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How Sustainability and ESG Initiatives Impact Corporate Culture

How Sustainability and ESG Initiatives Impact Corporate Culture

June 2024

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Environmental, Social, and Governance (ESG) standards and sustainability initiatives are reshaping how companies operate and shifting organizational cultures.

From influencing employee behaviors and operational practices, to transforming leadership decision-making and corporate transparency, ESG is becoming deeply embedded in all aspects of business.

We spoke with Dr. Christoph Jaekel, Head of Corporate Sustainability at BASF, and Dorthe Schering Nielsen, a Danish Independent Board Director and Executive Advisor who was previously with companies like Nike, Vestas, and Bestseller, about their experiences with and views on this topic. 

The Impact of Sustainability and ESG Initiatives on Corporations

As Christoph Jaekel explains, “In our industry, the ‘E’ part of ESG has always been very important and has further developed from EHS and product responsibility towards climate protection and circularity as two important transformational topics. Realizing that we all can make a difference in reducing CO2 emissions is critical to having everyone on board, as the transformation towards net-zero will fundamentally change many things we currently do in our industry.”

Jaekel shares how BASF has implemented a digital solution mapping CO2 emissions to product carbon footprints. “This implementation triggered a company-wide change process, and it is great to see that this Product Carbon Footprint has now developed into a ‘second currency’ in many of our discussions, whether operational, strategic, customer-oriented, or supplier-oriented.”

Studies show that strong ESG practices correlate with improved financial performance. A meta-analysis by Friede, Busch & Bassen (2015) found that around 90% of studies show a non-negative relationship between ESG and corporate financial performance, with a large majority reporting positive findings. 

To top it off, about 77% of companies recognize that their sustainability efforts increase customer loyalty—a significant number when considering the impact of consumer sentiment on business success. Consumer trends further emphasize the urgency for ESG adaptation, with research indicating that 44% of consumers are more inclined to support sustainable brands. 

Thus, it’s clear that ESG initiatives can drive top-line growth, reduce costs, minimize regulatory interventions, improve employee productivity and talent attraction, and optimize investment and capital expenditures.

Embracing the “E” in ESG is crucial, but the “S”, or social, component is equally important. “The ‘social’ or maybe rather, the ‘societal’ part of ESG will be the make-or-break of the transformation. For me, that is obvious from the numerous political debates during 2023, of which the debate on private household heating options was the most prominent. If people are not on board, none of the needed change will happen,” emphasizes Jaekel.

Engaging Employees and Stakeholders in the ESG Journey

BASF is engaging stakeholders through conferences and events to involve employees at all levels. “For example, BASF addressed this by holding a large stakeholder conference in July 2023 with the motto ‘Going Green Fast and Fair’. We brought together BASF leaders and experts with a broad set of external stakeholders from business, science, politics, and civil society. We broadcasted the event internally and followed up with similar events across all regions to involve as many employees as possible across all levels of management,” shares Jaekel.

Dorthe Scherling Nielsen advises organizations to create “sustainable business strategies” rather than separate “sustainability strategies.” 

“Environmental aspects are applied across the organization and value chain, including sales, innovation, finance, and supply chain; ESG targets should be developed in symbioses with the business strategy,” explains Nielsen. “Embedding environmental aspects across the business produces an awareness among employees: a realization that this is an ‘all hands on deck’ exercise, that the ‘E’ is not only about setting a CO2 goal, but that it influences business models, product design, operations, etc. In other words, the ‘E’ is a key component in driving value and competitiveness.”

Nielsen adds, “Defining a clear and strong environmental North Star creates a sense of pride and purpose in many employees and contributes to attracting new talent.”

The social aspects of ESG are leading to greater awareness of diversity, equity, and inclusion (DEI) and unconscious bias at all organizational levels too. However, Nielsen cautions, “Sometimes there can be a halo effect: gaps between what people say they do and what they actually do.”

Regulatory, Governance, and Organizational Development Considerations

When it comes to governance, there is growing recognition of the importance of transparency, especially with new ESG disclosure regulations emerging globally. “Sustainability has been integrated into our corporate strategy since the early 2000s. Since 2003, we have been reporting our sustainability performance along GRI standards. We provide a fully integrated report every year that brings our financial and non-financial results into one picture,” says Jaekel. “Sustainability is a top priority at BASF, and we regularly discuss these topics in our board meetings. The commitment from the top has been very important in getting everyone on board.”

Jaekel acknowledges the increased focus stemming from new regulations but stresses the need to avoid unnecessary bureaucracy. “Recently introduced regulations, such as the upcoming CSRD implementation, taxonomy reporting, and supply chain laws, among others, have clearly further increased the focus on ESG. However, I would also like to stress that it will be quite important that ESG does not result in adding unnecessary additional bureaucratic burdens on companies, as this diminishes efficiency.”

Nielsen emphasizes that governance discussions should go beyond compliance, anti-corruption, and reporting to focus on effective ESG execution. “The piece around governance that gets the least attention (and perhaps should get the most) is its role in ensuring effective execution of the ‘E’ and ‘S’ by defining the right decision-making processes,” she explains. “Sustainability is everyone’s job. It’s absolutely essential to define clear roles, responsibilities, and accountability from the top all the way through the organization.”

