Most Irish CEOs want to ‘lock in’ the climate change gains arising from the pandemic
72 percent of Irish CEOs say they have reevaluated their organisations purpose as a result of the pandemic
80 percent of Irish CEOs have moved the focus towards the social components of ESG (Environmental, Social and Governance) issues during this period of uncertainty
With profound consequences for people’s health and livelihoods – as well as the future of companies and industries – the pandemic has presented CEOs with the greatest possible test of their leadership abilities and personal resilience.
Chief executives of the world’s largest organisations are using this unparalleled moment in history to lead with increased purpose and impact, both societal and economic. They are leading with empathy and humanity as they prioritise talent and corporate responsibility, finding opportunity amid a fall in global economic confidence, and rewiring their businesses for tomorrow’s challenges.
At the beginning of the year, we found that most CEOs were seeing the primary objective of their organisation shift from purely profit to also consider their purpose in society. Worldwide, our survey shows less than a quarter (23 percent) saw the organisation’s overall objective in narrow ‘managing for shareholder value’ terms, with 54 percent taking a broader, purpose-driven approach focused on multiple stakeholders. Furthermore, one in five (22 percent) say that their primary objective is to improve society.
More recently, purpose has helped CEOs understand what needs to be done to meet the needs of stakeholders during the crisis, from employees to communities. For Alison Rose, CEO at NatWest Group (formerly RBS) – one of the oldest banks in the UK – purpose has, among other things, guided the response to their customers. “Purpose means listening really carefully to what customers are going through and ensuring we’re giving them the right support and being responsible lenders,” she says. “We put dedicated phone lines in for vulnerable customers and NHS (National Health Service) workers so that we can offer our help. We have a proactive calling programme that reaches out to our most vulnerable customers, contacting over 200,000 of them.” On the employee front, purpose means being aware of the support that her people need with the shift to wholesale working-from-home. “For leaders, there’s a greater obligation to be more visible, empathetic and engaged, because you need to show you understand the impact on everybody’s life,” she explains. “Everyone is dealing with challenges, not just in their work environment, but also in their personal life.”
This increasingly personal and emotional connection to purpose during the pandemic reflects the fact that CEOs face similar health and family challenges as their people and communities.
In fact, globally well over a third of chief executives (39 percent) have had their health, or the health of one of their family, affected by COVID-19 whilst 40 percent of those surveyed in the Republic of Ireland and 16 percent in Northern Ireland cite similar experiences.
The pandemic will be remembered by many as a defining moment for this generation. CEOs are clearly determined to learn from the pandemic and their own personal experience to recalibrate and make not only the best-informed decisions, but also the most authentic ones. Worldwide, 55 percent changed their strategic response, either completely or to some degree. Another 40 percent, while not changing their strategy, did pay more attention to the human aspect of the pandemic.
At Zurich Insurance Group, CEO Mario Greco believes that caring and compassionate leadership of people is critical to protect his employees’ well-being during the crisis and build a robust and motivated workforce for the future. At Zurich, this focus on protecting people’s health translates into concrete actions. For example, the company offered – on a voluntary basis – testing for employees and their families. “The leadership challenge of the crisis is the sense of responsibility you have for protecting your people from health issues,” he says. “This begins with reducing risk. As I have told my people many times – no one joins an insurance company thinking that it comes with a life risk.”
Today’s crisis also requires compassionate people leadership to address employees’ deep-seated fears and anxieties. “Normally, if you meet people in a work situation, you talk business. Today, though, people are fearful about what the future holds for them and their families. Today, you need to be a people leader above all else.”
At the beginning of the year, we found that CEOs were increasingly prepared to personally lead the way in tackling society’s major challenges.
Around two-thirds (65 percent) of CEOs worldwide said that the public is looking to businesses to fill the void on societal challenges. At the same time, 76 percent (68 percent in the Republic of Ireland and 84 percent in Northern Ireland) said they had a personal responsibility to be a ‘leader for change on societal issues’.
Being able to draw on a diverse spectrum of talent is critical to addressing the unique challenges of the pandemic, and CEOs are looking to strengthen their anti-discrimination approaches. In the wake of widespread protests following the death of George Floyd on 25 May in the United States, 81 percent of CEOs worldwide have either publicly announced new anti-black racism measures in 2020 or plan to do so in the near term with similarly very high figures for the Republic of Ireland (88 percent) and Northern Ireland (100 percent).
