Video transcript

Joe Kornik: Welcome to the VISION by Protiviti Interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, our global content resource looking into the future to examine the big themes that will impact the C-suite and executive boardrooms worldwide. Today, we’re exploring the future of ESG and its strategic implications, and I’m happy to welcome Mario Abreu to the program. Mario is Global Head of Corporate Social Responsibility and Sustainability for the Ferrero Group, an Italian multinational manufacturer of branded chocolate and confectionary products. Its brands include Nutella, Kinder, Ferrero Pralines, and the breath mint Tic Tac. I can tell you we’ve got at least two of those products in our house right now.

Mario, thank you so much for joining me today.

Mario Abreu: Thank you very much for inviting me, Joe. Happy to be here.

Joe Kornik: Mario, you’re head of Corporate Social Responsibility and Sustainability for the Ferrero Group. Talk to me, if you could, a little bit about your role there, both day-to-day and where you’re focused for the future.

Mario Abreu: Absolutely. Yes. This role of head of CSR and Sustainability here is relatively new. It was shaped about three years ago. The idea was really to bring sustainability up in front into the strategy of the group. I report into the Chief Strategy Officer under the staff of the executive chairman, and the responsibility here really is to set up the long-term direction for the company. As I’m joined by a team with me, I work very much in collaboration with the rest of the organization that has more of a mandate to implement.

In my role, most of my day is about external engagements. We need to understand what is happening around the world, what the external stakeholders are expecting, what are the new trends, what are the latest in science that we need to be aware about. Combining that with internal collaboration because, as we set out a long-term direction, a long-term strategy for the group, it is important to collaborate and support my colleagues who are, on the day-to-day, driving the activities, driving the projects that really make the positive effect that we are looking for.

Joe Kornik: I know a lot of our viewers are probably familiar with the brands that I mentioned in our intro. Tell me a little bit about Ferrero Group, the company, in terms of its global reach and its size and its scope.

Mario Abreu: Yes. Ferrero has been a growing business. We have done a lot of organic growth since the beginning of the company in its origin in Alba, in the north of Italy. In the past few years, we have also acquired a few new businesses so that allowed us to expand from what was mainly an European-based operation and outreach into having a much larger footprint today, for instance, in North America, but also growing in Asia and some other markets. We are more than 35,000 people right now in the company. We have many brands. Besides the ones you have mentioned before, we have acquired or developed a few other ones like Butterfinger and a few other companies that we have acquired, for instance outside the more traditional chocolate business in regards to cereal bars like Eat Natural. The company is expanding, and this is one of the very interesting things of the job, as well, is to bring in new companies, understand where they are in their, let’s call it, sustainability journey and help them convert towards the path that we have been setting here.

Joe Kornik: Right. Especially, as you grow, I know Ferrero takes sustainability very seriously. I know it’s a big part of your company’s culture. I was taking a look at your annual sustainability report that you have published on your website, and we can put a link to that in the video. I know that sustainability report measures everything from environment and how you source ingredients to responsible consumption and empowering your people. Can you walk me through some of the highlights of that report because I think it’s a really interesting look at the company?

Mario Abreu: Yes, absolutely. As you said, we try to put our information available there on an annual basis in the sustainability report. We have been doing even a bit more than that. We have been publishing on our sustainability website, ferrerosustainability.com. We have been publishing a lot of other documents as well that we believe stakeholders are interested to see. For the report, as you said, we have now a history of publishing some of these reports. We are more of the type of company that talks about the work then walks the talk. We try to avoid over or under promising, and we try to focus on delivering and reporting transparently on things that we have achieved.

We have, for instance, this year reached a very important number for us which is regarding sustainability of cocoa. 100% of all of the cocoa resource is now sourced through independent programs. We maintain our palm oil certification for 100% of the palm oil resource. All of our volumes are segregated and certified according to their own table of sustainable palm oil. We are progressing in terms of packaging. About 84% of our packaging is now recyclable or designed for recycling or proposed for reusable. Another 84% number there because we have reached it now, 84% of renewable electricity for all the electricity that we source ourselves across the world. We have a number of initiatives in regard to our own staff. We report the total amount of hours, for instance, that we have in regard to training which is consistently growing as well.

We try to be as broad as possible in regard to the report, looking at the four pillars of our sustainability approach today. I hope the reporting is interesting for the readers. We know it is still a long report. It’s almost 100 pages, and we would like to make it more precise. At the same time, there is a lot there. There is a lot of information there. We try to also bring in some case studies. We have very interesting collaborations ongoing on the ground in Turkey to protect human rights for hazelnut farmers. In Ivory Coast and Ghana, also in regard to protection of human rights for the farmers, the small holders, who source a lot of the cocoa we consume in our plants. All of this makes it for a long report, but I hope an interesting one anyhow.

Joe Kornik: No, it is, absolutely. I spent some time with it, and it is thorough and it is long, but it’s really interesting. A lot of that report focuses on the progress that the company has made or is making. But some of it also is a vision statement on where the company is going or wants to go. Can you talk a little bit about some of Ferrero’s goals for, let’s say, 2030 and beyond?

Mario Abreu: Yes, sure. Joe, as I mentioned, we like to talk about what we have been doing and avoid promising too much, but one of the responsibilities that I had right in here was to start setting these ambitions towards 2030, right? One of the first things we did was to get our climate goal, approve it by the Science-Based Target Initiative. We have aligned our emissions in terms of Scope I, 2, and 3 through the IPCC curves according to the recommendations of SBTI. We have a target for reducing our carbon footprint of all the energy we produced, all the electricity we buy by 50% between 2018 and 2030 despite growth, and we are growing at a reasonable pace. That requires not only that we go for a renewable electricity, but also that we produce energy ourselves with the lowest possible carbon footprint.

We have goals for packaging for 2025. We have goals for sourcing cocoa, hazelnut, palm oil, sugar for 2025 as well. Now, what we’re trying to do in regard to 2030, and the longer perhaps horizon there, is to use some of the ambitions we have now been able to put in place for 2030 and use that as some kind of backcasting. If we have a vision of where we want to be in 2030, and we take account of where we are today, then we start influencing what the next two years will give. With that, we’ll reach 2025 for which we have already some goals as I mentioned, packaging materials, et cetera. That already starts to give us an opportunity to think about what are the next steps beyond 2025 that we’re going to have to implement to be able to reach the ambitions for 2030. Because at the end of the day, as we see with climate change, the conversation has been mostly to reduce emissions, mitigate emissions.

Now, we see that climate change is all over. We see that on a daily basis. Then we have to continue working on mitigation and we have to continue working to minimize and avoid emissions as much as possible, but we also have to increase the resilience of the business to adapt to the changes that we cannot avoid anymore. That, for me, is one of the key important parts of being able to look into the future. It’s to be able to increase the resilience of our business, and not only about making promises. It is about ensuring that whatever comes our way in the next five, 10, 15 years, we’re going to be ready to continue developing the business in a sustainable way from a perspective of profit generation, of providing environmental protection, and creating social justice. If we don’t do all of these at the same time, we know we’re not going to be successful.

Joe Kornik: Right. No better lessons certainly than what we’ve gone through the last few years in terms of not knowing what’s around the corner or what the future may hold and being resilient. A lot of what you discussed sounds like ESG. That’s where we’re focused on with this content initiative, the future of ESG. I know Ferrero prefers to focus on sustainability and corporate social responsibility rather than ESG. I’m just curious as to your thoughts, why is that?

Mario Abreu: Joe, very interesting question. I think for most of laymen, it might not make any difference. At the end of the day, it’s all about sustainability. I think ESG has become a bit more, should I say, fashionable in the past few years because the investors have really started to be quite conscious about the impact of sustainability on return on investment of businesses because of risk, because of unwanted consequences of business practices. I think that it’s great that if companies have not been looking at a more science-based, human, people-based sustainability, that now they are addressing sustainability indicators or attributes to reduce the risk for investors, so that is good.

For Ferrero, what has been working really well is we come from a heritage of, as you said, corporate social responsibility, which, looking back over time, fits very well with the intention of a family-owned business. We’re still privately-held. From the early days, the founding fathers of this company, they always believed that they needed to give something back to society. Giving back to society, whether we call it philanthropy or corporate social responsibility, is a good thing. It’s about making sure that you are supporting, where you work, the people that work with you, the people that are in your supply chain to be able to give something back.