This requires adapting position descriptions, implementing ESG KPIs and bonus structures for managers, and establishing cross-functional decision-making forums to break down silos. “ESG cuts across the entire organization and value chain. Many companies operate in silos. This means many businesses need to change how they operate and work together to move from silo to holistic thinking. Here, defining the right cross-functional decision-making forums becomes absolutely essential to succeed,” advises Nielsen. 

The organizational culture shifts resulting from ESG and sustainability are profound. Jaekel shares, “The most obvious effect that I see at BASF is that we all learned the ins and outs of carbon footprinting. In earlier days, this was expert knowledge of the LCA [life cycle assessment] community. Now it has become an important part of business thinking, which I am very proud of.”

Nielsen agrees that ESG is driving new mindsets and ways of working but cautions that change is hard. “Sustainability is hard. Especially the ‘E’ requires companies to do things differently and challenges the status quo, sometimes even parts of the company DNA and values. Therefore, pushback and resistance to change among some employees is also common. A lot of this can be alleviated through the right governance measures.”

To further emphasize the importance of effective ESG governance, Nielsen adds, “Time and again, I have seen companies underestimate this part: they might succeed in setting ‘E’ and ‘S’ goals but not in executing effectively. A couple of ways to help ensure effective implementation through governance include incorporating ESG bonus KPIs for all managers and adapting position descriptions to help ensure employees feel this is part of their job, not just an add-on they may or may not have time for.”

The Financial Benefits of a Corporate Culture Centered Around ESG

Beyond the environmental and societal benefits, there is mounting evidence that an ESG focus improves organizational culture in ways that drive financial performance. Research shows that companies with highly engaged employees are 21% more profitable, and sustainable companies have the most engaged employees of all. ESG initiatives give employees a sense of purpose and pride, and because of this, they are a powerful tool for improving and increasing employee engagement.

But employee engagement isn’t the only thing that improves when companies take ESG and sustainability seriously—nor is it the only improved characteristic that drives better financial performance. A company’s ESG performance also has a measurable impact on employee satisfaction and talent attraction. Companies in the top quartile for ESG performance had employee satisfaction scores 14% higher than those in the bottom quartile. That means that these companies end up spending less money on recruitment and retention initiatives because happy employees lead to lower turnover rates.

To top it all off, ESG initiatives have also been linked to increased productivity (as much as a 17% increase), and naturally, the more productive your workers are, the more money they’ll make for your company. Highly engaged business units also experience a 41% reduction in absenteeism.

The financial markets are also recognizing the value of ESG. Companies with high ESG ratings experience lower costs of capital compared to companies with poor ESG ratings, and in 2020, 81% of sustainable indexes outperformed their parent benchmarks.

How to Drive Organizational Culture Change Through ESG and Sustainability

ESG success requires an all-encompassing transformation touching every part of the business. It demands new leadership skills in change management, employee engagement, and systems thinking. But for those who get it right, the prize is compelling.

As investor, consumer, and regulatory expectations continue to rise, ESG will only grow in strategic importance. Rather than a reporting burden, ESG should be seen as a value driver and source of competitive advantage. By integrating ESG into organizational culture and operations, business leaders can build more resilient, future-fit organizations positioned to succeed in a world of complex sustainability challenges. 

The journey may be challenging, but the destination—a sustainable, prosperous future for all—is well worth the effort.

But embedding ESG and sustainability into your organizational culture requires more than just setting goals and implementing initiatives. It demands a shift in mindsets, behaviors, and ways of working across the entire company. 

To drive this cultural transformation, consider partnering with an experienced executive search and leadership advisory firm like Stanton Chase. 

Culture change is a journey, not a destination. By partnering with us, you can ensure you have the right leaders and skills in place to integrate ESG and sustainability into your organizational DNA. Click here to reach out to one of our consultants.

About the Interviewees

Dorthe Scherling Nielsen is an expert in sustainability, government affairs, business transformation, and communication with over 20 years of experience. She has worked with major companies like Nike, Vestas, Hempel, and Bestseller. Nielsen currently serves as an Independent Board Director and Executive Advisor on Sustainability.

Dr. Christoph Jaekel is the Head of Corporate Sustainability at BASF. He has held various positions at BASF for over 19 years. As a chemist by training, Jaekel brings a deep understanding of the chemical industry to his sustainability role. He regularly represents BASF at sustainability conferences and events, such as the Exane BNP Paribas ESG Conference, to discuss the company’s sustainability strategy and initiatives.

About the Authors

Christian Ehl is a Partner at Stanton Chase Düsseldorf and the Global Functional Leader of Stanton Chase’s Sustainability and ESG Specialization.  He has 19 years of experience in executive search, leadership advisory, sustainability, and ESG. He is the author of several sustainability related whitepapers and articles and supports his clients in transitioning to more sustainable business models with the right people in place.    

Tina Mavraki, CFA is a member of Stanton Chase’s Sustainability and ESG EMEA Region Advisory Board. She is a Non-Executive Director and Strategic Advisor with a unique blend of capital markets and ESG integration experience.

Executive Search
Environment Sustainability and Governance
Organizational Culture

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