Companies beefing up their sustainability teams need to ensure their Chief Sustainability Officer has C-suite backing. Without executive level support, sustainability will struggle to take root.
At US cigarette manufacturer Philip Morris International (PMI) sustainability and transformation have gone hand in hand. The company’s gradual move away from making cigarettes towards less harmful nicotine alternatives means it can now legitimately talk about sustainability and its efforts to reduce the damaging impact of its product externalities.
Since 2008, PMI has invested more than US$10.5bn researching how to deliver nicotine in a less harmful way. A pivotal moment came when the company committed to using its new technology not as a portfolio add-on, but to replace cigarettes altogether, manifested in a target for smoke-free products to account for over half of total net revenues by 2025. “This is where sustainability and transformation came together,” recalls Jennifer Motles, PMI’s Chief Sustainability Officer (CSO) speaking from Lausanne, Switzerland. “If we have a better offering for our consumers, why continue to sell a product that is so much worse?”
Fundamentally changing the company’s product proposition involved looking at PMI’s whole value chain and operations. In a coherent approach (which shares many of the hallmarks of root and branch treasury transformation) Motles explains that PMI’s smoke-free future depends on every part of the organisation understanding and buying into the new value proposition and corporate strategy.
In many ways, Motles rise to CSO since joining PMI eight years ago, originally tasked with global affairs, policy and advocacy, has gone in lockstep with the company accelerating integration of its sustainability strategy. Her promotion to a role that spans risk, reporting, managing costs, stakeholder engagement, operations and impact, also mirrors the swelling ranks of sustainability officers at other leading corporates where consultancy PwC counts a threefold jump in recent years. Outwardly it’s indicative of how more companies are taking sustainability seriously, but Treasury Today interviewees also warn a successful sustainability strategy depends on getting key criteria attached to the role right, none more so than executive level backing.
Support from the top
First and foremost, a truly successful sustainability strategy rests on companies recruiting a CSO at executive, C-suite level. In 2020, PMI changed the reporting line of its CSO so that Motles reports to the Chief Finance Officer, altering the governance, structure and message around sustainability at the company. Sustainability data is treated the same way as financial data and the definition of value creation has been transformed so that the company is not just beholden to financial capital but all stakeholders, she explains. “The reason why sustainability was put under the CFO is because the company understood the strategic value of sustainability,” she says.
Where sustainability sits within an organisation offers a window into how the company views sustainability, agrees Singapore-based Dr Darian McBain whose ESG experience includes a six-year stint as Global Director, Corporate Affairs and Sustainability at Thai Union. Reporting directly to the CEO of the world’s largest canned tuna fish producer behind brands like John West and Chicken of the Sea was indicative of how the company viewed sustainability as a strategic advantage.
Working alongside the CFO and treasurer, she helped set the KPIs sitting behind the company’s first sustainability linked loan in 2021. They included maintaining the group’s consistently high rankings in the S&P Global Dow Jones Sustainability Indices, GHG reduction targets and increasing the use of electronic monitoring and human observers onboard tuna vessels. Elsewhere, she engaged with suppliers on fish stock sustainability and human rights in the supply chain; increased sustainability in operations at the company’s factories and engaged with governments, civil society and customers.
Creating awareness amongst Thai Union staff, where McBain says the younger generation at the seafood company identified sustainability in line with their own values in a unifying force, was particularly thrilling. “A good CSO is an advocate of change management,” she says.
It is this high-level ability to pull on the levers of power that sets the role apart and fast tracks strategy, continues Elisa Farri, Vice President, Co-lead of Capgemini Invent’s Management Lab. Although most companies now have a sustainability officer, a smaller number have put a “big C” in front of the role conferring official backing from the top. It’s difficult for a CSO to drive transformation if the role doesn’t have board level protection and top-level support, she says. “How the role is established and the support it gets depends on what the organisation hopes to achieve,” agrees McBain.
Strategic sustainability
Endorsement from the top is essential if the role is to become truly strategic. If a CSO’s primary focus is more humdrum regulatory compliance, monitoring and reporting they will never be able to drive transformation, says Farri. “I am not saying these roles are not important, but they are not sufficient to drive a holistic transformation. The role should be much more strategic with potential for transformation that goes beyond a tick the box.”
In a reflection of her strategic role, Motles says she is not solely accountable for the delivery of sustainability at PMI. It is the role of department heads to deliver the strategy across the organisation. PMI’s different divisions “own” integrating sustainability in a way that is consistent with their own strategy. “My job is to create awareness; I am not executing,” she explains. “They define their sustainability strategy around product development or operations and shape it accordingly. It is not superimposed.”