Now, as we start talking about resilience, as we already did, we need to make sure that we understand what science tells us as the right way to go, at least, in terms of environmental protection. For that, that’s kind of how we bring the word sustainability. Is this environmental protection based on science? But also on the acknowledgement that without social justice, we cannot be able to leverage on the people we need, on the people that are working in our factories, working for our suppliers, working on the farms and the fields. Combining social justice, environmental protection, and return on investment, this triple bottom line, that’s how we address sustainability.

Joe Kornik: Right. No matter what you call it, I think it’s clear that Ferrero is clearly ahead of the curve when it comes to sustainable business or the business of sustainability, even putting up that annual report that we talked about earlier for 14 years and clearly you’ve been thinking about it longer than that. I guess I’d be curious to hear your opinion how you think other businesses are doing when it comes to sustainability and tie that back to the consumer, right? I mean, this is not just an initiative to do good and do well, which would be great, but there’s a real strategic business reason for sustainable business.

Mario Abreu: Yes, Joe, I believe so. There is a reason and I think more and more businesses are seeing that reason. If you ask how businesses are doing, it’s very open, very difficult question to ask. Nevertheless, I believe that more and more companies are seeing the opportunity to work on sustainability. I still believe there is probably, generalizing a bit, but there are probably two types of approaches. One approach is fixing yourself on one specific attribute and make sure the consumer understands you are very good on it. It takes something like, I don’t know, let’s take carbon. Then all your communication and a lot of your effort is put into your carbon footprint, reducing your carbon footprint, and being good on carbon.

You may not have a 360-degrees approach. You may not be doing right in the number of other important attributes of sustainability, but you focus on that one and you try to get your consumers to recognize you for the efforts you’re making there. There are companies that probably are more mature in the journey, and they try to do everything or, at least, they try to understand what are the main aspects, main attributes that should be part of their strategy, and they go towards a handful, a dozen, whatever, of important attributes that are encompassing of all your business. I think the companies that are looking at one specific attribute, I think at this point in time, they are able to connect with the consumers, but I don’t think they have the full picture of the long-term resilience.

Joe Kornik: Any advice for those businesses that maybe aren’t so far along? What steps could they be taking or what steps could business leaders be taking to set them up for a successful and sustainable future?

Mario Abreu: Yes. I think, first and foremost, you have to have someone in your organization who is spending enough time to think about sustainability, who is empowered to not only hear your external stakeholders, but also interact with your internal stakeholders and start deciding what are the key elements to be the priority focus. You cannot just go from zero to 100 in a couple of seconds. You have to be able to shift your gears as you move forward. You have to be able to understand where are the pressing points, the hotspots. Start listening to your business partners, your consumers, and start creating both the internal—not necessarily the organization, but the internal group of people that will feel empowered, that will feel capable of starting to work on sustainability attributes. Then also start reaching out to consumers or to your end customers and be aware of what is it that they want to get from you. I think everybody has to understand. It’s complex and it’s a journey. I think this is one of the key aspects that we have to keep in mind all the time about sustainability.

Joe Kornik: Thanks, Mario. Last question from me, and it’s bold-prediction time. I’d like to ask you to look out to 2035, let’s say, and predict a couple of things for me. One, where the Ferrero Group would be at that point in time? Two, where do you think we’ll be as a planet? I mean, do you think it’s a better world in 2035? How optimistic are you?

Mario Abreu: Carefully optimistic. I think we have to have a better world in 2035. I don’t think we can afford not to. I mean, if we care about our children and their children, we have to have a better world in 2035. We cannot wait for 2050 to start changing things. We have to start changing things today. Where the Ferrero Group will be, well, hopefully, that’s what we’re here to do, is to guarantee that we will continue to have a reliable supply chain, continue to make products that our consumers are delighted to taste and to savor, and be able to be resilient no matter what will come our way. I think that’s where we’re trying to head, again, to be more resilient in our strategy. I think we know enough about the path that we are taking, and hopefully, Ferrero is going to be, if not stronger, as strong as it is today in 2035.

Joe Kornik: Thank you so much for the time today, Mario. I really appreciate the insight and the look inside the Ferrero Group.

Mario Abreu: Thank you, Joe. Thanks for inviting me. Thanks a lot.

Joe Kornik: Thank you for watching the VISION by Protiviti Interview. I’m Joe Kornik. We’ll see you next time.

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Kornik: Can you tell me a bit more about the African Union Development Agency (NEPAD), its overall goals and how you plan to lead the organization into the future?

Bekele-Thomas: This partnership called NEPAD came about as a result of the recognition by the African Union heads of state, including 33 prime ministers within Africa, that the partnerships we had in place previously weren't in the best interest of Africa. So, we wanted to develop an organization where the priorities are set by African governments, where Africans would lead their own development and determine their own partnerships. The African Union initially came up with some priority areas of interest, such as infrastructure, security, education and several others that would be developed over time. But it realized that it didn’t have a vision to tie them all together, so it established what’s called Agenda 2063, Africa’s blueprint and master plan to transform the continent into a global powerhouse of the future. It is Africa’s strategic framework that aims to deliver on its goal for inclusive and sustainable development for Africa. It is ambitious and unique; no other continent has such a framework. It was adopted in 2015, but the African Union realized it needed an implementation plan, a way to respond to all the aggressive priority areas outlined in Agenda 2063. That led to the creation of the African Union Development Agency in 2019.

Kornik: Agenda 2063 is very ambitious, for sure. Can you talk about your specific goals that you have for the next several years?

Bekele-Thomas: Agenda 2063 is a visionary document and there are certainly some priority programs that are relevant and important, but what is most important for Africa is not just having the vision but the action. The implementation is critical, but in order to implement programs you need two things: One is resources; we need to mobilize the necessary resources to help us implement the program. So, resource mobilization is one of my focus areas. The second focus area is to build capacity. Not just capacities at NEPAD, but national capacities at all levels as part of a 10-year implementation plan so we can monitor our progress and hold governments, civil society organizations and the private sector accountable, if necessary. The problem we have all over Africa is that our inaction is leading us to crisis. COVID-19 in Africa was a result of the inaction by our governments. We have many paradoxes in Africa, and one of the paradoxes I see is, we’ve got many of the skills other parts of the world have, but here, they're often frustrated; they’re despondent, they're dependent, and they find themselves frustrated by inaction. Transformation requires an all-in approach, and sometimes that is lacking in Africa. So, reversing that trend here is critical to our future success.

Kornik: You touched on a lot there and how important it will be for Africa to tackle those problems for the success of the continent in the future. How optimistic are you? Where do you think Africa will be on the global stage when it comes to some of the sustainability and ESG initiatives in, say, 2035?

Bekele-Thomas: I think it's very important that we are optimistic because that’s one way we can galvanize our energy to do better, right? I am extremely optimistic. I know Africa cannot do it alone. We are all interconnected; it’s a collaborative effort. We share the same planet, and I see Africa having a bright future. Africa is rising. I believe if we just do the right things and harness all this positivity in Africa, we will be fine. Africa has what it takes to be better in the coming years if we implement our Agenda 2063, which is a very inclusive, very comprehensive, very visionary document. But like I said, good intentions will not be enough. We need to have the processes; we need to have the foresight; we need to have the strategic scenario-planning in place. We need to accelerate implementation. And it’s important that we have the private sector support the implementation of Agenda 2063—that will lead to economic advancement in Africa. And the better the economy, the more stakeholders we have, which will lead to prosperity and less poverty. My dream for the future is to see a connected continent and an integrated Africa; a resilient and self-reliant Africa; a continent that celebrates it natural resources; an Africa that is growing and economically viable; an ethical Africa with no inequality. That is my vision for Africa, and I believe it will become true.

