Sustainable Sustainability: Why ESG is Not Enough
Rajeev Peshawaria
322 pages, Penguin Random House SEA, 2023
The world is coming to the realization that all sectors of society—governments, regulators, businesses, and civil society—must collaborate to save our planet from existential climate and social dangers. However, the clock is ticking, despite spending nearly $30 trillion in ESG funds aimed at catalyzing climate and social action, escalating regulations in most countries, and putting an array of green incentives in place. Why are we still struggling to make the progress we need toward sustainability?
The Environmental, Social, and Governance (ESG) framework became popular in the 1990s and has since become the frontrunner to drive responsible business behavior towards addressing the existential challenges our world is facing. But, despite noble intentions, ESG has primarily spawned a culture of compliance, characterized by mere box-checking rather than the innovative spirit required to salvage our planet. In Sustainable Sustainability: Why ESG is Not Enough, I argue that:
- As a framework based on robust regulation, accessible capital, and enticing incentives, ESG has inadvertently produced counterproductive behaviors, fostering widespread greenwashing.
- Real champions of environmental and societal sustainability view themselves as stewards of the planet and its people, by proactively pioneering innovative approaches to create profitable solutions to today’s challenges.
- Rather than by extrinsic incentives or regulatory pressure, genuine steward leaders are intrinsically driven by an authentic commitment to leave a positive legacy.
Meaningful progress necessitates a values-based revolution. We need to elevate our understanding of leadership to steward leadership—which is the genuine desire and persistence to create a collective better future for stakeholders, society, future generations, and the environment. Steward leaders strive hard to marry purpose with profit. Embracing values like interdependence, long-term view, ownership mentality, and creative resilience, they relentlessly pursue a purpose that fosters a better future for all. Encouragingly, numerous companies have embraced steward leadership as the solution. In the following excerpt, I explore how this concept originated.—Rajeev Peshwaria
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The Evolution of the “Steward Leadership” Concept
As the term suggests, steward leadership is the combination of two words: Stewardship and leadership. But before we combine the two words, we will need to upgrade them in light of current concerns.
The Merriam-Webster dictionary defines stewardship as:
- the office, duties and obligations of a steward
- the conducting, supervising or managing of something, especially, the careful and responsible management of something entrusted to one’s care
So, traditionally, stewardship has been seen as ‘taking care of ’ or ‘serving’. Given today’s existential challenges and the urgent need to address them, we at Stewardship Asia Centre offer an upgraded definition: Stewardship is creating value by integrating the needs of stakeholders, society, future generations and the environment.
Similarly, leadership has traditionally been seen as the action of leading a group of people or an organization or having a position of authority. Again, in today’s context, I felt the need to upgrade this definition. Rather than being seen as the action of directing and telling others what to do, i.e., seeing leadership in terms of a leader’s relationship with her followers or in terms of titles and positions—CEO, Prime Minister or President—in recent years, I have defined leadership differently.
‘Leadership is the art of harnessing human energy towards the creation of a better future.’ However, as explained earlier, to address today’s environmental and social challenges, leaders need to see themselves as stewards of planet Earth and society and maximize their leadership energy by developing honest clarity of values and purpose.
So, at first glance, it seems that all we need to do is to add the word steward before leadership to arrive at steward leadership. ‘Steward leadership is the act of harnessing human energy towards the creation of a better future.’ But this would not answer the question: A better future for whom?
To ensure that the better future is not too narrowly focused on oneself and/or one’s shareholders, we need to borrow from our definition of stewardship, which says that value must be created in a way that addresses the needs of multiple stakeholders, the environment and society at large. In other words, stewardship requires the better future to be a collective one.
Additionally, the desire to create a collective better future must be 100 percent genuine and driven by intrinsic rather than extrinsic motivators.
Introducing these elements into our definition, we can now arrive at a refreshed one: ‘Steward leadership is the genuine desire and persistence to create a collective better future.’
A $10.1 trillion annual opportunity
Steward leadership is neither anti-shareholder nor anti-profit. On the contrary, it boils down to accepting the 21st-century leadership challenge, which is to drive superior shareholder returns by addressing the very challenges that threaten us today. If the World Economic Forum is to be believed, climate change alone represents $10.1 trillion a year in new business opportunities and can generate millions of new jobs by 2030.
So, the idea here is to make profit while addressing the biggest pain points of today’s society—climate change, income inequality, cyber vulnerability and social unrest to name a few. This will require extremely high creativity, innovation and resilience, which governance alone will not activate. We will need honest steward leadership.
Somehow, we need to motivate more business bosses to choose steward leadership so that enough innovation can take place to save us and our planet. Innovation and resilience can neither be legislated nor driven by extrinsic motivators alone. The scope of the ESG framework must be upgraded to include leadership.
