The Evolving Role of Chief Sustainability Officers

The role of the chief sustainability officer is undergoing a rapid and dramatic transformation. Historically CSOs have acted like stealth PR executives—their primary task was to tell an appealing story about corporate sustainability initiatives to the company’s many stakeholders, and their implicit goal was to deflect reputational risk. The role had virtually no involvement in setting company strategy or communicating it to shareholders; those responsibilities fell to the CEO, the CFO, and the head of investor relations.

Now, however, some CSOs have moved away from a role centered on messaging and instead are spearheading the true integration of material ESG (environmental, social, and governance) issues into corporate strategy. This pivotal change requires close collaboration with other members of the senior leadership team and active engagement with investors. Two factors have helped spur this transition. First, investors and executives increasingly recognize that sustainability is a significant factor in company financial performance. Second, a rising political backlash in the United States against investors who incorporate ESG into their decision-making processes has emerged, with some on the right framing this practice as woke capitalism and some on the left as an insufficient response to global challenges. That has prompted CSOs to change their focus from public communication and outreach to more direct interactions with key stakeholders and investors.

To date, there has been little substantive discussion on the need to professionalize and formalize the CSO role. Rather, there has been a lot of vague advice on the role, including suggestions that the CSO should take responsibility for all stakeholder interactions, and even innovation and organizational culture. The CSO has thus been charged with being all things to all people, and expectations about the role are both incoherent and grandiose.

A 2018 study conducted by one of us (Alison) found significant barriers to the professionalization of the CSO role, including enormous inconsistency across sectors, a lack of role clarity, and insufficient access to power and resources. Those barriers are now starting to fall. We recently interviewed 29 CSOs across a diverse collection of industries and countries and held discussions with 31 investors, and we found a noticeable shift in the authority and focus of the sustainability function. One visible manifestation of the shift is that CSOs are now more involved in investor meetings, and investors are embracing this change. The shift to a more central role for CSOs is most dramatically revealed in companies undergoing major business transformations in response to existential challenges. Many are in controversial sectors, and some are empowering the sustainability function as a response to historic mismanagement of their most negative external impacts.

We argue in this article for four major changes to the CSO role. The CSO should be involved in strategy and capital allocation; be more focused on and realistic about stakeholder interactions; be more fully engaged with investors; and be supported with sufficient sustainability resources and expertise throughout the entire organization, including on the board and senior leadership team.

The Right Strategy

The role of the chief sustainability officer has its roots in corporate social responsibility (CSR), and many CSOs began their careers in CSR-focused roles. Originally CSR aimed to showcase companies as responsible corporate citizens. Typical CSO-led initiatives included recycling, waste reduction, environmentally friendly energy consumption, and employee volunteer programs. The distinction between CSR and philanthropy was often unclear. There was virtually no connection between CSR and a company’s strategy, capital allocation, or business model. There didn’t need to be, because the CSR group was small and had limited resources—a modest cost center enabling a shiny annual CSR report.

The CSO role is finally becoming strategic, if you define strategy as the art of choosing what not to do. Today CSOs help identify and direct attention to the ESG issues that have a substantial impact on an organization’s financial performance and risk profile. This approach aligns with broader corporate strategy-making, as it helps organizations focus on what matters most to long-term value creation.

Moving the focus from feel-good corporate social responsibility to hard-nosed sustainable value creation requires pragmatic leaders who are willing to admit that not all ESG measures are win-win—that is, good for the planet and for the bottom line. Companies need more nuanced and rigorous discussions about the trade-offs and conflicts that exist among stakeholder interests, and among environmental, social, and governance issues. For example, an electric-car maker that rushes to get green vehicles on the road may need to source cobalt from conflict areas in Africa; a food company that sources organic food from far-flung locations can create more carbon emissions than if it sourced food locally. The CSO should be steering these discussions.

Acknowledging trade-offs is a step toward solving a long-running problem in corporate sustainability—the tendency to focus on the important at the expense of the existential. Social media platform companies, for instance, would prefer to discuss renewable-energy data centers than their products’ impact on mental health and democracy. Consumer packaged goods companies would rather talk about brands with purpose than their lobbying efforts against sugar taxes. Pharmaceutical companies would rather talk about packaging waste than drug access and pricing.

Narrowing the focus to ESG issues that are material to a company’s value creation represents an evolution in the CSO role, according to Matthieu Riché, who leads sustainability at the French retailer Groupe Casino. “The first stage was creating CSR awareness, putting policy and governance in place,” he told us. “The second stage was understanding and responding to increasingly sophisticated stakeholder issues. We have reaped the low-hanging fruit and are now at the third stage, where CSR directors are on the executive committee, solving strategic dilemmas to address and finance the CSR transition in close consultation with all stakeholders, including investors.”