Podcast transcript

Joe Kornik: Welcome to the VISION by Protiviti podcast. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content resource looking into the future to examine the big themes that will impact the C-suite and executive board rooms worldwide. Today, we’re exploring the future of ESG and its strategic implications for people, process and the planet, and I’m happy to be joined today by Sharadiya Dasgupta, founding partner of Blue Dot Capital, where she leads the firm’s strategy, client partnerships and industry engagement, as well as advising CEOs, CIOs and family-office principals. Blue Dot is a sustainable-finance consultancy that partners with financial services firms to support the end-to-end development and execution of ESG and impact investing programs, capabilities and products. Sharadiya, thank you so much for joining me on the podcast today.

Sharadiya Dasgupta: Thank you so much for having me, Joe. Looking forward to the conversation.

Joe Kornik: So, you’re a founding partner, as I mentioned in my introduction there, of Blue Dot Capital. Can you tell me a little bit about Blue Dot and what it does, and how it’s helping to shape the future of ESG?

Sharadiya Dasgupta: We are indeed, as you’ve so elegantly described in your introduction, Blue Dot Capital. We are an ESG and impact-investing consulting firm, and we have a narrow and deep focus on serving the asset management community. We work with investment management firms investing across public and private markets, and support the development of their in-house ESG and impact-investing policies, strategies and program capabilities.

In terms of shaping the future of ESG, well, that’s a great aspiration to have. We are starting out, and it’s not just us as a firm that’s starting out. I think the whole ESG space has so much room to grow in rigor and sophistication, and so much evolution will happen, so it will be prematurely self-congratulatory for me to say if we are shaping the future of ESG. We aspire to. Time will tell. Also, if we do succeed in earning that validation, I want that recognition to come from our clients and partners, and not self-certified, so I won’t comment on that right away.

Having said that, we are fortunate to work on a range of interesting ESG projects with our clients, some of which have pretty novel components, so let me share a small subset with you and your listeners. We are currently working with the investment team of a private market-investment platform to explore and understand, what does a sustainable mobility strategy look like? Sustainable mobility is a big field that involves multiple industries, so we are trying to understand, what are the impact objectives that a private-market investment firm can try if they launch a sustainable-mobility fund? What should be the hierarchy of those objectives and themes? What are some of the unintended consequences that we should be guarding against when designing this investment strategy?

The second example is related to supply chain. As we all know, supply chain continues to be the topic du jour, so we are working with a very large global data company that’s working on developing the blueprint of what an ESG-informed supply chain financing might look like, and we are doing that in partnership with a consortium of leading lenders. So, we do have a front-row seat to see how the ESG conversation is evolving, and we are excited about that.

Joe Kornik: Yes, it sounds like it, and those are some really interesting examples that you just brought up, which is really interesting. And you are in the forefront of the investment that’s happening in ESG, and there’s been a real rush of money into that space—into ESG investment funds—certainly, since the pandemic. Sustainable business has come of age in the last few years. Do you think that movement toward ESG investing is real and lasting, and where do you see it today, and where do you see it going in the future?

Sharadiya Dasgupta: Climate change and the need to decarbonize and enhance our resource efficiency, that’s a business imperative. That will require businesses to adapt and innovate, and I do not see any intelligent tenable resistance to that any longer. At best, it’s a matter of time. It’s your choice as business leaders whether you start acknowledging it now and you’re taking strategic action, or you could buy yourself a little more time and delay by another few years, but there will be some tradeoffs for doing that, but it’s just a matter of time. I don’t think there is a question of whether you need to do it or not.

Parallelly, there are also some immense demographic and socioeconomic shifts happening that have implication for consumer preferences and buying habits, again, that impacts the bottom line and that impacts investment-allocation decisions. To answer your question, the practice of incorporating ESG into business decisions and into investment decisions, that will continue.

However, some of the ways of incorporating ESG and some of the mechanisms that we have practiced will have to evolve and will have to mature. For example, we often hear people—including, if I’m not mistaken, some of your guests on your earlier episodes, have talked about the problem of ESG data. You hear people often complain about the lack of quality ESG data. Regulators, and to a certain degree, market forces will take care of that. Regulators are already setting disclosure regulations for publicly listed companies, for asset management firms. All of that will end up fixing this problem to a large degree.

However, the problem that is not often talked about enough is the lack of education within investment management firms to analyze and draw meaningful insights from the data, because traditionally, the paradigms of investment management do not really have room for a more critical examination of some of these risks and opportunities that we are now talking about.

There has to be reorientation within investment management firms that force them to take a more expansive view of risks and opportunities. I hope that over the years to come, there is greater sophistication in how investment management firms analyze the ESG data that’s coming their way, and this cannot just be led by the ESG functions in the investment firm. This has to be truly cross-functional. There has to be buy-in from investment teams, and investment teams will also have to develop this capacity to analyze and critically examine this data. There has to be a cross-pollination between disciplines happening here. This cannot just be the responsibility of the ESG and climate teams of companies.

That’s one prediction as to how it will evolve, and my other prediction is that there has to be a disaggregated examination of ESG. ESG is convenient. It’s a convenient acronym and a convenient way to organize information. But E, S and G are such broad topics, and an expression like ESG can end up being reductive, so now there will be a trend away from using ESG as a catch-all, and sophisticated investment firms will have to develop capabilities and research functions that have the capacity to do a more critical and nuanced examination of the components of ESG and the subcomponents that are relevant to their investment theses and their investment philosophies. The gist is that the investment management profession will have to become more sophisticated in how they dissect and examine ESG information.

Joe Kornik: Interesting. I feel like both aspects of that answer did talk about talent and skills and capabilities, and I’m wondering: You mentioned that more rigorous analysis of the data is necessary. Do you think that’s just a tweak to reposition some existing professionals in these firms, or do you think that’s systemic? Are we not developing those skills and capabilities even at the B-school level or university level? Do you see a skills gap, I guess, is what I’m getting at around data and analysis as we move through the next several years.

Sharadiya Dasgupta: It’s a skills gap. You say that correctly. There is a skills gap, and the skills gap would have to be bridged. It cannot be just the conventional financial analysis–led conversation. It has to be a bigger table, and we need folks with an understanding of some of the operational aspects of ESG, folks with a sophisticated understanding of climate risks and their implications for economic growth and financial performance, so it is a skills gap.

But the good news is that there are enough initiatives already afoot that are tackling this problem of a skills gap. I know universities that have launched multicollaborative research efforts that have participation from the financial services industry, that have participation from academia and some of the other disciplines needed that we just talked about to broaden and deepen our understanding of the interplay of ESG and financial performance. Institutions like the CFA Society and CAIA, they will increasingly take a bigger role in making sure that investment management firms have the tool kit needed to continue to future-proof their investment decisions. A lot more is needed, but we are off to a good, promising start.

Joe Kornik: I mentioned in my introduction that Blue Dot also advises CEOs and CIOs, so I’d be curious: What’s the advice? When you advise business leaders on sustainable investing, for instance, what are some of the biggest challenges they’re facing? What are their needs, what are their questions and what is your advice to those business leaders on overcoming or navigating those challenges?

Sharadiya Dasgupta: One of the challenges that leadership teams are facing is how to balance the now with the 2030 or the 2050 goals, and it’s not easy. Just with the geopolitical developments and uncertainty, the energy-transition conversation now has connotations about energy security, etc., so a number of CIOs and business leaders have had to reevaluate their stance on fossil fuel investing and how they still continue to be an enabler in the decarbonization process that has to happen. Is it just a momentary hiccup? Does it have ramifications for medium-term plans?

It sounds sprawling and messy, and it is sprawling and messy, so we do not always have neat answers, and we are lucky to have clients who understand that there are no silver bullets, so the advice that we give our clients is to make sure that they are budgeting for and they are accounting for the long-term trends and that, as stewards of capital, they’re not taking their eyes off what are the long-term directional trends, but then, in that short to medium term, they are adjusting for some of the variability that we just talked about. That’s the biggest challenge that business leaders are facing.

Joe Kornik: You mentioned long-term quite a few times there in your answer, and you led me into my final question of the podcast, which is, if I were to ask you to look out a decade or more — this is VISION by Protiviti, so we like to bring smart people to the table and ask them to give us their vision of the future and where we’re headed in a decade or even more. We could even go all the way out to 2035, which is a nice, round number. What do you see in the investment space? How much progress do you think we’ll have made, or where do you think we’ll be, or what kind of world do you think we’ll be looking at in this space in, let’s say, 2035?

