Jane: [00:00:00] Hello and welcome to the LSEG Sustainable Growth Podcast, where we talk to leading experts on topics right at the intersection of sustainability and finance. I'm Jane Goodland. And this week I'm talking to Alison Taylor, who's a clinical associate professor at NYU Stern School of Business. She spent the last 20 years working with multinational companies on risk, anti-corruption, sustainability, human rights, culture, stakeholder engagement, ESG and ethics. But before we hear from her, let's have a quick reminder to follow us so you don't miss any future episodes. And also, don't forget to rate us on Spotify, Apple Podcasts, or any other platform you use.
Jane: [00:00:43] Hi Alison, great to see you. Thanks so much for coming on to the show.
Alison: [00:00:46] Thank you so much, Jane. It's lovely to be here.
Jane: [00:00:48] So, Alison, you describe yourself as a Clinical Professor at NYU Stern School of Business with lots of other hats and even more opinions. I'm fascinated by that. So, tell us more about your career and what's getting most of your attention at the moment.
Alison: [00:01:03] Sure thing. So, right now I am a full time member of the faculty at Stern, Clinical Professor is the same thing as saying Professor of practice. So, I'm not an academic. I spent some time in mainstream management consulting. I spent time in political risk analysis. I spent 12 years in corporate investigations. So anti-bribery due diligence, fraud investigations, money laundering, political risk. In what we used to call high risk emerging markets. Then I had a career in sustainability. I've also worked on questions of organisational culture. I ran and still run a think tank called Ethical Systems. And then I've got a ton of other advisory roles including with KKR a Swiss private bank called Pictet. And I do various other sorts of speaking and advisory work.
Jane: [00:01:58] And you've managed to squeeze in writing a book as well, I understand.
Alison: [00:02:00] I did, I did, and I've just written a book called Higher Ground. So, I mean, I suppose that is a long winded way of saying I teach, I write but I try to keep my hand in the real world and work with real companies grappling with real problems.
Jane: [00:02:13] Busy, busy lady. But it sounds fascinating, though. I mean, like, all of those things are the sweet spot of what we talk about here on the show. Because, as you know, we really do want to think about the things that intersect finance, business, sustainability. So, looking forward to this. Indeed. And actually, one piece of your work which kind of caught our eye was the article you wrote with a friend of the show Professor Robert Eccles. And that was about the evolving role of the Chief Sustainability Officer, which actually then leads on to a bigger exploration of sustainability and business. And the piece argues that these positions are undergoing rapid and dynamic transformation. I was wondering, could you talk a bit more about what you mean by that?
Alison: [00:02:58] Sure. So, I mean, one of the things to say right up front, right, is that this is a weirdly under-discussed topic, like the role of sustainability within a company who it reports to, its budget, its resources, its remit, its role definition, I think have been really lacking. And even though we hear a lot of discussion about how to integrate ESG into companies, you don't tend to read a lot of granular detail about how this is actually getting done. And then when you look at what a lot of Chief Sustainability Officers are actually doing, which I've done because I work directly with them, you very often find that the role is heavily focussed on reporting. You find that there is a sort of stealth PR aspect to it. You find that the teams often do not have a lot of budget or resources or power. And then maybe most fascinating of all, there's huge inconsistency over where businesses think it sits and what its remit is. And so, to me and Bob, really, this is kind of part of the problem, indicating a lack of seriousness or maybe still siloed thinking about this topic. So, we make a really strong pitch to getting this role in the C-suite, to professionalising it, to defining what it's really doing. And most strikingly, I think, arguing that there needs to be a much closer relationship with the senior leadership team and the finance function in particular, because if a company is taking sustainability seriously, you would expect to see that in mainstream disclosures, which in the US are the 10-K and the proxy statement, and you would expect to see sustainability being factored into capital allocation, governance and strategic decisions in general.
