CEOs need a much sharper focus on social challenges, argue Ian Davis and Daniel Litvin
THE LONG-RUNNING debate about the societal role of business is currently generating far more heat than light. Angry attacks on environmental, social and governance (ESG) activities by companies have been mounting from both those on the left (who see ESG largely as greenwashing) and right-wingers (who see it as corporate wokery). CEOs who once happily pronounced publicly on big societal issues, sometimes even usefully, are now more hesitant to do so, for fear of getting caught in the crossfire. Meanwhile a set of profound societal challenges threatens to upend the long-term operating context for many global businesses. CEOs need to be thinking about these, even as they currently shy from the public stage. Consider just four of them. First, climate change and resulting moves by policymakers to accelerate the energy transition will lead to a radical reshaping of many industries. Second, growing geopolitical divisions, above all between the West and China, could wreak havoc with supply chains and other global economic linkages. Third, new technologies, from social media to AI, seem set not just to unleash huge economic gains but also to heighten social and political strains. Fourth, the erosion of support for democracy in Western countries, together with long-brewing popular suspicions of big business, creates the conditions for further political turbulence. This sets the stage for populist or anti-corporate moves by governments. Governments are struggling to respond to these issues. But the response of the private sector, for all the well-meaning ESG initiatives, is also inadequate. Voluntary action to reduce carbon emissions, for example, is patchy. Many firms global supply chains remain largely unrestructured. (It seems to take the outbreak of war to trigger big shifts in this respecthence the belated restructuring of European energy supply chains following Russias invasion of Ukraine.) Big techs attempts to curb the societal ill-effects of new technologies are flimsy. Western multinationals profess support for democracy but have done little to bolster public trust in democratic institutions. Meanwhile some actively erode it through lobbying and political donations. Ironically, at least for some CEOs, thinking about their societal role through the lens of ESG has become part of the problem. It distracts from the hard-edged strategic actions now needed. Blurry ESG thinking encourages the idea that companies should build into their core business a broad range of issues and concerns that matter to stakeholders. But this risks organisational overload. Moreover, ESG as an agenda has been mostly pushed on companies from the outside, by investors and single-issue NGOs. It rarely galvanises internal energies as needed. Much ESG activity is also premised on the idea that it is in the interests of individual companies to behave well because of the long-term commercial benefits this should bring. Such benefits exist. But the idea creates an exaggerated impression of the capabilities of companies acting alone to solve broader problems in the absence of action by governments. For CEOs of global businesses, a new mindset is needed. It should be built around the following three elements. First, firms need to build a deeper understanding of societal challenges, how they might evolve, and how they might impact the business. This should be a genuinely strategic exercise, unlike the materiality assessments conducted by corporate sustainability departments whose main purpose is often external reporting. It needs to be led by the CEO and overseen by the board. Second, companies should focus more narrowly on the few societal issues which are most critical to the business. Management of these issues should be driven deeper into corporate strategy. A narrower focus means less risk of distraction or wading into peripheral issues where the companys legitimacy may be called into question. Third, recognising their limitations, companies should look to support and mobilise more powerful coalitions, with governments at the core, to help tackle the critical issues. The rationale should be protecting the long-term foundations of the business, not signalling virtue. It is true that the ESG movement has already spawned an array of voluntary multi-stakeholder initiatives. However, many of these are loosely defined and lack government enforcement. Their impact has been mixed. This sort of deeper, more focused approach will help CEOs to concentrate on the highest-impact actions needed on the biggest societal problems their companies face or have helped unleash. Technology giants, for example, would step up collaboration to develop stronger industry norms of behaviour, pushing regulators to enforce them, to head off potential societal strains and disasters from their latest innovations. They might have less bandwidth as a result for, say, climate initiatives, but they would at least be focused on the core challenge for their sector. Oil majors, by contrast, would need to focus with greater intensity on climate change. But rather than concentrating solely on setting tighter targets to limit their own production of fossil fuels (the main demand of ESG activists), these companies would aim to mobilise more effective coalitions to tackle the challenge at the global level. Among the highest-impact moves they could make, however difficult to pull off, would be to persuade state oil companieswhich control most of the worlds hydrocarbon reservesto consider future limits on their own production. Deeper thinking is needed on geopolitical divisions, too. It would probably lead companies to step up their efforts to make supply chains more resilient. While careful not to overstep their legitimate role, CEOs would also engage more with governments as bridge-builders to reduce the risk of international conflict. This is not fantasy. At various junctures in world history, large companies have mobilised powerfully behind or alongside governments to tackle big societal challenges. Just recently, the covid pandemic was brought under control through a vast mobilisation involving pharmaceuticals firms and governments. Or rewind to the aftermath of the second world war, when an economically devastated Europe was rebuilt and revived in part due to the Marshall Plan, a multi-billion-dollar American government aid programme, designed and delivered with significant involvement from leading American CEOs and companies. They saw it through the lens of enlightened self-interest: a way to resuscitate a vast foreign market for American goods as well as to help hold back the spread of communism in Europe. How todays great societal challenges are tackled likewise holds the key to securing huge amounts of long-term commercial value for global corporations. Away from the noise of current debates about ESG, business leaders need a new mindsetserious, focused and ambitiousas they seek to grapple with them. Sir Ian Davis is the former chairman and worldwide managing director of McKinsey, and the former chairman of Rolls-Royce. Daniel Litvin is the founder of Critical Resource, senior adviser to ERM, a sustainability consultancy, and visiting senior fellow at the London School of Economics. He is a former Economist journalist. Both authors write here in their personal capacity.