Episode 21: The Driving Forces Behind ESG

Transcript

0:00 – 0:0:33
Chris Thornton

Change@Work is a podcast about the ever-evolving world of work and the human behaviors that drive it. I’m Chris Thornton, Senior Principal here at Daggerwing Group. Together with partners, clients, and leading experts from a variety of industries, we’ll share what’s happening in the world of work, how leaders can prepare for the future, and how to engage employees along the way.

0:33 – 0:50
Chris Thornton

Welcome to the podcast, Johannes Wassenberg, Managing Director at Moody’s Corporation where he specializes in designing and implementing target operating models, executing strategies, and leading culture change toward digital innovation within the financial services and ESG industry. Johannes, welcome.

0:50 – 0:52
Johannes Wassenberg

Yeah, thank you Chris. Really look forward to our conversation.

0:52 – 0:57
Chris Thornton

Johannes, you do work at Moody’s but you’re not speaking on behalf of Moody’s today, is that correct?

0:57 – 1:04
Johannes Wassenberg

That is correct, Chris. I think it just allows for a better flow of discussion between you and I if I speak purely on my own behalf.

1:04 – 1:23
Chris Thornton

Fantastic. So, we won’t pretend that you don’t work at Moody’s but you won’t be speaking on their behalf. That sounds fair. Alright, well we always like to start with a few questions to get to know you a bit so here we go. What was the best vacation you ever took and why?

1:23 – 2:17
Johannes Wassenberg

I think I like a lot of different vacations I took. I like taking vacations that are in the outdoors, that take me to remote places, that just make me relax, shut off. Ideally, sort of without Wi-Fi access, etc., so one good vacation I remember with my children – my brother lived in Canada for a while so we visited him. Went from Toronto to Nova Scotia and had a fantastic time, came back via Maine. Another fantastic time I had was taking the children camping in France – doing some wild camping at a lake where we could hardly get down to, (it was a bit adventurous), but we woke up to the stunning turquoise green water in the middle of nowhere. So, things like that really make my heart tick, beat faster.

2:17 – 2:29
Chris Thornton

That sounds so good right now. I’m just planning a vacation with my family and that sounds perfect. Have you been anywhere lately or are you staying out because of the pandemic?

2:29 – 2:56
Johannes Wassenberg

No, I’ve recently managed to escape. My partner’s parents are from Madeira, deep in the Atlantic. So, in February, we went to Madeira. Then, actually to stay with my 85-year-old father who lives in France, for the last two weeks. Thanks now to remote working, that is possible without having to take holidays. So, worked from Brittany for two weeks and had a fantastic time with my father as well at the same time – probably drinking a bit too much wine and whiskey in the evenings, but I did cope.

2:56 – 2:59
Chris Thornton

Where is home base for you usually?

2:59 – 3:19
Johannes Wassenberg

Well, I’ve been in the UK for 24 years so this has become my home. The children were born here, before – I come from a military family, so home has pretty much been everywhere in western Germany, a bit in the US where I lived for a while. So, a bit of a nomad from that perspective. But now, settled in the UK and really happy here.

3:19 – 3:28
Chris Thornton

Very good. So, you’re very happy there. But if you could live anywhere in the world, knowing that you’ve moved around a bit and been a nomad, is there anywhere else you would live?

3:28 – 3:35
Johannes Wassenberg

I think I’m actually really happy here. I’d like to travel, but I’m happy with my roots here – I’m content.

3:35 – 4:08
Chris Thornton

I love it. Alright, let’s get into the topic of ESG if that’s okay. Want to talk about that, it’s still somewhat of a novel topic (outside of those of us who are not working in the ESG space), but I think so many people are experiencing ESG – at least parts of it – but may not understand what it all adds up to. Now that organizations have started to prioritize it within the last five years or so, in your own words, can you describe what ESG is and how it came into the spotlight?

4:08 – 6:47
Johannes Wassenberg

I think ESG is the expression of a paradigm change that we’re seeing in our world, and if I look back at what this world has looked so far (since perhaps the beginning of the Industrial Revolution), if I think about a company’s CEO, CFO, the C-suite – their world is really defined by a limited amount of stakeholders that they had to master at managing these stakeholders in order for the company to thrive. Clearly, customers upfront but then your owners, your creditors, your suppliers, your employees. And then of course depending on your industry we have a few others – regulators, etc., but I think at a core, those are your five key stakeholders. And if you looked after these five key stakeholders, you were really managing and a good steward of your company’s destiny. That paradigm, which in hindsight will look like a very easy and lovely world – not with any of the complexities that it entails, but that’s the paradigm we are seeing shifting towards a paradigm where, clearly those stakeholders (those five stakeholders) remain key, but where a lot of other additional stakeholders are coming onto the stage, and the two main drivers of that (in my view), are social media and big data/artificial intelligence. So, of course we and you would hope human-kind is developing a greater conscience about the impact of climate change, about greater equity, etc., but we’re also seeing (just very recently now with the conflict with Russia and Ukraine), that human-kind is not always getting better. And I thought long and hard about it because I’m perhaps in that regard a bit more of a… some people would call me a cynic, some people would call me a realist, but I think it’s more than just “a lot of us feeling passionate about our planet and feeling passionate about our human brothers and sisters,” there are other drivers why this is suddenly a thing coming into the forward – why people are talking about ESG. But I also think it’s not yet that clearly understood and therefore, as you said, ESG is out there, people see it, people hear it, they can smell it, they can taste it, but it’s still a bit vague.