Alison: [00:04:51] So Bob, and I really made this argument that that's what we need. And we explored some examples of leading companies doing this. And also really found on that journey that a lot of the companies we think of as poster children in this space are not necessarily doing the best job on this, whereas it as companies really facing what we would describe as existential sustainability challenges, meaning they're not going to survive unless they adapt to some of these ESG issues that are really going furthest and fastest with treating this as a true strategic priority. So that was the article. It certainly generated a lot of debate. We've since done a follow up survey, which I think has shown that still mainstream companies, senior leaders will say this is incredibly important as a topic. But when you actually look under the hood at what they're doing with data and operations and capital, it's a slightly less pretty picture.
Jane: [00:05:43] And talking of pictures, actually the articles got a fabulous photo of a lion, I think walking through Wall Street, is it? It's very, very cool. You did mention about the fact that you had identified some companies who were taking this seriously because obviously it was very core to their business and the future of their business. So, can we pick up on that a bit about the connection between business strategy, investor engagement and then the the sustainability angle? Because I assume that's one of the stimuluses for, for companies taking it seriously. Right?
Alison: [00:06:16] Yeah. The article quotes Laura Brooks from Anglo American really talking about how many detailed questions investors are now asking about this topic. They're expecting her to have true experts on the line. They're getting really granular. They're not just picking up on ESG scores and taking a high level view. They're really, really much more interested, and much more informed than they used to be. And so, I think traditionally we've seen ESG engagement sitting with the stewardship team very often. And now I think we're really seeing these next generation investor conversations evolve, where you've sometimes got the CFO, the CEO, and the Chief Sustainability Officer in the room talking to investors together. And I think that's really interesting. We might even think of the CFO as dealing with current performance, being somewhat backward looking. And the Chief Sustainability Officer's job is then to consider and lay out a long term strategic vision for the company and the company's future.
Jane: [00:07:14] So I think that puts sustainability squarely in this strategy kind of family, doesn't it? Which I suppose we've also talked about where sustainability resides in an organisation. But presumably strategy is one of the functions that it might end up being in if a company is thinking about it in those terms.
Alison: [00:07:30] Yeah. And I think, whether it reports into strategy or not. And I think you could maybe make these arguments in different ways. You would certainly want to see that there is not a lot of air between the core corporate strategy and the sustainability strategy. You'd want to see sustainability considerations factored into core corporate strategy, because if that's not the case, then the sustainability considerations clearly aren't important enough. So, we just, I think, need to move on from treating this as a side issue, treating this as really an aspect of stealth communications and really saying here are the material issues that we are going to consider. And I suppose that's a different way to think about this as well, that rather than seeing a lot of ticking the box on 40 things and reporting across 70 indicators and working to try and get a better ESG score, what you really want to see is companies focusing on maybe 1 to 3 truly strategic material issues and then reorganising their business to tackle those material issues. That would be an indicator of seriousness.
Jane: [00:08:35] I think that's a really, really good summary of actually what most businesses need to be doing. You talked about in the article about four key changes that you think are required to really get the CSOs into the right space. And I'd like to explore some of those a bit more. So, the first is around strategy and allocation. Then it goes on to stakeholder interactions, investor engagement and then resources. So, let's just take a look again about the strategy and capital allocation. So, leaders in your mind through your research what's happening in those companies with respect to strategy and allocation. That would make you think okay, they take this seriously.
Alison: [00:09:16] Sure. So, I think I mean, again, we can get back to materiality. Right. And is the company saying we are going to focus on these strategic priorities. We are going to treat ESG as a strategic challenge, which means we're going to focus and means we might be reporting on some other things. But that is not the same thing as treating them as strategic priorities. We really found that many materiality assessments are really everything is material assessments and that it's very, very hard for companies to say, here's where we're going to focus and then here's where we're not going to focus. And then I think by extension, if you do see a company truly focusing on a couple of strategic material priorities, you'd expect those to be factored into capital allocation. You'd expect them to be factored into long term incentives. You'd expect them be in kind of mainstream reports and risk analysis and that kind of thing. So let me just go ahead and pick a really controversial example, which is Philip Morris and a lot of people do not want to hear from Philip Morris on a sustainability angle, for very obvious reasons. But one of the things that Philip Morris has done, I think is to try to address the harms of its core product rather than trying to treat sustainability as off on the side. And there are very, very clear sustainability incentives for the whole senior leadership team. And the company has, because it will not survive unless it can do something about this, the company has got the Chief Sustainability Officer in the c-suite reporting into the CFO, and is focussed on the harms of the core product and the business model and not just human rights in the agricultural supply chain or the environmental impact of the product, both of which are important issues. I'm not saying they're not but they're not existential issues.
