In the past, corporate management was primarily characterised by the idea of shareholder value (Clarkson, 1995). Today, increasing environmental risks are shifting the spotlight onto business sustainability (Egorova et al., 2022). Furthermore, changes in social values are giving rise to social and leadership issues. As a result, many companies are now adhering to ESG criteria and are discovering that successful implementation requires internal change processes.

By Matthias Larose

The ESG criteria for companies were initially consolidated in 2004 by the United Nations’ Global Compact Initiative and Ivo Knoepfel in the UN working paper entitled “Who Cares Wins.” Alongside the traditional economic investment objectives such as return, security, and availability, sustainable criteria from the environmental, social, and governance (ESG) sectors are now also taken into consideration. Subsequent studies have shown that adopting sustainable management practices in line with ESG criteria can lead to an increase in a company’s value (de Souza Barbosa et al., 2023). 

ESG as a transformation driver

The acronym ESG has become the central objective for measuring and managing the “green” and social contribution of an organisation from several stakeholder perspectives, such as employees, owners or investors.
In order to implement the ESG criteria, however, changes must be provoked, initiated, and promoted. For companies, the ESG criteria can be translated into the following transformation requirements:

• Environmental impact: Companies need to act in a more environmentally sustainable way to reduce environmental impacts. This involves investing in clean technologies, transitioning to renewable energy and reducing CO₂
• Social: Promoting social responsibility requires changes in business practices to ensure that workers are treated fairly, equal opportunities are supported and decent working conditions are created.
• Corporate governance: Sustainability must not and cannot be a flash in the pan. Good and long-term oriented corporate governance is necessary to achieve sustainability at all levels in the company. This includes ensuring a high level of transparency, orientation towards ethical standards and clear responsibilities.

Transformation approach – Human Business Design

The transformation towards sustainability thus requires both short-term and long-term efforts. Companies and their stakeholders that aspire to ESG principles need to make changes in their strategies and business models to shape a more sustainable future for the company.

Transformation requirements for a stronger ESG orientation must be considered holistically. The organisational designs required for this are increasingly thought of and developed from the target customer perspective. In parallel, organisations are expected to adapt to an ever-changing (market) environment and deal with the growing, sometimes unforeseen challenges in the best possible way to tap into the full development potential from the situation of change.

HRpepper offers the answer to this with “Human Business Design” (Völkl/Meifert) – the support for decision-makers to take a holistic view of transformation processes. Human Business Design describes transformation changes along seven pontoons. These thematic islands are partly interdependent and thus provide an excellent orientation framework for critically questioning an existing organisational design.

 The introduction of ESG criteria is an example of such a transformation driver arriving from outside, the handling of which is crucial for the future of affected companies due to its comprehensive effects. Human Business Design helps entrepreneurs, managers and all actors in a transformation process to gain an overview of the thematic areas (pontoons) in which changes (can) take place. In detail, these are:

• Orientation and self-direction
• Products and services
• Responsibility and structure
• Processes and methods
• Places and spaces
• Resources and skills
• Culture and leadership

Together, they provide a holistic picture of the (corporate) situation and offer areas for reflection to form hypotheses: Where and how will the introduction of ESG criteria have an impact and what does the organisation need to shape the change profitably? In transformation processes, it is generally worthwhile to look at all pontoons. The size of the need for action per topic area depends on the respective organisation.

ESG criteria and corporate governance

With regard to the ESG criteria, a central focus for action is emerging in the area of leadership in this process. Even if the ESG requirements under “good corporate governance” remain relatively vague, a great deal of leverage can be achieved. Conversely, “poor corporate governance” can be one of the biggest hurdles to the effective implementation of ESG (PwC, 2021). The “sustainability transformation” therefore fails in many places because, on the one hand, central business models are not designed sustainably in the first place. And on the other hand, unfortunately, we also know from our client projects that it is often problematic even for companies with a sustainability strategy to put it into practice.

A major sticking point are the employees, who are often far too rarely involved in the strategic processes. We at HRpepper Management Consultants then ask: Do they have the necessary knowledge and competences regarding sustainability? Are they aware of the (measurable) goals the organisation has set for itself, where it stands with them and what the employees can contribute? Because employees who identify with their organisation are usually also interested in helping to shape its future.

In this respect, the leadership should communicate a comprehensible, positive vision of the sustainable business model and the associated changes, as well as present measurable goals whose progress is continuously visible to the employees – for example, through quarterly dashboards that are easy to understand and provide information about the connection between sustainability and economic success.

Adherence to appropriate leadership in transformation processes is crucial to ensure a smooth and successful change in companies or organisations towards ESG. Central aspects here are:

• Courage and the will to break new ground
• Openness and the involvement of stakeholders in finding solutions
• Acting as a role model, with acceptance of and compliance with changes in oneself
• Willingness to make mistakes and have them corrected
• Transparency through the communication of results and the making of decisions

Transparent communication, participation and trust as the basis of the leadership understanding bind employees in the long term and motivate them for change. Ultimately, organisational change can be implemented most successfully if everyone pursues a common goal, is convinced of it and all employees can make a personal contribution to achieving it. And what better goal is there than the preservation of our planet?

Outlook

Would you like to develop, adopt, implement or test your corporate sustainability strategy with goals and measures? In order to be sustainable and successful in the long term, HRpepper – together with its cooperation partner Adelphi – offers integrated consulting services in a triad: People, Planet and Profit.