6:47 – 6:56
Chris Thornton

Right, and people might have a different idea of what it is. So, you see other drivers coming in to change that paradigm, and in what ways has it been changed?

6:56 – 9:39
Johannes Wassenberg

Going back to the old paradigm where a company had to deal with its five key stakeholders. Those five groups were more or less reflected in accounting standards. But, of course, a company always had impact on a much broader set of stakeholders. They had impact (and the very obvious example) on somewhere in the supply chain, the sweat shop, and some emerging market that a company utilized for cheap labor but didn’t really matter. But also, just using the infrastructure, using educated workforce, etc., where yes, in theory, you should pay taxes for that, but we all know that wasn’t always the case. So, you benefit, on the one hand, from a much broader group of stakeholders committed who are there supporting you. But you also use (have an impact on them), by using that educated workforce, by using the air, the land, the water, to which you may not pay that good of a price. So, what I’m saying is that beyond those five stakeholders, you have (and you could say to some extent) an infinite amount of stakeholders that are directly (and increasingly less directly) impacted by the actions of a company as well. That was always the case. So, what has changed? In my view, what has changed is that these stakeholders, before didn’t know their expectations weren’t impacted by who’s at the end of the supply chain that they worked in. However, with social media, what they’re suddenly able to see is for example the lifestyle that people in industrialized countries have. They may be able to see which company they’re working for, they may be able to see which company’s using their water, or whatever the impacts are. So, basically, these stakeholders start having changing expectations about their attraction with individual companies and the company’s impact on them. And, in return, social media also allow them (if the expectations are changing), to express those expectations. They can mobilize, they can do sort of very quick crowdsourcing, crowdfunding, mobilization of crowdfunding. So, that dynamic, therefore has changed in a non-linear way. So, it’s not that suddenly all these stakeholders are behaving all the same way, so you can very easily predict their behavior. But, clearly in a non-linear way, you have suddenly as a company executive, you face both risks and opportunities by this much broader group of stakeholders.

9:39 – 9:47
Chris Thornton

Okay, and that covers social media. But what about big data that you mentioned?

9:47 – 11:15
Johannes Wassenberg

The second element that’s been added to this, which then I think provided not just the necessary but the sufficient conditions for that paradigm change, are that you increasingly can gather data so you can measure and therefore manage those changing expectations, changing behaviors – clearly not perfectly, and clearly there’s a whole range out there that you can’t, but increasingly you can start to penetrate that with the power of big data, with the signals that you can extract from that data and you can manage through national language processing etc., So, you have both dynamics – the changing expectations and the ability to express those expectations on one hand, but also increasingly, an ability to measure that, and therefore manage that. So, it’s not just that the tail of your risk distribution is increasing (it’s just a cost of business), but you can’t basically see it. No, you can increasingly (and using an analogy) take a torch and shine into that tail and make that tail of your distribution a bit more visible. For me, it goes much beyond just a more ethical approach to business. I think it’s a very logical, rational evolution from the old paradigm – five key stakeholders to multiple stakeholders as a result of social media and big data.

11:15 – 12:44
Chris Thornton

And when we think about ESG, let me test a couple things with you. So, when we think about ESG – environmental, social, and corporate governance, (and those three pillars), those elements that are coming together to interact with, respond to, and in many cases, help lead in those areas based on what the company stands for, what it’s doing, why it’s doing it, and all of those areas. We sometimes found within the last 10 years – let’s go 10 years ago – we saw that leaders and people of companies focusing in on one part of them. So, what does corporate governance look like, what does the representation look like on there when it comes to social, environmental – again, we find them focusing in on one part if it, but of course they’re connected because you can’t move one lever without impacting another lever. And so, how do we…the way one of my clients described it to me (I won’t name them because it’s inelegant, so apologies for the language), they said the world expects us to not be assholes in the work that we do. But we can do more than just not being assholes. We can actually do good and make the world a better place because we’re in it and that is what we are trying to do. Now, you don’t have to respond to their inelegant language.