Individual accomplishments aside, much work remains to be done. A 2022 review of 200 sustainability reports reveals a significant lack of nuanced discussions of trade-offs and priorities. For example, many organizations produce a “materiality” matrix in these reports to identify crucial ESG issues, but most fail to distinguish between value-creating and ethical concerns, or between risk-reduction measures and strategic opportunities. They also focus as much on minor issues as existential threats. The result is “everything is material” maps that offer a laundry list of ESG issues and inspirational goals but have little credibility on the specifics of execution.

Global efforts to improve nonfinancial reporting will assist CSOs in identifying and communicating which ESG issues matter most to company performance. The IFRS Foundation’s newly created International Sustainability Standards Board, the European Financial Reporting Advisory Group, and the U.S. Securities and Exchange Commission are all working to establish clearer reporting standards. As with financial reporting, clear standards will enable investors to make apples-to-apples comparisons between companies in the same sector, essential for making investment decisions. Empowering investors to better analyze corporate ESG efforts will also improve the rigor of conversations they can have with CSOs.

The Right Emphasis

Numerous companies have reacted to pressure from vocal stakeholders by exaggerating their sustainability commitments or making virtuous public statements devoid of concrete action. This phenomenon has contributed to widespread cynicism and a backlash against greenwashing. It has even led some politicians to believe that adopting an anti-ESG stance could garner them voter support. CSOs must shift their focus from merely appeasing stakeholders to actively engaging with investors in order to explain how sustainability contributes to value creation. Doing so will bring more clarity on how to measure, frame, and treat sustainability initiatives. That knowledge, in turn, will strengthen CSOs’ internal influence and increase their effectiveness overall.

Rethinking the CSO’s role in stakeholder engagement does not mean that corporations should ignore or deprioritize stakeholder pressures: rather, the opposite. It is time to acknowledge that no corporation can manage all stakeholder interactions with the same level of intensity, and that stakeholder interests always present trade-offs. Indeed, leading corporations tend to develop expertise in dealing with the stakeholder groups that are most important to their business models because that is where they face the most friction. Apparel and food companies focus their efforts on suppliers. Mining companies focus on their impact on the communities that surround their operations. Social media companies have developed innovative approaches to community engagement because of the complexity of their content moderation challenges. It is not a coincidence that these are the issues where the companies in question have worse reputations than firms in other sectors and face the most pressure from activists.

Moving the focus from feel-good corporate social responsibility to hard-nosed sustainable value creation requires pragmatic leaders.

CSOs need engagement expertise, but they must exercise it in a strategic and focused way. They cannot be all things to all people, and they shouldn’t try to be the PR voice of the firm. Prioritizing who they engage with leads to better outcomes. Val Smith, CSO at Citi, explains it this way: “The CSO has always been focused on engagement, but who we engage with has changed. It’s become more important to engage directly with customers and especially investors. This necessitates a deeper background in business and finance.”

The Right Conversation

Growing investor interest in sustainability is often perceived by progressive commentators as a dilution of stakeholder interests, or even antithetical to them. In fact, it is the driving force for granting CSOs the internal authority and influence they need to effectively integrate material sustainability issues into strategic thinking.

In the past, CSOs met with the ESG or stewardship group from large asset managers, but those conversations typically excluded representatives from the finance function and were limited to ESG-related metrics and frameworks with little apparent link to business risk or opportunity. And when the CEO, CFO, and head of investor relations met with industry analysts and portfolio managers, sustainability was seldom part of the conversation. But today’s investors want something different.

Anglo American’s group head of sustainability integration and impact, Laura Brooks, told us that the company no longer has to push mainstream investors to engage on sustainability; the investors come to them. “In the last five years,” she said, “investor interest in sustainability has skyrocketed. They are now interested in a whole host of specific topics and want to have detailed discussions with our subject matter experts to understand what we are doing and to track progress. That’s a great step forward.” Sandy Nessing, the CSO of the electric utility company AEP, saw a big shift in the focus of her role as investor interest in ESG began to grow, starting around 2017. “The CFO came back from an investor meeting and said, ‘What is ESG?’” she explains. “That’s when my role changed.” Lloyd Visser, the global head of sustainable development at ConocoPhillips, held more than 50 investor meetings last year.

CFOs will also have to change. Maria Luiza Paiva, who was appointed executive vice president of sustainability at Brazil-based mining company Vale after two devastating dam collapses shook investor and stakeholder confidence, frequently participates in investor meetings with the CEO, CFO, and head of investor relations. Paiva envisions her role as temporary; her goal is to embed sustainability throughout the organization. “My role should be biodegradable,” she says. As a testament to Paiva’s progress, Vale’s CFO Gustavo Pimenta was the only CFO on a Demystifying ESG panel at the 2022 Financial Times Mining Summit, and he impressed the audience with his fluency in sustainability topics.