For Verizon Communications' Chairman and CEO Hans Vestberg, playing a critical role in tackling racial inequality was a logical extension of the company’s approach to major societal issues, its strategy, and its leadership philosophy. “When I have opinions about societal challenges, it’s when it’s part of my strategy,” he explains. “I was always an extremely strong advocate for diversity and inclusion. I’ve lived and worked in four continents, and I’ve learned that if you have seven people like me in the room, it’s just going to be a disaster. Diversity and inclusion is one of our leadership philosophies and part of our credo as a company, and so talking about it comes very naturally for us.”
Hans Vestberg, who was visibly emotional in a video announcement to his staff where he announced Verizon was committing US$10 million to organisations that are dedicated to racial equality and social justice, believes that a strong stance is a moral imperative if you find something simply unacceptable. “We knew racial injustice was something we needed to talk about because we’re not going to accept it,” he says. “We’re really building diversity right here: our customer base is diverse and our company is diverse.”
The pandemic has created what will be a career-defining economic challenge for most CEOs.
Given the scale of that challenge, many were worried that chief executives would be forced to relegate the importance of environment, social and governance (ESG) themes. However, our research shows that CEOs are still very much engaged with this issue, and in particular the ‘S’ of ESG. Close to two-thirds (63 percent) said that their response to the pandemic has caused their focus to shift to the social component of their ESG program with even higher sentiment expressed in both the Republic of Ireland (84 percent) and Northern Ireland (76 percent).
That is not to say that CEOs are being deflected from the ‘E’ of ESG either. Chief executives are more than aware that climate change also offers a significant economic and humanitarian threat over the coming decades and that there is a need to rebuild organisations in a way that supports a new and sustainable economy. The seriousness with which they take the issue of climate change is reflected in the fact that many believe that managing climate-related risks is key to their own job security and long-term legacy. When we asked CEOs whether it was likely that managing climate-related risks will be a key factor in them keeping their job over the next 5 years, close to two-thirds (65 percent) worldwide felt it was indeed likely with those in the Republic of Ireland (84 percent) recording a markedly higher level of relevance than their counterparts in Northern Ireland (56 percent).
For Mike Hayes, KPMG’s Dublin based global Head of Renewables, it should come as no surprise that CEOs say they will be measured against their ability to manage climate risk. “It is an area everyone needs to think about. People need to understand that climate risk is a financial risk and the financial impact of climate change will affect all of us. Central banks throughout the world are looking at climate risk and saying to the lenders and asset managers and other entities they regulate that they have to take it into account. If you thought the 2008 property crisis was bad, you haven’t seen anything yet.”
Jane Lawrie, Global Head of Corporate Affairs, KPMG International, says the continued focus on ESG during the pandemic – and the emphasis on the social dimension – reflects the fact that driving performance in these areas is key to demonstrating the power and impact of an organisation’s purpose. “CEOs have responded to the COVID-19 crisis by putting even more focus on purpose, helping to signpost to employees and stakeholders why their company exists and how it aims to contribute to the world at large,” she says. “The survey shows that CEOs are prioritizing efforts across the ESG agenda as a real business imperative, with societal actions coming up alongside the environmental plans.”
To move forward, CEOs are looking to double-down on the structural shifts that have emerged during the crisis – 71 percent (80 percent in the Republic of Ireland and 84 percent in Northern Ireland) say they want to lock in climate change gains that have been realised during the pandemic. Measuring and communicating the impact of environmental improvements, as well as social and governance performance, will be critical.
As ESG has become a CEO and boardroom issue, most if not all of the Fortune 500 companies have put it high on their agendas says Mike Hayes; “Companies face the risk of physical climate impacts such as drought, heatwaves, floods, and so on. Consumer sentiment represents another risk. There are certain things many consumers no longer wish to buy. Furthermore, investors don’t want to be associated with carbon emitting activities. Employees are also putting pressure on companies to address the issue while regulators are starting to punish companies which fail to do so. A lot of business models are going to have to change because of this and some assets will become more valuable while others will not attract the same valuations as before. There will be a lot of stranded assets as well.”
Hayes also notes that climate risk is now becoming an audit question and asks should we start providing for climate risk in audit statements? “The Task Force on Climate Related Financial Disclosures (TCFD) has made recommendations for climate-related financial risk disclosures for companies to provide information to investors, lenders and other stakeholders. The audit regulator in the UK has started a consultation process with the big four professional services firms in relation to how financial risk should be reported in audits.”