Jane: [00:11:09] But how many sectors truly have existential sustainability issues that would warrant that type of that level of scrutiny at the C-suite now?
Alison: [00:11:19] I mean, arguably most, if not all of them, right? I mean, I think we can think about fast fashion and whether those business models are sustainable given the pollution, given the labour rights violations and so on, we can think about the future of a lot of food and agricultural products in the face of climate change. We can certainly think about the future or not, of oil and gas. We can think about how mining needs to transform. We certainly can't do without mining. But how can the mineral extraction, how can we think about things like green copper, green steel? So how can we think about adjusting the car industry to account for renewable energy? I mean, I'm struggling to think of an organisation that does not face these existential challenges over the long term. But I think there's a very varying awareness and very varying adaptation, I think to these issues when we look at what the company is saying and doing. And so, some companies are in denial trying to manage these ideas via reputational risk mechanisms and that kind of thing. And some are truly trying to plan for the long term.
Jane: [00:12:29] Yeah. It's interesting, isn't it because I think when you look at that question, you get very different answers, don't you? Depending on how you come at the topic and where you are on that journey. And I think a high majority of people will be very familiar with the risks associated with our kind of resource companies. But then when you start actually thinking about different sectors and industries and thinking about what is the existential risk from a sustainability perspective for that sector, it becomes easier to identify the specific things. So, the other the other change that you were advocating for was around stakeholder interactions. And I was wondering what you mean by that, because stakeholders got this very sort of like umbrella term these days, that it can mean everything, everyone and anyone. Right?
Alison: [00:13:16] Absolutely. So, this is sort of my favourite topic because I think this is kind of a remarkable and I'm going to make a point that I think is sort of obvious, but that is weirdly under discussed. So, you will tend to see in Chief Sustainability Officer job descriptions, that is the job of the sustainability team to look after stakeholders or do stakeholder engagement or tell the story to stakeholders or provide information and disclosure for stakeholders. And that's fascinating for a couple of reasons. One, because by implication, if we're saying it as the job of the sustainability team to look after stakeholders, we're saying by implication it is not the job of anybody else in the business to look after stakeholders. And then that gets even weirder when you think about who stakeholders actually are. So, stakeholders in a business are suppliers, customers, employees and communities. If you are a supplier, you are clearly having far more consequential interactions with the procurement team than with the sustainability team. If you're a customer, you're having far more consequential interactions with the business development team or sales team than you are with the sustainability team, if you're an employee with your boss in HR and so on. So, suggesting that anybody bases their view of the company on the glossy reports put out by the sustainability team is really weird. And then I think it is maybe the most powerful indicator I can think of that although all this sustainability language and rhetoric and commitment sound new, what we're actually doing is engaging in business as usual and delegating nice messaging to stakeholders to a specific team and not actually thinking, what would it take to think about our impact on stakeholders, to think about the externalities of our business, to work on building trust rather than defensively managing reputational risk, and to think about how we consider our impacts on stakeholders throughout the business and not just in one siloed, relatively powerless team. So, I think to me, this is a tale that we've moved from shareholder value rhetoric to stakeholder capitalism rhetoric, but we have not really adjusted the underlying systems to account for that huge change in governance that is really needed.
Jane: [00:15:35] It's fascinating. And so much of what you say there definitely rings true in terms of the statements that, we're all guilty of making in the corporate world about from a sustainability perspective. But that's really interesting. Let's move on to the other change that you want to see happen is around investor engagement. Do you mean by that just more face time between the sustainability person and the investors, or is it something different?
