Knowledge Center: Podcast
Focusing on sustainability to gain a strategic competitive advantage12/7/2020 Heidrick & Struggles
In this podcast, Heidrick & Struggles’ Roman Wecker speaks to Andreas Feiner, CEO of Arabesque S-Ray, a global group of financial technology companies offering sustainable investment, advisory, and data services, and to Philipp Rösler, former German Vice Chancellor and Minister of Economics and Technology and an advisor to Arabesque S-Ray. Feiner and Rösler discuss how a sustainable business model reflects positively on economic outcomes and, more importantly, demonstrates responsibility for the environment, society, and the next generation.
Some questions answered in this episode include the following:
- (1:56) How does Arabesque S-Ray measure sustainability, and is there already a kind of global standard evolving?
- (3:54) Should one consider sustainability as a pure cost center or as a strategic competitive advantage?
- (4:34) Would you recommend linking the salaries of the C-suite to the achievement of the company’s sustainability targets?
- (6:20) How can boards become more involved in driving the sustainability agenda?
- (7:17) What has changed in terms of sustainability strategy since the beginning of the current global crisis?
Below is a full transcript of the episode, which has been edited for clarity.
Welcome to the Heidrick & Struggles Leadership Podcast, the premier provider of leadership consulting, culture shaping, and senior-level executive search services. Every day, we’re privileged to talk with fascinating people who are shaping the future through their leadership and vision. In each episode, you’ll hear a different perspective from thought leaders and innovators. Thanks for listening to the Heidrick & Struggles Leadership Podcast.
Roman Wecker: Hi, I’m Roman Wecker, a principal in Heidrick & Struggles’ Frankfurt office and a member of the global Industrial Practice. In today’s podcast, I’m talking to Andreas Feiner, CEO of Arabesque S-Ray, a global group of financial technology companies offering sustainable investment, advisory, and data services, and to Philipp Rösler, the former German Vice Chancellor and Minister of Economics and Technology and advisor to Arabesque S-Ray.
Philipp, if you could please point out one highlight about yourself to start the conversation.
Philipp Rösler: I have experience from both politics in my previous life and then economics and business via the World Economic Forum—and now I am doing my own business, so I’ve seen, to some extent, both sides in terms of public and private cooperation.
Roman Wecker: Thank you so much. And Andreas, one highlight about yourself?
Andreas Feiner: I think it’s worth mentioning that it’s basically my passion to support the mainstreaming of sustainability by making it performance relevant for investors as well as corporate management. Sustainability, if you do it right and it’s enabled by technology, is one of the few areas where you can create a world where you’re doing the right thing and creating a positive economic outcome. Doing this is really the passion of my life.
Roman Wecker: Philipp and Andreas, welcome and thank you for taking the time to speak with us today. Andreas, let’s start with you. Arabesque S-Ray focuses on advisory and data solutions to assess the performance and sustainability of companies worldwide. How exactly do you measure sustainability, and is there already a kind of global standard evolving?
Andreas Feiner: Yes, definitely, and I think the global standards that are evolving are SASB (Sustainability Accounting Standards Board), the GRI [Global Reporting Initiative], TCFD [Task Force on Climate-related Financial Disclosures], and the Science Based Targets initiative. But how we measure sustainability is very interesting. We collect data from companies themselves for a long-term signal, and we read thousands and thousands of news articles and NGO [non-governmental organization] campaigns in order to have a more short-term element that we can then balance with the long-term elements from the companies. With this we get a full picture from company disclosures but also what is said about companies. And what we do, for example, with the news articles is we read 30,000 articles a day, and we do sentiment analysis with artificial intelligence to measure whether a company is performing well or not so well in terms of sustainability topics, and we sell this to the market in very interesting ways.
For example, S&P is integrating our UN Global Compact scorings into the S&P 500. Furthermore, we’re building bespoke ESG [environmental, social, and governance] scores for the market. The most recent example is the work that we’ve done with the Wall Street Journal for which we have again used the framework of the Sustainability Accounting Standards Board and married it to the news articles that come out of the Dow Jones and the Wall Street Journal network. This is a very exciting project. It was started in October, and on a monthly basis they are now publishing the hundred most sustainable managed companies in the world, and it was powered and co-developed by Arabesque, the Dow Jones, and the Wall Street Journal.
Roman Wecker: Philipp, in your opinion, should one consider sustainability as a pure cost center or as a strategic competitive advantage?
Philipp Rösler: The companies that are focusing on ESG and have a sustainable business model are way more successful, even in terms of numbers and figures, than any other companies. I think this is proof that it certainly is a strategic competitive advantage and that every company should focus its future on ESG. It means at least that companies should always have ESG in mind and take it into consideration for each one of their management decisions.
Roman Wecker: Andreas, back to you. Would you recommend linking the salaries of the C-suite to the achievement of the company’s sustainability targets?