Sharadiya Dasgupta: Let me shift the timeline to 2030—2030 is a major milestone and we have a major climate milestone for collective humanity’s sake we should be able to reach, and I do want to be optimistic about it. We have to halve emissions by 2030, and I hope that we have achieved that, or we are not perilously away from achieving that goal by 2030. Some of the technology needed to take us there already exists. It’s a matter of scaling that technology. It’s a matter of making sure that the capital continues to flow toward those technologies.

And then, in some cases, we do not have the technology ready, but our human ingenuity can definitely come into play, and there is so much innovation that has just happened in the last decade or so. There is no reason to not expect that to continue. So, the trifecta of politics, policy and capital, hopefully, will get us to that critical halve-our-emissions milestone by 2030. That’s my overarching big hope, and investors and the financial system, more broadly, have to play a critical role in making that happen.

I also hope that by 2030, the elements of equity are fundamentally entrenched in the climate-change conversation. The climate-change discourse has major implications for equity, and the ideas of equity within countries—even within, let’s say, the United States. Predominantly, or to a large extent, the most brutal impact of climate change will be felt by the historically disadvantaged communities. So, again, you cannot have effective climate policy if you are not taking into account those considerations, but it’s not only within countries. Globally, again, the climate-change conversation has major ramifications for the capital flow into developing countries and to frontier economies.

So, I hope that, as I said, the trifecta of policy, politics and capital gets to a point by 2030, whereby these considerations of equitable growth are just inextricably entrenched into the climate-change conversation. Those would be my hopes and goals for 2030. To tie it back to how we are shaping the future of ESG, I hope that Blue Dot, along with all our peers and the financial services industry and other professional services firms like Protiviti, that we all play a role in making that happen.

Joe Kornik: You sound optimistic. Do you think that we’ll get there? Do you think we’ll be in a good spot in 2030?

Sharadiya Dasgupta: I woke up and chose hope today. You’ve caught me on a good day, so, yes, I am choosing to be hopeful today. As ESG professionals, it’s not always easy to hang on to hope. Obviously, there have been a few curveballs, especially on the political and policy-making side of things, which has been disappointing, but as professionals in the space, if we don’t hold on to hope, it will difficult for us to focus on action. Sometimes, the change and the progress feels incremental, but hopefully, it will all add up and we will be doing whatever it needs for us to get to that 2030 milestone or, as I said, at least in the ballpark so that we are not in for a major climate calamity for us and the future generations.

Joe Kornik: Well, hopeful seems like a really good place to end this podcast. Thanks, Sharadiya. This was fun and informative.

Sharadiya Dasgupta: Thank you, Joe. Thank you again for having me.

Joe Kornik: Thank you for listening to the VISION by Protiviti podcast. Please rate and subscribe wherever you listen to podcasts, and be sure to check out Vision.Protiviti.com to view all of our insights and content around the Future of ESG theme that we’re currently working. On behalf of Sharadiya, I’m Joe Kornik. Thanks for listening. We’ll see you next time.

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Video transcript

Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, our global content resource looking into the future to examine big themes that will impact the C-suite and executive board rooms worldwide. Today, we’re exploring the future of ESG, and I’m thrilled to be joined by Lyndsey Anderson, global head of research and insight at the Economist Intelligence Unit, to discuss its latest ESG rating service report, which measures the environmental, social and governance scores of 150 countries.

The Economist Intelligence Unit, the EIU, offers insight and analysis of the economic and political developments in a complex global environment, identifying opportunities, trends and risks on a global scale. Reviewed quarterly, the ratings identify the markets that are laden with reputational and compliance risks, as well as those that provide supportive environments for ethical operators. Lyndsey, thank you so much for joining me today.

Lyndsey Anderson: Thanks, Joe. It’s really nice to be talking with you.

Joe Kornik: The EIU gave each country a ranking in each category—the E, the S and the G—and that creates one overall ranking. The results are pretty eye-opening. Let’s start with the positive. Europe is far and away the big winner here, led by the Scandinavian countries in continental Europe. Eight European countries, and Australia and New Zealand, make up the top 10. Only 12 countries received an A rating, and 10 of them were in Europe. Why is that? What’s the driving force behind that success in Europe?

Lyndsey Anderson: It is quite stark in terms of that European outperformance, and it is particularly the environment, so it’s particularly the E strand that’s driving this and, in particular, its environmental policies are a major reason why so many European countries rank so highly. Governments in the European Union have invested significant funds into promoting the uptake of global energy sources. EU members also have strong common regulation when it comes to things like protection of water quality, waste disposal, forestry protection, etc.

It’s worth noting some outliers in that E pillar there, that environmental pillar. It’s not just richer, more developed countries that completely dominate that E pillar. The U.S., for example, trails emerging economies such as Chile and Costa Rica and others. If we look at the other two pillars, the social and the governance pillars, that trend is similar. European countries generally fare very well. One aspect of that is, the larger resources have allowed for the more effective regulation of some of these issues—things like corruption, labor conditions, civil rights abuses, etc. That contributes to Europe’s all-around strong showing in the rankings.

Joe Kornik: I’m going to ask you about the U.S. in a little bit, and I do want to dig a little deeper into that, but now I want to go to the flip side. China, Vietnam and Saudi Arabia were among some of the worst-performing countries. It seems we’re not going to be able to make too much progress for the planet without China coming along, so what were the biggest problems for these poor-performing countries? Was it the E, the S, the G, or a little bit of all three?

Lyndsey Anderson: Yes, it is a little bit of all three. China ranks 119th out of 150, Vietnam 122nd, Saudi Arabia 126th. These are low-ranking markets, and it is generally a weaker showing across all the three pillars, so they fall toward the bottom of the rankings for the E, the S and the G.

Vietnam gets its weakest score for the governance pillar. China and Saudi Arabia get their lowest scores for the social pillar. There is a fair bit of nuance within that. Both China and Saudi Arabia score badly for things like freedom of association, freedom of expression. Saudi Arabia performs worse on things like female labor participation and gender equality, whereas China performs worse for some of the labor rights indicators. None rank highly in terms of environmental performance, and that’s due to a limited transition away from fossil fuels, weak protection of domestic ecosystems, etc. It is a very mixed picture for these markets, and there is no one thing pinning them toward the bottom of the ratings, or an obvious area where they could improve and jump up.

Joe Kornik: The report illuminates for me—and maybe this is obvious—that climate and environment, and, specifically, decarbonization is where we still have a lot of heavy lifting to do. Do you also see those findings, and how do we get there? I know the report highlights some dire global situations, like drought in Africa. These are big problems, so I’m curious about how we tackle them. Is there a role for business leaders in solving some of these biggest ESG challenges that we have in front of us?

Lyndsey Anderson: Yes. That’s spot-on in terms of climate and the environment. The environment remains the worst-performing of the three pillars in our ESG ratings. We’ve got only four countries—Denmark, Estonia, Latvia and Lithuania—that received an A rating for that pillar, compared to 16 markets that received an A in the social pillar, 30 markets that received an A in the governance pillar.

And, returning to Europe, the European Union is a good example of how rapidly business investment can respond to ambitious decarbonization, ambitious broader environmental policies. EU countries have been some of the quickest adopters of renewable energy. They have significantly expanded the areas of legally protected ecosystems, made progress with reforestation efforts, and this has all contributed to these highest scores. In terms of how we tackle the issues, other large economies that currently perform far worse on environmental issues, on that E pillar, can learn a lot from the EU. The likes of the U.S., India, China can probably achieve quite rapid change if stringent environmental regulations were even gradually put in place because of the business investment that could then follow.

Notably, of course, the implementation of these regulations can then have global ripple effects, global knock-on impact. For example, sticking with the EU, the minimum standards that have been applied on all sorts of environmental issues, ranging from ethical sourcing of minerals to food quality, they’re forcing suppliers in non-EU countries to align their own products with these higher EU practices. High standards in these larger, better-performing economies can have positive ripple effects on the rest of the world.

