confederation of legacy companies" with distinctive cultures. Therefore, she pursues sustainability using a pluralistic approach. She works with the CEO to "drive transformation through the multiple businesses and parts of the company" and "provide support and a vision across all four business units." John Mandyck, the CSO of UTC Building & Industrial Systems, noted that, "while CSOs can devise a sustainability strategy that takes into account all of the many subcultures, they can also use the sustainability platform to unify these subcultures."

Ceres' View from the Top report recommends implementing a system that "enables cross-pollination of sustainability-related discussions across committees accountable for strategy, compensation, and risk management." Through this technique, any decision or fruitful conclusion to a discussion can have an organization wide impact, rather than being limited to a specific committee or department.

Another duty of the CSO is delegating responsibilities to the appropriate individuals and departments. An example of delegation is when companies shift from sustainability reporting to integrated reporting, causing a transfer of responsibility for reporting on sustainability from the CSO to the CFO. One company where this has occurred is Smithfield Foods. Smithfield CSO, Dennis Treacy, says that the company applies "a sustainability lens to everything we do (that) saves us money-and even makes us money-while creating value for stakeholders at the same time." Integrated reporting allows sustainability analysis to be fully incorporated with financial analysis rather than being an afterthought that does not factor into decision-making.

Risk Reduction

CSOs can aid in risk management and reduction by becoming the intermediary between the board of directors and socially conscious stakeholders. These stakeholders can bring risks to light, enabling organizations to reduce hazards and prepare for future threats.

One example of threat reduction is the mitigation of "stranded assets." A stranded asset is an asset that becomes underperforming or unusable well before the end of its expected life. The asset then has to be marked on the balance sheet as significantly impaired or entirely as a loss.

First Affirmative Financial Network is encouraging Kinder Morgan, a large producer of natural gas and petroleum products to do a serious analysis of stranded asset risks because of imminent changes in the regulatory environment, specifically due to the recent Cop21 Paris Climate Conference. A CSO would help identify, prepare for, and navigate the increasing pressures on the oil and gas sector that we are recommending Kinder Morgan address.

S&P and Moody's Analytics account for environmental risks when analyzing the overall risk of a company. Therefore, having a competent CSO tends to reduce the risk of the firm. By focusing on reducing energy use, sourcing from sustainable suppliers, resource conservation, and innovating product sustainability, Georgia-Pacific CSO, Bill Frerking, earned the company the first rank on Standard & Poor's Global Forest Products Companies Index in 2012 and 2013.

Alcoa's CSO, Kevin McKnight's, work on reducing greenhouse gas emissions led Alcoa to being named in Standard and Poor's 500 Climate Disclosure Leadership Index.

Conclusion

Countless studies and a report from the World Economic Forum are clear that "business as usual cannot be sustained," and that CSOs are an avenue for progress. Unfortunately, no matter how sustainability is incorporated into decision-making, the change will not be instant.

It takes time for CSOs to ensure that employees and board members have the expertise to make decisions with social and environmental impacts in mind, either through the hiring process or through education. Therefore, change is likely to be incremental. But then let's face it, sustainability is by definition long-term.

First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: July 29, 2016