Andreas Feiner: I would, at least to a certain degree. It would not be the right thing to have basically full discretional compensation or salaries linked to sustainability targets, but they should be a key part of the compensation model for the C-suite, because only if [sustainability is] performance relevant and cash-flow relevant for the people in charge will it be fully implemented at the company and permeate down the ranks.
If you look at research from Willis Towers Watson, it basically shows that more than half of the companies in the S&P 500 already have at least one ESG parameter as performance relevant or pay relevant for the C-suite. And if you were to design this as a company, you might want to take a couple of the ESG parameters—not an ESG score, which was something that was done in the past—and consider your key objective in the firm. Ask what you stand for as a firm, identify certain ESG parameters, and start to measure them and make them pay relevant—this is kind of the trend that we are seeing in the market.
Roman Wecker: Philipp, sustainability is and has always been a key focus in your career. What is sustainability to you in one simple statement?
Philipp Rösler: For me, sustainability means the combination of freedom and responsibility. It means that the freedom to live, to work, and to be in business is always combined with responsibility for the environment, for society, and for the next generation.
Roman Wecker: Given your current non-executive roles on several company boards, how can boards become more involved in driving the sustainability agenda?
Philipp Rösler: To some extent, depending on the different economic systems, boards are in the driver’s seat. If they are supposed to control the management board, for example, they can always ask the right questions. They can add what we just discussed into the salary assessment and ESG terms and topics into the contracts. Although, with respect to the current management and management of the business model, they should ask the right questions, “Have you in mind the environment? Have you in mind the responsibility for society? Have you in mind the responsibility for the next generation? And what are your thoughts in terms of human rights?” They can ask way more questions than those about revenue, profit, and the top or bottom line.
Roman Wecker: Andreas, in a world where the COVID-19 pandemic has amplified volatility, what has changed in terms of sustainability strategy since the beginning of the current global crisis?
Andreas Feiner: The pandemic brings suffering of unspeakable proportions, and we all hope that we are getting through this very quickly and that this is going to end very soon.
In terms of sustainability strategy, I don’t think that it’s had a big impact in terms of changing the trajectory we’ve been on—I think it has actually amplified it. At the beginning of the pandemic, companies were very busy implementing everything that was required in order to react to the pandemic and to the new reality. But since the summer, we’ve seen a lot [of questions] coming back such as, “How do we make our company more resilient? How can we make it more performance resilient in the current crisis?” And what we have seen is that sustainable companies have been much more resilient in this type of environment than companies that have done less in terms of sustainability.
You can clearly see that in the stock market performance. If you look at the top performers on ESG versus the bottom performers on ESG, and you just compare their stock prices, since the pandemic hit there is a wide dispersion between the ones that are good versus the ones that have less sustainability implemented in their practices, and this is to the tune of more than 10% since the start of the pandemic. We also see that people understand the vulnerability that we’re facing now in terms of supply chains and in terms of the business and the revenue models, and it’s now being more and more considered in the business processes. The pandemic has accelerated that.
Roman Wecker: Philipp, you touched on this already in one of your previous answers, but I would like to elaborate a little bit further on this. What can current governments do at a global level to drive sustainability efforts? Or should companies be in the driving seat, and should the priority link to international politics?
Philipp Rösler: Public–private cooperation is always key. Neither the private sector nor the public sector on its own will be able to sort out any problem, so you always need this public–private cooperation. And as it comes to sustainability, I think the public sector has the role to set the right legal framework, but the framework has to be filled by the private sector. It sounds, to some extent, trivial, but it’s not, because we see it on the global level. In the United States, the change of their administration will bring a huge push to global sustainability. We would assume that the Biden administration will rejoin the Paris Agreement, and this will give a legal framework and some push to the public sectors across the world so that they can adopt and adjust their legal frameworks on a national level or regional level like the European Union. And then, the economy has a clear idea of what will happen and what the rules will be for the next 5 to 10 years, and they can adjust their business model in order to deliver on the idea of sustainability. So, this demonstrates that in solving or having more sustainability, you always need this public–private cooperation.
Roman Wecker: In your opinion, what is the one thing companies and governments should do better to speed up the change?
Philipp Rösler: I think they should realize that sustainability is not a downside for their business model or for economic success of the region or even the country; it’s more the other way around. It’s a strategic competitive advantage because those countries that are focusing on sustainability will be way more successful in the future, or already are today. And it’s the same for the business. In order to drive forward in a public–private cooperation of sustainability, you need this understanding. It’s not a burden or additional cost or more bureaucracy; it’s the other way around. It’s an opportunity to live the responsibility for your own life, for your own society, nation, and for the next generation. And I think if this mindset can be adopted everywhere, we’ll take a huge step forward in terms of sustainability.
Roman Wecker: Andreas, focusing on talent strategy, do you think companies are now well equipped to develop higher leaders who can drive the sustainability agenda?