In terms of the role of businesses and business leaders, businesses have an enormous role to play in terms of addressing these challenges. A discussion on regulation and policy can sometimes dominate when we’re trying to think in general terms about what progress is being made and what kind of issues are still outstanding. But business leaders and, of course, consumers, the customers of businesses, have a huge role to play in terms of bringing about change. An advantage that many businesses have is that they are often able to be more flexible and more nimble. They can change strategy more quickly in response to emerging challenges than governments often can be, and a lot of very big corporations are also operating in a global marketplace. They’re maybe less constrained by needing to respond to ESG challenges in a way that has to serve a specific national interest.

A crucial first step in terms of the role of businesses, naturally, where a lot of progress has been made, is to ensure that businesses understand the challenges, understand the diverse range of risks that these challenges pose to their businesses. That’s ranging from reputational and compliance risks posed by operating in certain markets to actual physical and infrastructural risks associated with the environmental pillar in particular, with climate change—things like the potential for political instability rise as a result of ESG factors, which can obviously have a very destabilizing effect on businesses at a local level.

Of course, there is an enormous amount of research and data that demonstrates the value creation that a proper strategy for addressing these sorts of ESG challenges can have for businesses. That’s across that whole spectrum, from reducing these sorts of operating risks to missing against potential reputational damage to reducing costs by investing in efficient technologies. Businesses have the potential to be complete partners in addressing these challenges rather than being led by regulation.

It’s not to suggest that contributing to solving some of these ESG-related issues is not without its challenges for businesses, because as you say, Joe, these are big problems, and solving them might necessitate things like more collaboration between businesses that are historically used to being in competition with each other, for example. So, there is this corporate cultural-change challenge that we’ll need to follow on in some areas from this—more ready acknowledgment that individually tackling these things just makes sense in terms of risk mitigation, reputational management, the ability to attract investment, etc.

Joe Kornik: When these business leaders look out a decade or a more, it’s pretty clear that climate and environment are the front-burner issues for a lot of them. Where do you see social and governance globally a decade from now? Where do you think that they will rank? Do you think that the environment will still be the big thing that will be on our plates, or where do you see social and governance in a decade

Lyndsey Anderson: With that time frame, the environment is likely to remain the most relevant aspect of ESG analysis, and that’s due to the increasingly visible impact of climate change and environmental degradation on the world and, obviously, the urgency in terms of the need for action. I mentioned earlier, we’ve got four markets that score an A in that pillar, so that also shows you the amount that still needs to be done. We’ve got a situation where many countries have set this net-zero goals for 2050, and to achieve those, they’ll have to accelerate their energy transition markedly over the coming decade, and that will just increase the prominence of environment on the agenda.

It feels like social issues have come into prominence a little bit more gradually, but we would expect them to continue to advance. So, particularly with things like gender equality and minority rights, they will continue to advance up the agenda and grow in importance. This just feels like a less well-served area in terms of the availability of data to track and measure progress. Maybe less uniformity in terms of agreeing what constitutes good, but the growing calls for this information do support the view that it is going to continue to advance as an issue, albeit, possibly over the next decade, secondarily to the environment. Governance is more complicated. Of course, it remains important, but the increasing size and importance of autocratic economies to the global economy—most obviously China—does complicate the advancement of democratic governance ideals and progress and pushing this up the agenda.

Joe Kornik: One way to think about the future is to take a look at some of the scores and rankings in emerging economies. Uruguay, Chile, Costa Rica did very well, but some of the emerging manufacturing hubs, like Morocco, India and China, did not. When you look at those two sides of the coin, what does that tell you about the future of ESG in 2030 and beyond?

Lyndsey Anderson: As we discussed already, ESG issues are evidently an increasingly important consideration for businesses. Operating in countries with weak performance in aspects of ESG, whether that’s environmental protection or labor rights, can carry significant reputational damage or compliance risks. These considerations do have the potential to slow investment into these weaker-performing markets to the benefit of those economies that could pose lower reputation or compliance risks. Now, of course, manufacturing hubs do tend to have a large energy consumption. Unless this hub that is drawing investment away has a clean-energy matrix, more investment in manufacturing and better-performing markets risks just pushing up emissions and in turn worsening that country’s environmental rating.

The energy mix of those markets that could draw some of that manufacturing investment away is an important thing to consider if we think about that decade-long investment trend. On the flip side of course, the emergence of manufacturing investment going elsewhere does have the potential to drive positive reform in some of the emerging manufacturing hubs that you mentioned. Places like Morocco, Vietnam, Ethiopia help facilitate and drive regulatory change over time, and that brings me back to this earlier point I made about the role of business leaders in choosing where to invest. Businesses can contribute to change, and that is from both the impact-investing standpoint and in terms of encouraging and driving reform.

Joe Kornik: You mentioned earlier political unrest when we talk about the S, the social. There are plenty of alarming findings in this report, but one of the biggest, or one of the most alarming, at least as far as I’m concerned, is the decline of democracy that the report points out that we’re seeing worldwide. What do you make of that? What does that mean for the future of the planet and people on the planet?

Lyndsey Anderson: The scores for governance in our ESG rating, they do echo a trend in the EIU’s annual democracy-index report, an annual report that we produce looking at the state of democracy globally. There’s been a trend for several years how that the world has been experiencing this democratic recession since around 2015. The pandemic, COVID-19, has accelerated that in many ways. That’s raised the power that the governments have over people’s lives, which, in some cases, has led to the erosion of individual freedoms. There have been more country-specific setbacks for democracy, as well as coups on the African continent in 2021, particularly in West Africa.

Probably the biggest trend we see, or the biggest determinant of how democratic values could evolve over the next decade, is something that our analysts have termed the China challenge. China’s economic performance over the past 40 years has created this formidable competitor to the U.S. China’s increasingly vocal claims about the superiority of its governance model have put Western leaders on the defensive, and, ultimately, a reduction in any commitment by countries to democracy and to personal freedoms would result in a sustained weaker performance in the social and governance aspects of ESG over the medium term.

Joe Kornik: I said I would circle back to the U.S. This is my final question for you—you’ve been very generous of your time. I’m based in the U.S., and a lot of our readers for the VISION program are as well, so I have to ask you how the U.S. is doing: Where did the U.S. rank overall, and what do you see as some of its major challenges for the future?

Lyndsey Anderson: The U.S. as a striking underperformer in our ESG rating is the reality. It ranks 33rd out of 150 markets covered. That means it trails most European Union members. It trails many other developed economies such as Australia, New Zealand, Canada, Japan, and it trailed some emerging economies as well—the likes of Uruguay and Chile. The ratings don’t neatly align with income levels—in particular, our data shows that there isn’t a particularly strong linkage between how affluent a country is and its environmental performance as compared to other pillars. Now, there is this stronger correlation between income and the scores for social and the governance pillars. I think that’s what makes the U.S.’s underperformance more striking.

The U.S. bucks the trend where richer countries generally perform more strongly in those social and governance parts of the ratings. The U.S. is ranked 19th out of 150 markets for the social pillar. It’s ranked 21st out of 150 for the governance pillar. It’s bucking the trend in terms of things like the relatively weak protection of labor rights in the U.S. compared to in other developed economies, for example. The environmental pillar is without a doubt the area where the U.S. needs to make more progress in order to climb up the ESG ranking. In the environmental pillar, it ranks 59th out of 150 markets, and it’s dragged down by still-limited uptake of renewable energy, still-significant exports of coal and oil. It still has a long way to go on that E pillar in particular.

Joe Kornik: Thanks, Lyndsey.

Lyndsey Anderson: Thanks very much, Joe. It’s been nice to talk to you.

Joe Kornik: I know those ratings are updated quarterly, so I’ll be checking back in for sure. If you’d like to learn more about the EIU’s ESG Rating Service Report or read more about the rankings, check out the link to the executive summary that we provide in the introduction and show notes. Thanks for watching this VISION by Protiviti interview with the EIU. I’m Joe Kornik, and we’ll see you next time.

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The irony of responding to mounting evidence of climate change by actions which boost carbon emissions illustrates a core conundrum for India. On the one hand, India is among the countries most vulnerable to changes in the climate—including a risk to the monsoon pattern on which hundreds of millions of farmers rely, receding glaciers in the Himalayas which feed the great rivers of the north and east, and more intense storms and flooding.