A strategic approach to sustainability also makes it easier to avoid trade-offs and compromises because every division is on the same page, she continues. “Your business issues are your ESG issues; your sustainability strategy is your business strategy.”
Tactical vs strategic
In many companies, sustainability remains tactical rather than strategic because the role is tagged onto an existing senior role – a sustainability officer could be assigned to the CFO, Chief People Officer or Head of Legal, for example. This approach can also impede another vital ingredient of success. A successful CSO interacts on an equal footing with senior executives across the various units of an organisation. This creates a glue that then percolates sustainability through the organisation, explains Farri. “Silos are a recipe for failure. You need to create interlocks between the CSO and rest of the organisation.” She also observes that where companies have bundled other divisions with sustainability it can lead to a trade-off where one division outperforms. “This could be a smart move in the short term, but there is always the risk that sustainability comes second,” she warns.
Skills
A successful CSO will play a lead role supporting and developing sustainability knowledge within a company. One of the biggest challenges is that although sustainability is still a new concept at many companies, it is simultaneously becoming increasingly sophisticated. For example, a department head will need to understand what decarbonisation means, how to measure it; reduce it, and how much that will cost. It involves building new skills and the capacity to be agile, says Motles. “The learning curve is steep. It’s my job, but for others, it’s not their full-time job.”
Another challenge – that will also resonate with treasurers charged with change management – is buy-in. “Most people view change with suspicion,” reflects McBain who left Thai Union to join the Singapore Monetary Authority as the regulator’s first CSO before setting up her own advisory firm supporting corporates with strategic sustainability advice, particularly around the performance benefits.
Buy-in comes with access to funding, but also ensuring sustainability is profitable and commercially viable, lowering long-term costs and providing a competitive advantage in operations, customer satisfaction and brand image. “If you are working for a for-profit corporate you need to be able to show that sustainability wins customers. Much of my advisory today involves looking at how sustainability looks within a wider corporate strategy. My goal is for sustainability to be neither a cost nor an add on,” she says.
Alongside a hotchpotch of skills spanning policy expertise and practical implementation; change management and leadership, plus a background in science or academia (helpful but not a prerequisite) one skill stands out. Above all, CSOs flag the role demands regulatory knowledge as government policy begins to accelerate the transition, changing the tone of sustainability from a “nice add on” to something companies must do.
For example, the EU taxonomy requires companies to report their non-financial data with the same rigour they report financial numbers. A CSO will need to be across a Task Force on Climate-related Financial Disclosures (TCFD) set up to improve and increase reporting of climate-related financial information alongside modern slavery laws, anti-money laundering and local environmental requirements.
“Staying on top of the changing regulatory landscape is very important,” says Motles who adds that PMI’s sustainability strategy has placed the company ahead of the curve of mandatory reporting now coming down the line. “Because of the way the company is organised, how we understand sustainability and the role it plays in our governance, we have been doing this type of reporting for a while.”
Stakeholder engagement
Of all her tasks, Motles feels most passionate about stakeholder engagement, an area she spends around half her time. A key element involves ensuring external stakeholders can assess the scale of PMI’s transformation. Metrics unique to PMI show how much the company has reduced carbon emissions or the total number of users of PMI smoke-free products. “The KPIs we are using measure our transformation,” she says. “It makes for a powerful conversation with investors.”
More so as investors become more knowledgeable on how to use corporate data, and engagement becomes increasingly meaningful. For example, Motles’ says her conversation with PMI’s investor base has grown increasingly complex since the company published its Business Transformation-Linked Financing Framework in 2021. The framework integrates the company’s smoke-free transformation into its financing strategy following ICMA Principles, tying the cost of debt to its sustainability performance.
“I make sure investors can understand our data and materiality, so the conversation moves beyond an ethical disagreement about smoking. Cigarette companies are not one and the same, and my job as CSO is to provide that data and prove that we are doing something different and addressing the thing that conflicts with their investment interests.”
PMI’s transformation is testimony to the power of engagement and dialogue within the financial community to drive real change, she says, warming to her theme. It illustrates the fact engagement is a more effective lever to corporate change than negative screens, exclusion and divestment. “If you divest before you engage you have missed an opportunity. Shareholders have rights and not using their influence is like not voting in an election,” she says.
The tobacco industry is not a homogenous bloc, she continues. If one company is phasing out cigarettes and another isn’t, that company’s efforts should be recognised in the same way that an oil group phasing out fossil fuels should be recognised by investors. “Why divest from a company that is doing the right thing?” she asks.
Integrating sustainability through an organisation can hit multiple road blocs. Companies recruiting a CSO should remember that getting the right accountability and governance structure behind the role is essential for sustainability to become strategic and transformative.