Of course, investor levels of sophistication vary, but our interviews show the investment landscape is in the midst of transformational change—not gripped by a temporary fad easily reversed by anti-ESG political grandstanding. Investors who remain skeptical about the importance of ESG are being pushed by their asset-owner clients to understand it thoroughly. Matt Eichmann, who leads sustainability at Greif, a packaging company based in Ohio, told us about a meeting with a midsize asset manager where he expected a focus on conventional topics but instead was asked: “Can you help explain this sustainability stuff to me? Our clients are asking more and more about it.”

The next step in deepening the relationship between CSOs and investors—something admittedly still in early stages—is for the CSO to join the CEO and CFO in the meetings held with the analysts and portfolio managers who hold the company’s stock. Investors are beginning to ask that the CSO join these meetings. Having the company bring along the CSO is a strong signal to investors. And it creates opportunities for mutual learning about the role of sustainability in the company’s strategy, capital allocation, and future prospects. The final step, not yet common but clearly beginning to happen, is joint meetings that include all actors on both the company and investor side.

The Right People and Support

Nuanced conversations about ESG and strategy require high-caliber talent heading up the CSO department. Traditionally CSOs had NGO or public affairs backgrounds and reported to PR, communications, marketing, or public policy departments. However, as the CSO role has shifted toward the C-suite, it is attracting internal candidates from a range of functional backgrounds. For instance, Michael Baldinger, CSO of UBS, previously served as its asset management division’s first head of sustainable and impact investing and was the CEO of the asset management firm RobecoSAM. In 2020 Pete Sheffield, who has a background in public policy and government relations, became the CSO at the North American energy infrastructure company Enbridge. The same year, Concetta Testa of the Italian infrastructure company Autostrade transitioned from head of procurement to CSO and began reporting directly to the CFO. Regardless of their background, today’s CSOs need the skills to connect sustainability efforts with the company’s main goals, making sure that resources and actions are focused on creating long-lasting value.

In some cases, the person responsible for sustainability oversees additional areas, such as innovation and technology. At Nike, CSO Noel Kinder, who began his career in supply chain and manufacturing, reports to the president of advanced innovation and the COO. Sustainability is integral to product design and innovation at the company, which has numerous sustainability leaders embedded across the enterprise. Kinder believes that sustainability is a catalyst for innovation. Two recent examples are Space Hippie and Nike Forward. Space Hippie is Nike’s lowest-carbon-footprint shoe based on recycled content, and innovations from that effort have been applied to other products. Nike Forward is an apparel innovation that requires far fewer manufacturing steps, reducing the carbon footprint.

Consider also Jason Keiper of chemical company Stepan, who has a background in R&D and holds the dual role of chief technology and sustainability officer, reporting to the CEO. This isn’t mission creep in the role of the CSO, it’s a greater integration between sustainability and the function most material to realizing the company’s strategy. Resources aren’t being diverted from sustainability; they are being added to it.

CSOs need experts on their team in relevant topics such as climate, biodiversity, supply chain, and human rights, but they also require collaboration from individuals across various business units and functions where sustainability is critical to success. These individuals, often connected through dotted lines and sustainability committees, contribute to embedding sustainability throughout the organization. For example, Autostrade’s Testa disperses 27 ambassadors across the company to ensure that each unit integrates sustainability into their responsibilities. UBS has created a groupwide Center of Excellence to embed sustainability across the organization and build internal competence.

At Unilever, CSO Rebecca Marmot, who reports directly to the CEO, helps ensure that sustainability is at the heart of the company’s strategy and integrated throughout the organization. Unilever builds its business case for sustainability around growth (developing innovative products that cater to consumers’ sustainability preferences), trust (establishing transparency for all stakeholders, including shareholders), risk (securing supply chains and optimizing operational integrity), and cost (improved efficiencies). “We work closely with every business unit and function in the company,” Marmot explains.

For CSOs to succeed, three organizational changes are needed at most corporations. First, the CSO should have the same stature as other members of the C-suite, such as the CEO or general counsel. New sustainability reporting standards, such as from the International Sustainability Standards Board, necessitate rigorous internal control and measurement systems, similar to those for financial reporting. The finance function houses this expertise, making the CFO an ideal candidate for the CSO to report to.

Growing investor interest in sustainability is the driving force for granting CSOs the authority they need to integrate material sustainability issues into strategic thinking.

Although we’ve shown several examples of successful CSOs reporting to the CEO or COO, we contend that the CFO is often the better choice. Pelumi Olawale, the lead analyst of sustainability strategy in the investment solutions group at MFS Investment Management, puts it this way: “The CFO’s job is to paint a picture of the financial health of the business—essentially answering the question, ‘How are we doing right now?’ Part of the CSO’s job is to paint a picture that tells investors how well the company is positioned for future success: ‘Here is how we are really doing in the context of the sustainability issues that matter to long-term value creation.’”