Yet the politics of a noisy democracy make the hard decisions required for India’s sorely needed energy transition more difficult. The rising middle class aspire to the carbon-heavy lifestyles they see on streaming content—cars, travel and summer air conditioning. And politicians shy away from taking on the vested interests of King Coal, at least not while 77% of India’s power is generated in government-owned thermal plants and more than a million jobs in key states depend on the coal industry and its supply chain.

By 2030, India will be the most populous country on the planet and have the second largest economy behind only China. It’s critically important for us all that India gets this right.

At COP26 in Glasgow in November 2021, India’s climate dilemma was again on display. The Prime Minister, Narendra Modi, was an early advocate of climate action from his years as Chief Minister of Gujarat, and published a book entitled Convenient Action calling for radical policy change. He pleasantly surprised many by coming to Glasgow offering a more ambitious national contribution by 2030 and a net zero target date of 2070. In a fast-growing economy with a very low per-capita carbon footprint, these were genuinely stretching commitments. Yet it was India which, on the last scheduled day of the conference, held up the final Climate Pact by refusing to agree to the intent to “phase out” unabated coal usage, and instead settling for “phasing down” coal.

At the same time, it is clearly true that it is in everyone’s interest, including that of India, that growth should become less carbon-intensive and more sustainable. The government of India has taken responsibility to change its power generation and transport sectors, but—as in other countries—needs to be careful about the politics of tackling coal and imposing new taxes.

The logical and ethical solution to India’s climate dilemma is a “grand bargain” with the global community, especially richer and more polluting nations. The government of India can turbo-charge India’s climate transition by pricing carbon across the economy in return for international partners offering climate finance at significant scale.

To achieve just India’s 2015 commitments at COP21 in Paris would require investment of $3 trillion, so estimates of the price tag for carbon neutrality are in excess of $20 trillion. Most of this debt and equity can come on commercial terms from private markets, given the underlying positive economics. The good news for international investors is that India’s climate transition offers a huge, long-term investment opportunity as India’s economy—currently the fastest growing in the world and rapidly moving from the fourth largest economy to the second by the end of the decade—commits to an epic and fundamental energy transformation.

Podcast transcript

Joe Kornik: Welcome to the VISION by Protiviti podcast. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content initiative looking into the future to examine big themes impacting the C-suite and executive boardrooms worldwide. Today, we’re exploring the future of ESG and its strategic implications for people, process and the planet and, specifically, how business leaders can create and foster a culture of sustainability at their organizations.

Today, I’m joined by two of my Protiviti colleagues to discuss what that means, how we get there and what the future holds. Joining me for the discussion today is Fran Maxwell, Global Lead of the People Advisory and Organizational Change segment, and Kim Lanier, Director with the People Advisory and Organizational Change segment. Fran and Kim, thank you so much for joining me on the podcast today.

Fran Maxwell: We’re excited to be with you, Joe.

Kim Lanier: Hey, Joe. It’s great to be here.

Joe Kornik: So, when we talk about this culture of sustainability, what does that entail, and why is that so important?

Fran Maxwell: As you probably are aware, there’s a lot in the market around environmental, social and governance—ESG—and what we think is that we’re at the infancy stage for organizations, developing what that looks like for them and embedding it into their overall culture. When we’re talking about culture, we’re talking about a set of behaviors that an organization tries to adhere to or tries to drive to. We believe a culture of sustainability is getting those things that drive your business from an environmental, social and governance perspective embedded into the fiber and the tissue of your organization. It’s just a part of how you do business, not necessarily something you need to think about.

Kim Lanier: To tag onto what Fran shared regarding a culture of sustainability, it entails developing a clear sense of direction by developing a statement of purpose in regard to ESG. That’s a great place to start. Purpose statements can be effective drivers of sustainability programs. They tend to home in on what is most important. There’s a tendency for organizations without that to address too many sustainability topics that may or may not be relevant to their core business. Most organizations still think in terms of what, how and why. Good leaders will put the why first, hence the purpose statement. Building a culture of sustainability means embedding sustainability into a core business strategy.

Joe Kornik: In general, how do you think most companies are doing in terms of building that culture of sustainability that you’re talking about, and do you think business leaders and boards recognize the importance of that?

Fran Maxwell: Joe, I’ll address your first question first. It’s challenging to come up with a generality, because organizations are all over the place. There are some organizations that are further along the maturity spectrum than others, that may have ESG metrics already built into leadership goals or individual goals. Those organizations are further along the spectrum as far as developing a culture of sustainability.

And then there are other organizations that are still trying to get their arms around what ESG means to them, like Kim mentioned. Maybe they’re doing too many things, or maybe they’re not doing the right things and they need to take a step back and figure out what direction they need to go. When we’re chatting with organizations, we often talk about starting at a materiality assessment so you can put a strong plan together in figuring out what’s important for your organization as it pertains to sustainability.

Joe Kornik: I feel like companies are at a pivot point right now in terms of the moment we’re in. Fran, you mentioned the different levels of maturity, what we just went through, and what we’re facing in the future, do you feel that too? What’s different about right now, and does that present any unique opportunities?

Fran Maxwell: One thing that’s different about right now is people are paying attention to this. Boards are, investors are. There’s a ton in media about it. We even see that as we’re interviewing candidates for positions—they’re asking about what our sustainability efforts are. What are we doing from the ESG perspective? What are our DEI programs? What do they look like? People—consumers and employees, or candidates—are paying attention. That’s what’s different, and that obviously drives board behavior and CEO behavior. If I were to highlight the difference, that’s the key component.

Kim Lanier: Increasingly, society is expecting companies to exist for more than just profit. They want them to contribute to that greater societal good, and that means taking care of people, communities and the planet. Society is driving this. Government is responding. And employees, especially millennials and Generation Z, want it. They want that sense of higher purpose connected to their work life. It’s rare that all these things converge at once. The key for the organization is not to get too political about it. It shouldn’t be a flavor-of-the-month approach. There’s a unique opportunity right now if we do this right and balance building a good business—profit, purpose and societal good all together—and take more of a long-term perspective.

Joe Kornik: And you both touched on this, but could you expand on it in terms of what needs to be in place for this culture of sustainability to exist and take root in an organization and flourish?

Fran Maxwell: Kim addressed a portion of it. It’s communicating the why: Why are we taking this on? I also think having a direction—understanding what’s important to you. The most important factor, though, is ensuring that the C-suite is modeling the behaviors that they expect from their people as it pertains to developing a culture of sustainability. We know that behaviors change and are modeled after leadership. Those leaders need to model these behaviors and recognize other folks that also share those behaviors and make it a priority for their leadership team to take these big initiatives on and be held accountable for them.

Joe Kornik: Let’s look out a bit into the future. What would you say are some of the key attributes to creating this culture of sustainability? Can you talk about what aspects of this can be addressed near-term and what ones may take longer for businesses to implement?

Kim Lanier: If I have to identify a few things, it would be the top four, as we talked about earlier: The mission, where there has to be a clear direction of purpose to establish a drive toward sustainability and ensure that the stakeholders and employees know how to align to the organization’s overall strategy and objectives. The second component would be consistency. There need to be systems and structures and processes established to support that so that it gets embedded into the organization, and the extent to which an organization can define the values and systems would form the basis of a strong culture of sustainability.

The third component would be the involvement or activation, and this is where once the system exists, it’s about involving and activating the workforce. This is asking a question: “Are our people aligned? Are they engaged?” It’s about getting them committed and owning and responsible for ESG and sustainability inside the organization. The fourth component would be being more adaptable. It’s about paying attention to trends and feedback from stakeholders, and it’s pausing and asking ourselves, “Are we listening to our key stakeholders? Are we listening to the marketplace?”

To address your question about what’s near-term and what’s longer-term, the near-term is creating a culture, setting that right foundation with mission and purpose. The other elements, like consistency and involvement, might take a little bit more of a longer-term view and involve resources from leadership to mature and make happen.

Fran Maxwell: Joe, I might add to what Kim said, and I believe it was in the foundation of what she said, but I’d like to call it out the measurement component: where you can measure the success of your ESG programs. You can see this most aptly, typically, in DEI programs, the diverse candidate pulls you’re bringing, or diverse hires, or those sorts of metrics. It’s important to have those KPIs or metrics in place—again, you're holding yourself accountable for meeting these standards.