But not leadership in the traditional hierarchical sense. We need steward leadership—the genuine desire and persistence to create a collective better future. It is about seeing oneself as a steward of planet Earth and humanity and taking ownership to address environmental and social challenges.
Personal steward leadership
Let’s be clear, stewardship is hard. Creating economic value for shareholders the normal way is hard enough, but creating value by integrating the needs of stakeholders, society, future generations and the environment is much harder. There will be a million obstacles and difficulties along the way. To stay resilient, leaders who choose to pursue stewardship will need a very deep reservoir of leadership energy. This is where steward leadership comes in. Only by maximizing their personal leadership energy can they create value the stewardship way.
In recent times, no one exemplifies such steward leadership energy in business more than Paul Polman, the former CEO of Unilever. Before we unpack what it takes to become a steward leader, let’s take a detour and look at Polman’s attempt at steward leadership.
Paul Polman at Unilever
On January 1, 2009, Paul Polman became the Chief Executive Officer (CEO) and Executive Director of Unilever. At the time, Unilever was the 60th-largest company in the world by market capitalization and was valued at more than $100 billion. By 2009, however, its stock had been on the decline for a decade and management was distracted by frequent restructuring. At the same time, the 2008 financial crisis had shone a spotlight on the role of responsible business at the global stage. Unilever drastically needed a transformation.
Polman knew the world was rapidly changing, with issues such as poverty, climate change and increasing food prices beginning to impact Unilever’s future business prospects. He foresaw consumers becoming more vocal about companies not living up to their roles in society, particularly with the growth of social media and other digital platforms.
On his first day on the job, Polman announced that Unilever would no longer be providing quarterly earnings guidance to Wall Street. He even told hedge funds that they were not welcome as investors looking to profit in the short term. Wall Street was predictably displeased with the statement and Unilever’s share price plummeted 8 percent on the day and a further 12 percent over the next several months. The media weighed in, declaring, ‘Unilever could use some guidance.’ Yet, Polman didn’t flinch. ‘I figured they couldn’t fire me if I did it on my first day,’ he said cheekily and kickstarted a wholesale transformation of the company.
To ensure the success of his vision, Polman replaced or reassigned 75 percent of top management to ensure that his team was aligned with the new strategy. Polman also set out to alter Unilever’s leadership culture to imbibe key leaders with a growth mindset that extended beyond financial returns. ‘You cannot save your way to prosperity,’ he elaborated, as high-performing leaders were crucial in delivering the company’s socially responsible goals. With this in mind, he launched the Unilever Sustainable Living Plan (USLP) in 2010 to double its growth, halve its environmental impact and triple its social impact.
Underpinned by multiple commitments and time-bound targets, the USLP signified a first-of-its-kind plan, in terms of its breadth, size, scope and ambition. USLP has been responsible for Unilever’s growth in their purpose-led brands like Dove, Lipton, Seventh Generation and Pukka tea. According to a 2019 article on Unilever’s website, these ‘sustainable living brands’ grew 69 percent faster than the rest of their business. Even more, these brands have enabled them to achieve cost savings of over €1 billion since 2008 by improving water and energy efficiency in their factories and by using less material and minimizing waste.
Nevertheless, while the USLP provided a framework for Unilever’s long-term vision, particularly for its external operations and output, there remained the concern of pushing forth a growth mindset throughout the organization and especially among its leaders. As such, in 2010, the Unilever Leadership Development Programme was launched to invest in authentic leadership development, assess company talent and enable Unilever to further develop leaders across its operating geographies. The programme forced managers to examine how their lives, work and leadership purpose could seamlessly intersect in a meaningful way to align with the company’s goals and foster stronger relationships and connections internally and externally.
In addition, prior to Polman’s arrival, many senior managers were being rated as over-performing while the company as a whole was underperforming. In response, Unilever introduced its ‘3 plus 1’ output measures, whereby individual managers set three business objectives plus one personal development goal in their performance plans to focus attention on critical, long-term goals. Bonuses were then based on achieving these output measures. By developing such a standard, Unilever prioritized success measures that were much higher than before to emphasize Unilever’s long-term focus for their managers. Ultimately, this cultivated a growth strategy that would reward accountability for the long term and expose underperformers who were heavily focused on promoting their own careers rather than Unilever’s vision.
Overall, while Polman persisted with his vision to transform Unilever, the internal systems and structure he put in place were heavily influenced by the purpose he believed was necessary to create value for everyone, not just the shareholders. However, it cannot be ignored that by pursuing such a vision, Unilever delivered a total shareholder return of 290 percent over Polman’s tenure. Even after Polman’s departure from Unilever in 2019, Unilever continues to lead the world in sustainability and performance.