Threat companies will opt to avoid ESG targets

Kearney’s survey of non-executive directors finds an ‘execution gap’ on sustainability.

Kate Hart, partner at Kearney.

ASIC’s crackdown on greenwashing could lead some Australian companies to avoid setting sustainability targets, says Kate Hart, a partner at consultancy firm Kearney.

Hart fears some boards may decide not to set ESG targets in case they are later punished for not achieving them or not adopting processes to work towards those targets.

“I think there is going to be green hushing,” says Hart. “Organisations might actually not want to articulate their targets because they will be worried about an investigation.”

The corporate watchdog is investigating superannuation funds for greenwashing under consumer protection laws and has already launched a case against Mercer.

Hart, who is a chemical engineer by training with a long career in supply chain sustainability, is an advocate for adoption of ESG targets but says there’s a gap between intent and execution at board level in Australia. Kearney recently completed a survey with Melbourne Business School and Russell Reynolds of 64 non-executive directors (NEDs) in 60 companies and found more than half the companies lacked “organisational alignment, focused operating model and resources needed to deliver sustainability initiatives”.

Hart says the research was triggered by discussions with clients about their ambitions for sustainability and what was “getting in their way”.

“The report highlighted that there is this ‘execution gap’ between the ambition and the actual organisational execution readiness, and it starts at the top where there’s no common language regarding sustainability,” she says.

“There are different interpretations of what sustainability means. That’s important because each NED will have multiple companies in their portfolio and if they are (finding) different interpretations of sustainability, there’s no consistent landmark everyone can be shooting for in the same language and with the same understanding.”

Almost 50 per cent of the NEDs define sustainability ambiguously or purely in economic terms, so there is an excessive focus on the economics of ESG, she argues. Hart says the survey found reporting lines in companies are inconsistent and many organisations do not have a chief sustainability officer.

“Only 80 companies in Australia have got approved or committed science-based targets associated with their decarbonisation journey,” she says. “There’s a much larger number than that who have actually set a target but there is no clear pathway for them to get there. That’s really what’s most concerning here.”

What’s the solution?

“What’s really important is how organisations are building the organisational muscle and the connective tissue to actually deliver against the commitments that are being made,” Hart says. “We’re all going to suffer if we don’t achieve our commitments and this does have a time horizon associated with it. And 85 of the ASX 200 either don’t have a zero emissions goal for 2050 or they have one but with no clear plan to achieve it.”

She argues the gap needs to be closed from the board level, with appropriate investment at the organisational level, to really be able to execute companies’ sustainability ambitions.

“It requires a different mindset and a different execution muscle, and people can’t just assume that it’s going to be delivered in parallel to business as usual,” she says. “It just won’t.”

She says sustainability can be a pin the tail on the donkey exercise for some companies – they set a target but don’t have the understanding of what is needed to achieve that target.

Only 15 companies in the ASX200 have SBTi (Science Based Targets initiative) approved or committed targets aligned with the 1.5-degree scenario – holding warming to 1.5 degrees above pre-industrial levels. The Kearney survey found 40 per cent of directors of Australia’s biggest companies were not convinced about the value of ESG and saw sustainability as a risk and cost of doing business, rather than an opportunity.

“This is despite rising director accountability and the fact the overwhelming majority of NEDs perceive sustainability to be core to their business strategy,” the report says.

About 70 per cent of NEDs see their companies as sustainability leaders but only 16 per cent of companies actually meet the execution criteria for leadership in sustainability.

Women NEDs are less confident sustainability is understood by business leaders compared to their male counterparts, the report says.