Second, the CSO should work in tighter coordination with governance, risk, ethics, and compliance functions. The antiquated approach of viewing compliance as a means to mitigate regulatory risk and sustainability as an endeavor to enhance reputational capital beyond compliance is no longer helpful. In fact, the result of that mindset is jarring: If you compare sustainability disclosures alongside a company’s annual report, you often get the impression that you’re reading about two entirely different companies.

Compliance and sustainability teams should have clearly defined roles but tight coordination. The sustainability team can help differentiate between the material issues that drive innovation and value creation and those that present risks and require ethical guardrails (such as human rights impacts). Compliance teams can help ensure rigorous, legally defensible disclosures with regard to material risks. Close alignment is also necessary over the commitments companies make in their codes of conduct and values statements, especially as litigation over greenwashing starts to mount. Some firms, including Novartis, Tenneco, and Lockheed Martin, have already combined responsibility for key ESG issues and compliance under one senior leader.

Alignment on core ethics and governance questions can also help a company reassess its approach to corruption, tax, political lobbying, and disclosures, which can no longer be treated as irrelevant to sustainability efforts. Consumers, employees, and activists are becoming more attentive to the misalignment between sustainability goals, lobbying, and campaign finance activities. For example, Ceres, a sustainability advocacy nonprofit, discovered that while 94% of S&P 100 companies acknowledge the science of climate change and 93% consider it a material risk factor, almost 30% lobbied against some policies consistent with the Paris Climate Agreement. By integrating sustainability initiatives with risk and governance, CSOs can effectively tackle this conflicting messaging, address growing concerns over hypocrisy, and ensure that sustainability programs do not merely serve as a cover for shortcomings in ethics and governance.

Third, it is crucial to enhance the integration between corporate boards and the CSO function, as well as overall corporate sustainability efforts. Although boards have been gradually expanding their sustainability expertise, there is still room for improvement. Offering boards one-off, generic ESG training or enlisting a single ESG expert on the board isn’t enough.

Board composition and treatment of sustainability will vary (many leading companies have an ESG committee or an external stakeholder advisory board, for instance), but all board members must understand the relationship between sustainability and value creation, incorporating it into strategy discussions and capital spending plans. CSOs can play a vital role in educating them, and they should actively participate in these discussions. We found that many CSOs report to the board at least several times a year and field questions from board members on an ongoing basis.

While some companies incorporate ESG targets into executive compensation, for the most part targets are divorced from value creation and set in ways that often mean additional bonuses for executives if the company meets only diversity or climate targets (even if these are not the only material ESG issues for the company). One striking example of how this plays out to the detriment of strategic sustainability: Marathon Oil executives got a bonus for meeting climate targets the same year the company was fined for a major oil spill.

To set compensation appropriately, the CSO needs to work with the CEO and CFO to determine which sustainability issues are crucial to value creation. Then they need to determine whether it is adequate to simply incentivize executives to drive overall long-term value creation or whether additional goals and targets are needed. The compensation of the CSO needs to change as well. It should be based on the same KPIs that are applied to the CEO and CFO instead of being largely based on achieving certain ESG targets.

Philip Morris International, where one of us (Robert) is a paid adviser, is working to further integrate its sustainability and corporate strategy by connecting executive pay to its sustainability goal of creating a smoke-free future. The foundation of this is its ESG KPI Protocol. As CSO Jennifer Motles explains, “It establishes a framework, which is specific to the company, and clearly defines KPIs that can provide our organization with a method for making the connection between the company’s purpose, strategic direction, financial performance, and environmental and social considerations.” PMI uses 19 key performance indicators that help measure progress toward its 2025 goal of becoming a majority smoke-free business. These KPIs have been incorporated into PMI’s long-term executive compensation plans for 2022–2024 and 2023–2025 using performance share units (PSUs), which are equity-based compensation tied to performance targets.

. . .

In an ideal world, a stand-alone CSO role would become obsolete once companies fully integrate ESG considerations into their corporate strategy and operations. Until that day arrives, however, it is crucial to adapt and evolve the CSO role.

Today’s CSOs must have a deep understanding of the company’s value creation process, actively engage in business transformation, and ensure that resources are effectively distributed across the organization. Collaborating with other C-suite executives, such as the CFO, general counsel, and those responsible for ethics, risk, and compliance, is crucial. By being fully immersed in conversations with investors, the CSO helps to guarantee that the market accurately values the company’s sustainability efforts. These developments will pave the way for meaningful organizational transformation, empowering businesses to thrive responsibly and sustainably in an ever-changing global landscape.

Copyright 2023 Harvard Business School Publishing Corporation. Distributed by The New York Times Syndicate.

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