Optimal Placement of The ESG Function Within Organizational Structure

As organizations increasingly adopt sustainability initiatives, particularly in the realm of ESG (Environmental, Social, and Governance) considerations, it becomes crucial to identify the appropriate individual to oversee ESG affairs and delineate the necessary qualifications for this role. Misplacement of the ESG function within a Company can lead to inefficiencies in conducting non-financial reporting, underscoring the importance of strategic placement and qualified personnel.

Some companies struggle to determine the appropriate Management and approach for handling ESG (Environmental, Social, and Governance) matters. A notable example is Tesla, where Elon Musk publicly expressed opposition to ESG considerations. Surprisingly, Tesla received lower scores than fossil fuel companies such as Shell and Exxon. Despite the surge in ESG funds and the impact of influential asset managers like BlackRock, stocks with higher ESG scores experience heightened investment inflows.

ESG advocates contend that Tesla’s environmental excellence is undermined by shortcomings in social and governance factors, resulting in an overall subpar ESG score. Another illustrative case involves Jane Abernethy, the Chief Sustainability Officer at Humanscale. She highlighted the disparity between consumer intentions and actual behaviors. Humanscale, a Company supplying office furniture, implemented a takeback program in response to customer inquiries. Despite educating businesses about the program during the sales process, Abernethy received minimal uptake, with only one inquiry over the past few years.

Upon reflection, Abernethy recognized that the challenge did not stem from a lack of intent but rather from the complexities of dealing with durable goods in a business-to-business model. When the chair is ready for return, her Company may have lost contact with the customer, or the initial contact person might have changed roles or moved to another Company, resulting in a lack of awareness about the takeback program. This highlights the significance of optimal placement of the ESG function within the organizational structure to bridge the gap between intent and action.

The ESG function should be integrated as a sustainability component within the organizational framework. It is imperative to recognize that conducting an internal audit of your own company is not feasible. Therefore, engaging ESG consultants becomes essential to perform a materiality analysis and an audit. These assessments aim to identify existing gaps and provide strategic recommendations. In some cases, consultants may reveal inadequacies in the placement of the ESG function within the organizational structure and offer assistance in restructuring it appropriately.

It is crucial to identify the ESG factors that are relevant to your organization, comprehend the effective management of ESG functions, and strategically position them within the organizational structure. This understanding is essential to prevent misunderstandings and ensure the preservation of sustainability principles.