Alison: [00:16:01] No, I think there tends to be conversations between investor relations and the CFO and then mainstream investors, whereas ESG issues are delegated to the stewardship team and the sustainability team. So again, we've got these two sets of siloed conversations, and we're not bringing the conversations together into one coherent whole. And so again, if the investor is taking this issue seriously, and if the company is taking this issue seriously, you would expect to see the sustainability team and sustainability thinking front and centre in those mainstream investor conversations. And that was something that we heard from many of the companies, leading companies that we spoke to. But that is happening because, again, if these issues appear to investors to be existential risk to the business, then investors are interested in diving into them and interested in understanding what the company is actually doing. And that is a very different thing from looking at a company's ESG score and thinking, this is easy, and there's a neat solution, and you've just got a score of 70 and that you can make decisions accordingly. So, I think this also helps us get along or move on from this idea that ESG is about picking best in class companies or sorting good from bad companies and thinking about this as much more of a nuanced decision making tool. So also saying investors need to do the work, investors need to dig in. There's not some easy shortcut to understanding who's doing a good or bad job here. We again have to think of this as a strategic priority. And something that presents true strategic dilemmas and trade-offs.
Jane: [00:17:39] Which obviously works in the context of like an actively managed equity portfolio, for example. But if you look at assets being run off of a kind of passive indices, then I suppose the investor toolkit is somewhat different. But nevertheless, I think, passive managers can still take a view about what good looks like and what they'd expect to see strategically from their companies that are invested in well, they're in the indices basically. So good. And then the final change area, which I thought was interesting, I'm sure that lots of fellow CSOs around the world listening to this will probably say yes, yes, yes, exactly. It's one of resources because resources I think there's probably never enough of them, is there, in terms of for sustainability?
Alison: [00:18:20] I think that's right. And I think here, it starts to get super complicated, right? Because the question of where to put sustainability and how to embed it into processes and thinking and decision making is incredibly complicated. I used to work a lot with ethics and compliance teams, and they face some of the same challenges. How do we embed culture and ethics into the core of the business? But we know what the compliance team is and what it's for and where it sits. Its job is to think about the regulator. Its job is to deflect regulatory risk. Its job is to be the voice of the regulator inside the company. I don't think we've got the same definition for sustainability. And so, we've got this real question of who gets what resources? Are we expecting the sustainability team to own sustainability projects and decision making? Are we trying to embed them into other companies in other departments within the company? Are we treating the sustainability team as a sort of area of expertise that it's doing consulting to other sorts of the business? Is the sustainability team only dealing with certain sorts of material issues? Is it only dealing with reporting? So, what budget and resources and what the team does is very, very important.
Alison: [00:19:33] And I think different companies will need to make decisions around that. But what we do need to move on from I think album very common situation, where the team reports into marketing or communications and their job is to spend all year gathering data and writing a report and nothing ever gets done. And so, I think this is genuinely a very, very difficult thing to handle and difficult challenge for all companies but we certainly don't get anywhere if we stick to be as usual. And I think one thing here that I would say is that the onus really on investors to start to dig into this question and actually ask how the company is going to get from A to B in terms of its operations its data, its processes it's decision making, its incentives, its authority, its governance structure, etc., etc. I think we need to see a lot more focus on these questions, power, resources, culture, that kind of thing if we're going to get from where we've been, which is, I think, picking the low hanging fruit to the next stage of this, which is really where things are going to get knotty and difficult.
Jane: [00:20:40] And I think, the reporting frameworks that are coming in now, ISSB and CSRD, I think that will help investors to see that type of information, because that information is going to be more structured. It's going to be more transparent. But I agree, I think it's really important for investors to be understanding the how this happens rather than just what is happening. And I think all too often the conversation starts at, oh, so you've set targets, are those targets the right targets or what the progress has been, rather than saying, well, how do you make some decisions? How do you make decisions about what sustainability issues you want to focus on? Or what are the key issues for your industry, etc.? So, I couldn't agree more. Let's use that as an opportunity to move on to the relationship between sustainability issues and financial performance, because this is one that comes up time and time again in terms of, but I think that we've sort of covered it in a way. But I'm curious to hear your views about if you're asked, can sustainability or does sustainability affect the financial performance of firms? Imagine you're at the dinner party. It's the age old question, right?