Andreas Feiner: I think there’s still a gap, and it’s most apparent in two data points. The first data point is from the UN Global Compact—Accenture Strategy CEO Study, in which 92% of the CEOs stated that sustainability is a real strategic priority and is very important to them. On the other side, looking at how C-suites and boards and very strategic positions are basically higher than advertised, we see that less than 10% of those positions require specific sustainability knowledge. This kind of contrast is very stark. However, the trend is very positive. If you look into the great examples of Allianz, PWS, PSF, Siemens, and also Volkswagen now, they have put a strong focus on sustainability at the leadership level. But this is just the beginning, and I think it’s coming from a low base, but it’s accelerating under the leadership of the institutions that I just mentioned.
The other thing is, if you think about the position of a chief sustainability officer [CSO] in the C-suite of a company, I reckon he or she is probably most likely to have the same trajectory as the chief compliance officer or the chief risk officer. In the past, these positions were minus three or minus two and now are at the board level and represented in the C-suite. I believe that, in the next three to five years, each and every company needs to have a chief sustainability officer in order to be able to talk to investors, get cheaper funding, get their supply chains organized, but also to fulfill all of the regulatory demands that are coming from global regulators in terms of sustainability.
Roman Wecker: Andreas, that’s a great entrée for my next question to Philipp. Philipp, do you think it is still a tick-the-box exercise for many organizations, or are chief sustainability officers already truly empowered to make the necessary change happen?
Philipp Rösler: It always starts with only a tick-the-box issue, but even now, I think we are way more advanced. People have realized over the years that this is not only a tick-the-box issue because a legal framework has been put in place; they understand that it’s for their own benefit as individuals as well as for the company, and therefore they are more often asking for ideas way beyond the legal needs. They, by themselves, make a proposal; they say, “Look, why don’t we change our business model? Why don’t we adapt?” And so sometimes management is even faster than the board in terms of sustainability. That’s very encouraging, and, again, it’s way beyond the idea of only ticking the box because a legal framework is in place.
Roman Wecker: Andreas, will the role be unnecessary once sustainability is fully positioned within companies?
Andreas Feiner: I don’t really think so. Just think about the finance function. The finance function is fully implemented at companies and you still have a CFO, and the same goes for compliance, for risk, and for all of the other core functions of the business. So, I think it will always be necessary in the future to have a chief sustainability officer to coordinate all the different angles of sustainability at a company: “How do I get some funding?” “How is my financing and the cost of financing?” but also “How do my operations and my customers and my products interact in the world?” I think the CSO function is here to stay.
Roman Wecker: Philipp, how critical is it for new CEOs to already understand and be engaged in sustainability behaviors and plans?
Philipp Rösler: I think sustainability shouldn’t be extraordinary anymore; it should be the new normal in a CEO’s life, or management lives in general, because one thing is pretty clear: all future boards responsible for placing a CEO will ask [potential candidates questions] not only in terms of numbers and figures but also in terms of ESG and sustainability. So, a CEO would be well advised to have that in mind and integrate this mindset into his or her day-to-day actions and management.
Roman Wecker: What is, in your opinion, the single most important thing CEOs can do to become better leaders and better world citizens?
Philipp Rösler: They can try to understand, first, what sustainability really means—in general, but certainly also for their specific sector or industry. Second is a question of mindset: they should realize it’s not a legal need from outside but should be part of their conviction, and not because there’s a political or societal trend, but because it’s good for their role as CEO, for their role as being responsible for a company, and because leading a company has a lot to do with sustainability. I think a good CEO should really understand that ESG is the new normal of responsible management.
Roman Wecker: My closing question, again to you, Philipp, is, given your political background, what influence do you expect US president-elect Joe Biden will have on the global sustainability discussion (besides what you mentioned—that you would expect a rejoining of the Paris Agreement)?
Philipp Rösler: Andreas and I have discussed this several times, but we are both super convinced that he will have a huge impact on sustainability on a global level because the United States is still the largest economy in the world, and if the largest economy wants to jump into an issue, they will really push that issue forward. One of the first sentences Joe Biden, as president-elect, mentioned was that he would reenter the Paris Agreement, which is amazing. Can you imagine if this economy and this society put all their efforts and all that they’ve been doing, in addition to current day-to-day business, into sustainability? That will really change the discussion as well as the entire question of sustainability. And, at the same time, they would be a role model for all those who have said, “Oh, no, we don’t need it.” Or “Maybe we sign it, but we don’t take it seriously.” I think from now on we will see a huge push for sustainability.
Roman Wecker: Andreas, is there anything to add from your side?
Andreas Feiner: What I believe is that the United States will become the leader in sustainability over the next years to come because usually when such a big economy, as Philipp said, puts their mind to something, and especially the US economy and the American people put their mind to something, they will move mountains. So I think that the European Union and European countries need to really step up their game to stay ahead, and I think that is probably one of the better ways of being in competition—the competition to be more sustainable. I’m really looking forward to that, and being in that business is something that is exciting for the years to come.
Roman Wecker: Philipp and Andreas, thank you so much for this interview, and thank you so much for your time.
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