What Kim said that I’ll underscore is, it’s probably important to revisit every so often at the board level. I don’t mean every year, but every two or three years. The culture of sustainability, and sustainability as a whole, is a journey. It’s not necessarily a destination, and that goes to Kim’s adaptability comment: We can’t just set our course and think that’s exactly going to be it. We have to be prepared and open to making some changes and some curves, and taking some left-hand turns when we don’t expect to.

Kim Lanier: I love the comment about measurement, Fran, and I want to stir up a caution flag, especially for companies that are just getting started: One of the common things for companies that are just getting started is to measure everything, to go crazy with the KPIs, and if you’re just starting out, it’s good to identify those few metrics that are key to your ESG mission and strategy, and then expand from there rather than getting so overwhelmed with so many different KPIs. It’s hard to pay attention to so many indicators. The more mature organizations will evolve to that point, but when you’re just getting started, it’s a good idea to keep it simple.

Joe Kornik: Great advice. I was going to ask you about some of the steps that business leaders should be taking. What advice would you give them to make sure that they’re on track for success in 2030 and beyond? The point of VISION by Protiviti is to look far into the future—a decade or more. There are a lot of near-term things they should be doing, but let’s focus more on those longer-term challenges. What advice would you give business leaders to make sure they get this right?

Kim Lanier: That’s a great question. My guidance would be to get the governance and accountability in place for the long term—to realize that it’s more of a marathon and less of a sprint. If you start with that foundation that we talked about earlier in having a good mission, coming back to that and making sure that those systems and processes are reinforcing that, and putting the energy and the resources into communicating to all your stakeholder groups and engaging them, those leading practices will set you up for success for the long term.

Fran Maxwell: I’d agree with Kim. I might be more philosophical in what organizations should do to make sure they’re successful in 2030 and beyond. It’s fair to say that trying times are going to continue to happen. Divisive things are going to happen in our world. We look at the war in Ukraine as one of those examples right now. Not that that’s divisive, but there’s a crisis there. It’s really important for organizations to lean into their purpose and lean into their company values when these big global events happen, and not necessarily be all things to all people, but be really clear as to who they are to their customers, who they are to their employees and who they are to their stakeholders. Organizations that do that will be very successful in 2030 and beyond.

Joe Kornik: Let’s stick on that 2030 theme, because the whole point of VISION by Protiviti, again, is that we like to bring in smart people and ask them questions about the future. I’m not going to let either of you get out of here without at least making a prediction or two. If I asked you to look out a decade or even more—let’s say 2035—where would you say we’d be? Are you optimistic that we’ll get this more right than wrong? When you forecast out, or when you think about 2035, what do you see?

Fran Maxwell: Joe, you’ll see the successful organizations get more right than wrong, because the organizations that are on the flip side and struggle, you’ll see consumers and employees vote with their feet. They’ll go elsewhere. They may be willing to pay a little extra money for a competitor that is more focused on sustainability or more focused on the environment. And we’ve already seen that trend happen, especially as Kim mentioned earlier, at the Gen Z and millennial levels. We’re at this unique time where the consumers and the employees are now requiring that organizations are held accountable to certain standards. That’s my opinion: In 2035, the folks who get this right will have more consumers and more talent wanting to come toward them.

Kim Lanier: Joe, both Fran and I are optimists by nature. I’m cautiously optimistic that we’re going to be in a good place. Companies will take some time to figure this out. By 2035, we’ll see, as Fran mentioned, successful companies getting more right. And the other trend we’ll start to see is organic coalitions emerge. These coalitions will be groups of like-minded companies with more of a long-term perspective that shares that common culture of sustainability.

The founder of the World Business Council for Sustainable Development coined a concept he called “practical partnerships for sustainability,” and we saw that with things like the total-quality movement way back in the day, where companies come together with practical partnerships from different sectors to combine skills and provide access to practices that one partner might not have. While he might have been ahead of his time when he predicted this would happen with ESG, the more it becomes mainstream and the more it becomes a regulatory requirement, the momentum is here—this will likely become more and more of a reality as more companies implement, have experience with and involve a lot of sustainability practices.

It makes sense that companies will come together. It’s mutually advantageous to share these leading practices, and what works, and how to overcome barriers. That’s the hope for the next 12 years.

Joe Kornik: I hope so as well. Well, thanks, Kim, and thanks, Fran. This was fun.

Fran Maxwell: We appreciate the opportunity.

Kim Lanier: Yes. Thank you. Great conversation.

Joe Kornik: And thank you for listening to the VISION by Protiviti podcast. Please rate and subscribe wherever you listen to podcasts, and be sure to visit us at Vision.Protiviti.com to keep up with our latest theme, the Future of ESG, and subscribe to sharpen your vision. For Fran and Kim, I’m Joe Kornik. We’ll see you next time.

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Over the years, there have generally been two ways in which business leaders have addressed their “business with a purpose” emphasis: initially, through corporate social responsibility (CSR), and more recently, through ESG (environmental, social and governance) actions.

As an initial approach, CSR began to gain momentum in the 1970s. The concept focused on how much positive impact a company had on society and often had an outward public focus. CSR tried to demonstrate that a business takes an interest in social issues, rather than just those that impact its profit margins. Often, this was done to attract customers and employees who share the same values. While the movement’s purpose was to demonstrate that companies were doing right by the world, but since every company’s approach was different, their efforts really couldn’t be compared.

ESG, which originated in 2006, is replacing CSR in importance and relevance because it offers the promise of tangible, measurable and comparable data that could quantify a company’s impact. From the outset, I have been a big fan of the ESG concept. While it was established to allow socially conscious investors to evaluate a company’s social behavior and make responsible investment decisions, ESG has continued to expand post-COVID. The environmental and governance elements are well-established with a range of standardized metrics available to measure impact. The “S” element tends to be less operational.

In time, I anticipate a range of changes, including more regulation, more standardization, and more investor and consumer scrutiny. This is a good thing. It will help the world to understand the significant, positive role that business can and should play in helping to address the important issues of our time. ESG has been described as the “next generation of the concept of business with a purpose.” But despite this positive trend, I feel there is still more that needs to be done.

Video transcript

Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, our global content resource looking into the future to examine big themes that will impact the C-suite and executive boardrooms worldwide. Today, we’re exploring the future of ESG and its strategic implications for people, process and the planet.

I’m happy to welcome Tom Tropp to the program. Tom is Global Chief Ethics Officer for Gallagher, a Rolling Meadows, Illinois–based global insurance brokerage, risk management and advisory firm helping clients address risk, protect assets and recover from losses. As global chief ethics officer, Tom says, his job is to make sure the firm is doing the things it should do. While compliance is a must-do, ethics is a should-do. Tom, thanks so much for joining me on the program today.

Tom Tropp: It’s good to be with you.

Joe Kornik: Tom, let’s start with your role as global chief ethics officer at Gallagher. What does that role entail?

Tom Tropp: Well, it’s a lot different than it is from a lot of companies. We established this position 15 years ago, and the concept is that we clarified the difference between compliance and ethics. We have a chief compliance officer who is a lawyer who reports to our general counsel, who reports to our CEO. I am the global chief ethics officer. I report directly to the CEO, and I’m dealing with issues that focus on values.

We say that compliance tells us what we must do; ethics tell us what we should do. It’s about beliefs and values and culture. When it is a legal matter, it goes to the compliance department. When it’s something to do with the values of the company, the culture of the company, it comes to me. As you can imagine, there’s a lot of crossover. I will get something that I feel, “We need to have the lawyers involved in this.” They will get something and say, “We need to have Tom handle this.” It’s been interesting. As I said, it was 15 years ago we established it. We think there have been just a small number of companies that have copied it. We know they copy it in a sense because they very often call me and say, “How do you do this? How’s this structured?” and so we think it’s a different way of approaching. It has proven to be better for us.

Joe Kornik: Is there anything you can share? I’m curious, because 15 years seems like a decent amount of time. I don’t think ethics was quite a front-burner of an issue, perhaps, back then than it is today, so anything you can share about the evolution of the role over those 15 years?