When it comes to holding onto the gains made during COVID-19, Hayes says; “The real question should be what happens when normal service eventually resumes? COVID-19 has given us an insight and belief that a net zero carbon future is achievable. The improvements in air quality in cities around the world have been eye-opening. COVID-19 has made people sit up and take climate change much more seriously. This builds on a trend which has seen companies like Microsoft set themselves carbon negative targets and putting pressure on their supply chains to match that performance.”
For many organisations, these aforementioned supply chains has been somewhat of a sleeping giant says Owen Lewis, a partner and supply chain expert with KPMG in Ireland.
“As long as it worked not much attention was paid to it. As the pandemic spread, we saw complete shutdowns of whole countries and shortages in products that we wouldn’t have expected. Some things were already happening but at a slower pace. Online grocery shopping went from a 10% share to 90% at one point placing enormous strains on supply chains.”
According to Owen Lewis, many organisations didn’t understand the materials and information flows and the need for communication across their supply chains. “There was a lack of transparency around who they bought from and where they were located organisations are now understanding just how important the sleeping giant is.”
Some commentators have claimed the reason for supply chain problems due to just-in-time practices and the fact that they have become so lean. However, he argues that it’s the inverse. “Organisations with good JIT systems and who share information with well managed supply chain partners have recovered quickest from the pandemic.”
Lewis notes that many Western organisations have copied Toyota’s visible supply chain practices and implemented them without understanding their underlying principles. “If you think back to the tsunami which affected Japan a few years ago, between 60 and 70 key Toyota suppliers were wiped off the face of the earth yet Toyota was back to full production within six or seven weeks.”
Western organisations often tend to try to squeeze the life out of suppliers on price says Owen Lewis. “Japanese OEMs invest in suppliers to make them more resilient. We’re only resilient if we are all resilient. In the Eastern model, all suppliers are in a family together with the model seeing revenues shared across the chain. The objective is to work together to make it work for everyone in the chain; that reduces complexity and risk.”
With the pandemic driving supply chain issues up the agenda, Owen Lewis believes the key to more robust supply chains is increased transparency, simplification and resilience. “We are likely to see technology play a more significant role, not just in the exchange of information on supply chain flows but on other aspects such as the ethical nature of suppliers, risk, resilience, carbon emissions and stock levels. All that has to come into it. It’s very hard to mitigate something like a pandemic, but we can learn lessons from it and improve our ability to deal with similar shocks in future.”
Sandro Salsano, President of Salsano Group, who has been dubbed the “Warren Buffet of Central America” and whose Salsano Group holding company has stakes in over 100 companies in sectors ranging from technology to luxury goods, also believes that the crisis offers a unique moment in history to drive positive change in two areas: planet and people.
In particular, Sandro Salsano believes that we have a unique opportunity to drive the Environmental, Social and Governance agenda. “ESG has always been the core of any business we are involved in,” he says. “At the moment, for example, we are investing in vertical farming in the largest free trade zone in Central America, and we are also renewing our commitment towards clean oceans. On the ‘social’ side, we feel there is much more that needs to be done in areas such as gender parity.”
Earlier this year at the World Economic Forum (WEF) in Davos, the WEF’s International Business Council published a paper with a proposed set of ESG metrics and reporting disclosures. Led by the WEF and developed by a task force composed of subject matter experts from Bank of America, KPMG and the other Big4 accounting organisations, the paper identifies a set of ESG metrics. Adoption of these metrics can bring consistency, comparability and transparency to reporting of non-financial information and ESG aspects of business performance, critical to demonstrating long-term value creation.
Leaders must ensure that we do not lose the climate gains made during the pandemic and instead build a more sustainable economy.
Companies can learn from how resilient (or not) their operating models proved to be during the crisis. With consumers increasingly focused on purpose-driven brands and sustainability, companies are refining their products and services. Meanwhile, investors are more focused on ESG performance, with an emphasis on the ‘E’ of climate risk. Organisations building robust ESG reporting programmes – along with resilient and flexible supply chains and a talent strategy that focuses on the people and skills needed for an agile and virtual future – will be better positioned to succeed.
COVID-19 is challenging leaders like never before. To find out more about how KPMG perspectives and fresh thinking can help you focus on what’s next for your business or organisation, please get in touch. We’d be delighted to hear from you.