Alison: [00:21:48] Absolutely. Well, you like me, probably see that there is an enormous amount of debate about this topic. Does ESG drive Alpha? Does ESG drive higher returns? This has become I mean; I live in the US. It's a very, very binary polarised conversation. Two colleagues of mine, actually, at Stern have recently written op eds in the FT one saying ESG is dead and needs to go away. The other one saying sustainability is real and smart and investors know it. So, there's this conversation going on in academia, does ESG drive value, or doesn't it? I'm here to just say that the answer is it depends. It depends on the issue. It depends on what the company is doing. It is, I think, a little bit silly to think we can draw some sort of correlation between stock performance at that level and try and say ESG is driving it or isn't. And so, I think what we really need to do is get far more granular and stop treating ESG issues as this big kind of bucket of generic stuff, which is what companies tend to do, and get much clearer on which ESG issues present the company with risks. So, we need better risk management to stop these low likelihood, high impact events.
Alison: [00:23:04] Which issues are drive innovation and value creation, and then which issues present negative externalities that may not yet have a clear impact on financial returns, but could do in future if we can't tell the difference between those issues and what you know, what the particular ESG issue what the challenge actually is, is it an opportunity? Is it a risk? Is it an impact, then we're sure as hell not going to embed this into processes and decision making. So again, I think this is a plea for a less simplistic, if you tick the box on these things, we can draw some correlation at the market level. And again, to kind of treat this as a true strategic priority. And I totally agree with you about the rigour of reporting frameworks, but I slightly worry that we are in the process of moving this from a marketing exercise to being a compliance exercise. And so let me end this comment with, a final plea or a repeated plea to treat these issues as strategic. They're not tick the box reporting issues. They're not marketing issues. They're not communications issues. They are strategic imperatives.
Jane: [00:24:17] Really, really interesting and all very valid points indeed. So, let's finish with some common mistakes, and I'm sure that you see many. And I don't want you to name names, but what are the things that companies should avoid doing that you've actually seen happen to get this right?
Alison: [00:24:32] So the most obvious one is overpromising, ticking the box on 40 things at the expense of focusing on a few things. I see a lot of very vague, nebulous ESG issues that are hard for the average person to understand. I see a lot of yodelling about things that are important at the expense of the really, truly existential business issues. So, a lot of flagging of things that are very convenient to address. You see this, I mean, one very obvious example would be sustainability leaders in tech tend to focus exclusively on the environment and talk exclusively about the environment and climate change. That is fascinating because the truly existential issues facing tech are actually about the social impact of their products misinformation, mental health, advertising, addiction to the product. And so that is such a tell, right, that the tech industry does not want us to think about those topics and wants us to understand sustainability as just restricted to the environment. And then, you see other signs of lack of seriousness related that we've already discussed. So, lack of power and resources for the team. And really a lot of signs that this is being really this is treated as stealth PR so lots and lots of common mistakes, but I want to really double click on this idea that it is genuinely hard to say, here is where we're not going to focus. Here's what we're not going to cover because of the way that this rhetoric has played out, which is sort of if any of your stakeholders care about this thing, you need to be doing something about it.
Jane: [00:26:14] Yeah. I couldn't agree more. It's tough. But I like the idea of less yodelling, more strategic imperative. So, if you need to have a memory of something, that's it's less yodelling. I've never yodelled actually in my life before, and I don't intend to start yodelling now. Alison, it's been lovely speaking to you. You are a force of nature. You've got a lot of energy and it's lovely talking to you. Thank you so much, indeed, for coming on the show. Thank you.
Alison: [00:26:38] Such a pleasure to talk to you, Jane. Thanks so much.
Jane: [00:26:42] So that's it for this episode. I hope you enjoyed it. It was quite a journey. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at fmt@lseg.com. That's all from me but watch out for another episode very soon.