Tom Tropp: Oh, yeah, it was interesting: Pat Gallagher, if he was on the call, would tell the story: I had just joined the company as a merger partner, and I had just finished four years at the University of Chicago at the graduate school there, studying ethics. I said to Pat, “You need a chief ethics officer, and I don’t know exactly what that does, but you need to have one.” We talked for a while, and Pat said, “You know, that’s the stupidest idea I’ve ever heard. Let’s do it,” and we did it, and it’s evolved.

The initial concept was to go out into the field, visit with our branch offices. We were a much smaller company then. We had 7,000 employees in two countries. Today, we have 42,000 employees in 51 countries, so it’s a different company now, but initially, the idea was to go out and talk to our employees, ask them if they think we’re ethical, talk about ethics, what it means, and then listen to them. We called my visits listening sessions. We learned some interesting things.

Specifically, to answer your question, one of the very first things that surfaced was, we had just opened our processing center in India—a brand-new project for us. We had a couple hundred employees over there. We’ve got over 7,000 now. But we had just opened that, and I started visiting offices, and people were saying, “We think it’s unethical that you’re sending jobs to India.” I came back and talked to Pat about it, and we realized what the problem was: We weren’t sending jobs to India. We were creating facilities to make the jobs in the U.S. more efficient. We realized what had happened was that we hadn’t communicated it properly. We hadn’t focused on the fact that this was set up to improve your job. And that was a catalyst to convince us that we had some value in this and we needed to keep going. As the years have gone by, I’ll tell you, Joe, we have surfaced so many things—so many good things that I hear in the field—and so many problems. It’s very easy to address those issues when you’re reporting to the CEO/chairman of the board.

Joe Kornik: It makes it much more of a strategic role, obviously. What are some of those ethical standards and loftier goals that Gallagher has set that go above and beyond just basic compliance, and does the insurance industry present any unique challenges?

Tom Tropp: We have a document called “The Gallagher Way.” You can look it up on our website, and we invite people to read it and to use it. It’s got 25 tenets, things that we believe in. We wrote it in 1984, and it became a standard—the grounding for our company. All 25 of those things talk about what I would put into the ethics category—even a few of them that talk about sales. They talk about how to sell appropriately, ethically.

For example, number seven is, empathy for the other person is not a weakness. It’s OK to worry about each other. Some companies that we’ve read about, you’ve read about, that’s not accepted: “Go back to your desk and get to work.” Number seven is, we’re all cogs in a wheel. We’re all important. We have an award that we give to people that any employee can recommend an employee—the Cog Award—and we send them a certificate that says, you did something that made you a cog in the wheel. Those are our goals. Our goals are listed in that “Gallagher Way,” and I believe that of our over 40,000 employees, 90% of them can, if you ask them, start naming two or three of those 25.

Joe Kornik: When you think about where ethics fits into ESG, ESG has been something that has become top of mind for most business leaders over the last several years, and certainly, ESG falls into that. In general, how would you say companies are doing these days when it comes to where integrity and ethics fit into the overall ESG model?

Tom Tropp: I worry a little bit about it. Initially, when this first surfaced—the term, three, four years ago—I was asked by our board, “What is this ESG thing, and how are we supposed to focus on it?” and I said, “Our company’s over 90 years old. ESG is everything we’ve been doing for 90 years. It’s just that it never got a title.” It used to be called corporate social responsibility. Now, they have brought it together, and it’s great because it gives us a singular terminology to deal with.

Unfortunately, about every three weeks, the definition of ESG changes, and so it’s an evolving thing. I believe that it’s good. It’s a good thing we’re doing this. My fear at this point regarding ESG is that it’s going to move toward Milton Friedman instead of Ed Freeman. Milton Friedman, Nobel Prize–winning economist from the University of Chicago, his theory was called stockholder theory, and he said, “The only job of the president, of the CEO, of a publicly traded company is to grow value for the stockholders.” Ed Freeman, 15 years later, at the University of Virginia, said the same thing, but he used the word stakeholders, and he included all of the stakeholders of an organization.

My fear at what I’m seeing with ESG now is that it’s becoming driven by the investor community rather than favoring the other stakeholders. I’m afraid that it’s going to become something that is that is only focused on profit—encouraging people to buy our stock because we’re ESG-approved as opposed to encouraging people to respect us, because we’re worrying about all of those things.

Joe Kornik: Is there anything that you or other business leaders can do to ensure that they don’t fall into that trap—that they get it right?

Tom Tropp: Absolutely. We’re doing it. We’re all doing it. I am so impressed with some of the things I’m reading in the business journals about how people are focusing on this. Look at what’s going on with climate change. There is no way that climate change and global warming would be as big a subject today as it is unless we were focused, again, on identifying this connected concept of ESG. Now, in some countries—the U.K., in particular, and Australia following closely, and then Canada—it’s becoming a G as opposed to an E. It’s become, “You will do this type of thing,” and that’s fine.

That’s great, but when we survey our employees every year—we call it a culture survey—always, the first thing these folks bring up is, “What are we doing for the climate?” It’s a huge issue, and I believe companies are starting to see that among their employees and their other stakeholders—their clients, their vendors—it’s a huge issue. And my fear about the investor-community thing is real, but I’m also comforted by the fact that the other stakeholders are also focused on this and are pushing companies to respond.

Joe Kornik: You touched on a few of these, but I’m curious: What’s required? What else besides some of the things you’ve already talked about? What’s required for a company to excel in terms of its ethics and integrity? What advice would you give business leaders around what would be important for a company in order to excel in those areas?

Tom Tropp: The first, very logical, answer to that is leadership from the top. This has to go up to senior management. There has to be a conviction on the part of senior management that these things are important. If senior management doesn’t buy into it, forget it—it’s not going to happen. Now, senior management can’t run it, but they have to support what’s going on. I don’t create anything that we do. There’s people in various departments in the company who create that, but they know that they have support from someone who reports to the chairman, and that’s critical that you have to have that.

Then, you have to have a culture in the organization that encourages that circular thinking. If you don’t have that, you’re never going to get good, positive input. The stuff we learn about all of these subjects from our employees is absolutely critical. I just had a conversation yesterday: We decided we wanted to sponsor a particular organization that deals with a certain type of serious illness, so I looked for someone who was focused on that. I found someone. I talked to that person yesterday, and he totally changed my thinking on it. He said, “No, that’s not the organization you want to support. It’s this other one that is doing more important things in that area.” I said, “Fine. Do the research. Prove it to me, and then let’s go.” I never would have thought of that myself—it came from the field. There’s an amazing amount of wisdom out there in every company. You’ve just got to tap into it.

Joe Kornik: Well Tom, you’ve been incredibly generous with your time, so I appreciate that. We call this program VISION by Protiviti because we want to bring smart people together and have them look out a decade or more and give us their vision of the future and where they think this is all headed. When you think about sustainability and, specifically, ethics, any predictions about what kind of world you think we’ll be in a decade from now, or 2035, let’s say?

Tom Tropp: I could tell you what I wish would come true. We’re talking about setting our net-zero goal, and a lot of companies are doing 2050. We decided to do 2052. We haven’t announced it yet — we haven’t officially made the decision — but we think we’re going to do 2052, because that’ll be Pat Gallagher’s 100th birthday, and I figured the two of us are going to show up at the party in wheelchairs.

I don’t worry about our company in a decade or longer. We’re very focused on promoting people from within in our organization, and you don’t get promoted if you don’t buy the culture, and so I’m pretty sure we’re going to have the same type of emphasis. I am optimistic, and I find myself wondering if I’m insane when I say that, because there’s so much pessimism in the world today, but I find myself optimistic about that. I do think in spite of some of its flaws, this ESG movement is going to make a difference. People are starting to focus on these issues, and I believe companies are responding, and they’re responding on both ends—both the stockholder end and then the end with all the other stakeholders—so I’m optimistic. I sure hope I’m right.

Joe Kornik: It’s an exciting time. Businesses can lead the way on this one—perhaps even more so than they have on things in the past. I do think that this is an area where business can run with this cause and do good things.

Tom Tropp: I hope so. I hope you’re right.

Joe Kornik: Tom, thanks again for your time today.

Tom Tropp: It’s my pleasure. Always a pleasure to be involved with your group.

Joe Kornik: Thank you for watching the VISION by Protiviti interview. For Tom, I’m Joe Kornik. We’ll see you next time.

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