What is Driving Change: The role of stakeholder management

Along with a change in who makes it onto the stakeholder map, business is managing a change, or evolution, of the expectations of stakeholders. Issues that were once the domain of governments and NGOs, are now firmly on the corporate agenda with stakeholders seeing a clear role for business to drive impact. And at the end of the day, stakeholders are citizens too, so it makes sense that their concerns match the headline concerns of society more broadly.

We’re fortunate in Europe and indeed many other parts of the world to have strong stakeholder views and expectations of the business and mostly they are shaped by the external challenges that society faces.

The result is a significant shake-up of the typical stakeholder map with new issues and new stakeholder groups rising in priority, requiring a refresh of stakeholder management strategies. We explored this with our ESG Council Members and found mixed experiences in terms of how businesses are navigating this change.

Internal versus external drive

There is strong consensus that the rise of ESG and the resulting change in corporate behaviour was certainly sparked by external stakeholder pressure. Some go further and argue that without outside pressure, business would have largely continued the pursuit of profit over all else, whatever the environmental and social impact.

In my experience all of these are because a customer or a stakeholder or a government entity is forcing the issue first.

However, Council Members do highlight that the push from external stakeholders is not always well informed and can result in a call for activities that will not make a material impact on sustainability, are not feasible given the operating environment, or are not aligned with the company’s specific ESG goals.

If you’re following the stakeholder lens very strictly you would say that reuse is always the best model, from a climate perspective reuse is not always the best model, it is often the best model but it’s not always… so you’ve got to be thinking about it from a what does it mean in practice perspective as well as the intellectual ideal.

The believe-true gap is further evidence of this challenge where consumers are often misinformed about which actions have the greatest impact on sustainability.

This points to the need for greater education around ESG for consumers right through to senior stakeholders. It also highlights the importance of corporates being trusted and having the licence to be involved in ESG discussions so when they do say a particular approach is not appropriate, they’re able to credibly debate alternatives.

While acknowledging the role of external stakeholders, many feel that ultimately, the extent to which external pressure results in meaningful internal change comes down to the will of leadership.

 

 

And, looking further ahead, many feel responding to external stakeholder pressure to set ESG strategy will ultimately leave a company looking reactive and susceptible to emerging risks.

What’s more, any change that is the result of a single driver is likely to be short-lived, and Council members identify that long-term, sustainable change occurs when there is alignment between external pressure and other factors such as company values and culture, business challenges, market opportunities
and more. It is when operating with this alignment that business can lead, be proactive with its ESG strategy and make a greater impact.

You’re never going to embed sustainability, or any kind of programme change, if you’ve only got a single driver there and it’s not being led by the company itself.

In reality, it probably takes a perfect storm whereby external pressure creates both the spark that enables willing leadership to shape strategy based on ESG factors, and an environment where boards will ultimately endorse this strategy.

Most important stakeholders

The ESG stakeholder landscape, and therefore the company stakeholder landscape, is broad and complex. There is a mix of traditional and emerging stakeholder groups, and nuances across sectors and markets. At the heart of the ESG-specific challenge though, is that as companies make a multiplicity of promises to a multiplicity of stakeholders, they must balance increasingly competing stakeholder needs. It’s in this context that prioritising stakeholders can feel like a full-time job.

While many stakeholders have been agitating for change for some time, many argue that it was the attention of the investment community that saw the pace of change step up significantly.

When investors are telling you you’re a bit of a laggard or start asking ‘Where is…?’ and ‘Why haven’t you…?’ those kinds of questions make you ask the same internally. It drives change.

Many also credit the interest from institutional investors with firm links being established between ESG and financial performance, and ultimately the shift to formalising – and funding - the CSO role.

 

 

We have dialogues with investors fairly regularly and over the last couple of years I have noticed a change in the range and depth of questioning and inside knowledge of sustainability issues within the investor community and their ESG analysts have substantially increased.

Still, for some of our respondents, institutional investors are being over-emphasised in their importance and their needs should be balanced with other stakeholders. According to these Council members, institutional investors are one of many important stakeholders, not the only important stakeholder.

While consumers are well-established as a priority stakeholder segment, ESG has added complexity and created opportunity for those companies that have been quick to respond. The theory of the citizen-consumer suggests that people are increasingly making consumer decisions based on the issues they care about as citizens. This merging of socio-political issues with purchase behaviour has created a green economy where sustainability is a competitive advantage and can be a driver of growth.

There is increased consumer demand and we don’t want to be a lagger behind our competitors. And we see sustainability as sometimes giving us a competitive edge in specific areas.

Like consumers, employees are not a new entrant to the stakeholder map but they have arguably never been more important. Employees want to work for a company whose values align with their own, or at the very least, do not compromise their own. And ESG performance is where corporate values are often most stringently tested.

 

 

Companies that are able to align their internal and external communications and behaviour, operate in an ideal space reputationally. Where there is no gap between what they say and do internally and what they say and do externally, trust - and the associated business benefits - soar. These benefits include attracting and retaining high quality talent. And no stakeholder group is better placed than employees to expose whether corporate ESG promises are followed through on in reality.

We also have a strong movement within employees and I think employees are really important in terms of driving initiatives on the ground and also pushing the type of company they want to be working for.

Council members comment that while policy development may have been a key driver of sustainability change in the 2000s, today, governments are often laggards rather than leaders in the push for sustainability-related change. As such, they are not necessarily a stakeholder group forcing their way to the top of the priority list demanding more and more from businesses. However, this may change with the push for more standardised regulation globally around ESG, particularly in how listed companies report.

NGOs, special interest groups, think tanks, academics are important stakeholders particularly due to their role as conduits for companies to move from negative to positive impact, or scale already positive impact. Strategic partnerships with independent actors are especially important for those businesses that lack the licence or skill to drive material changes to the way they operate.

Stakeholder management strategies

A common challenge experienced by Council members as they implement and refine their stakeholder management strategies, is the varying levels of ESG expertise among stakeholders. This results in the CSO needing the ability to pivot between being a technical expert and a skilled communicator.

10 years ago, we used to go and talk to ESG investors and there might be five of them in the UK, two in the US and there might be three in Australia. And when you would try to talk to what we call non-ESG investors about these sorts of topics they would just say 'we are not very interested'. Now everybody wants to be an ESG specialist so you will find people who don’t have a huge amount of technical knowledge all of a sudden taking over accountability for some of this area.

Adding further complexity to stakeholder management, is the emergence of an anti-ESG movement. The motivations behind this movement are varied. At one end are those who question the business value of decisions that are too heavily weighted towards ESG considerations. At the other are those rallying against the woke agenda and looking to remove ESG issues from the mainstream. Needless to say, navigating this continuum takes deft skill.

These examples highlight that at the heart stakeholder management as a CSO is the ability to understand. To engage deeply and regularly with internal and external stakeholders, to recognise their needs, to balance these with those of the business, and to find the right way to move forward.

Stakeholder engagement is critical and if you are setting goals and defining programmes without assessing the needs and understanding the perspectives of all the different constituents you impact, that is a very silent way of doing it.

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Table of contents

1. Introduction: ESG Council Report 2023
2. Chief Value Creator?: The changing role of the Chief Sustainability Officer (CSO)
3. What is driving change: The role of stakeholder management
4. Building an integrated ESG strategy
5. Doing well by doing good: Resilience, risk and the reputation value of ESG
6. The Future of ESG?
7. ESG - a time for leadership, focus and communication, but above all action.

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