12:44 – 15:13
Johannes Wassenberg

But that’s what I would call risk. So, on the one hand, you want to minimize risks (i.e., you don’t want to be perceived as a bad person), but there’s also opportunities in going beyond that. And again, for me, those opportunities are not just opportunities as being seen to do good, but the real opportunity is in you being able to engage with a broader group of stakeholders, and therefore have a competitive edge. Let me perhaps bring in one more dimension. As I mentioned initially, how those five stakeholders are reflected in the P & L but there’s also often what is said is that ESG is you have this dichotomy to financial materiality and non-financial materiality. And I think that is, for me, is completely going down the wrong path. There’s only a question of time horizons. We know that financial data is obviously based on accounting standards that reflect the past – now yes, we can make forecasts, etc., but it’s with a limited time horizon. What we’re basically seeing with ESG, in my view (and those boarder group of stakeholders), it is a bit like if you take your P & L – so I mentioned already, your revenues, your customers, and then the different cost blocks is like if you have insight into derivatives of your revenue. So, what drives revenue? It’s obviously people’s behavior – do you have the ability to impact that behavior, etc. But equally on the cost factors – your supply chain. How is your supply chain going? Is that stable over time? So, you’re basically getting indicated – of course as you get further and further away (so first, second, third derivative away from that financial indicator), obviously they get weaker. But it is those signals, we need to be able to learn, to interpret, and to manage. If we don’t want to be the ones left behind, still dealing just with accounting terms of today and yesterday rather than acquiring the skills that will allow us to have a more better view if the future by looking at these signals and extrapolating that impact back onto the company. So, I think that for me is a kind of skill that leaders need, that companies need to master, is how we put all those signals into context. First of all, how do we get to them? So, you need to have a certain data literacy, you need to have data capabilities in your company, and need to be able to interpret them because, of course, those data signals are getting weaker. They often don’t have the same strength of correlation to known factors you’re used to, etc.

15:13 – 15:21
Chris Thornton

Because we weren’t measuring them, we weren’t looking at them, they didn’t matter. Profit mattered, not all of these indicators.

15:21 – 15:45
Johannes Wassenberg

Exactly. If you’ve become a CEO/CFO or a leader, you obviously have a certain trajectory on which you became that. So, you have your muscle memory you’ve shaped in a certain way what this now is doing. It basically, to some extent, de-validates the muscle memory, it requires you to gain new muscle, and that’s really uncomfortable.

15:45 – 16:29
Chris Thornton

It sure is. I’ve never seen a CEO or executive team stand up and cheer that they get to learn new ways of leading and measuring their own success. It’s always this sense of “Oh my gosh, how do we do this now?” Even if we feel compelled to do it, even if we know it’s the right thing to do, even if it’s going to give us a competitive edge, rarely do I see a leadership team standing up, applauding, saying “Fantastic, we get a new way of leading/being measured” in what matters. So, what is your advice to companies on how they can ingest, understand all that new information, measure, and then model expectations when they’re dealing with such a large, and sometimes vague, data set?

16:29 – 18:44
Johannes Wassenberg

So, I would advise them first to get alignment internally on this nature of the ESG because if you don’t have alignment, you play this whack-a-mole game. You basically start hitting the symptoms you’re seeing popping up here and there, everywhere, but I think it will be very difficult as a company to plot across through that. So, the less you have alignment among the leadership team, (and among the employees in terms of what is this new paradigm, what does that mean for us, how do we position ourselves), then I think you can sort of start thinking about what are the capabilities we need? What are the skills we need? How do we train our workforce? What are new skills, etc. But I think if you don’t do the first step, you just end up doing a lot of activism to be seen to do something, but ultimately, it’s just like a straw fire. I’m not a consultant, but from my own experience, that is critical – that you align on that, and from that perspective then, plot your course – what does that mean in terms of how you get to the customers, how you get to the stakeholders, what does it mean for the owner and employees in terms of how you want to engage with them and what skills you need, etc. As I said, and going back to your quoting again, but it’s more than just risk management – it’s if you have insight. You can gain huge opportunities, and that’s why, for me, I’m sometime unhappy with the term ESG because it labels it and puts it into this (and I don’t want to sound negative), but a sustainability corner. It’s not… everything is sustainability in the end but it’s a new paradigm, in my view. So, it’s not something that you, as a company, can choose to take on or not because you say “In my sector it doesn’t matter whether you’re sustainable.” That’s not the point. It’s not about that, it’s about how do you position yourself for the new paradigm. That’s why I say I’m unhappy – while I think it’s great that obviously there’s focus on ESG (environmental, social, and governance aspect), it sort of reduces it too much, in my view, to adequately reflect that it is a real paradigm change.

18:44 – 21:12
Chris Thornton

That’s so interesting, it’s not an initiative that we get to choose whether or not we’re going to do. It is now how we work, and it is now a requirement of how we work and how we lead. It’s not an initiative or something that we’re going to campaign ourselves and feel good about – this is now how we lead, this is now how operate, and this is how we do the work that we do. As I think about what this means for our listeners who are starting to grapple with ESG and maybe understand parts of it but not all of it, I’m going to give an example and then I want you to correct me and tell me what I’m missing, what I get wrong. But I was discussing it with one of our clients (who won’t be named), but they were talking about in the past, if we needed to protect our supply chain, our focus would be on where do we get X ingredient (and again, no names, no ingredient, but X ingredient), and we’d look across the world and we’d have different places, and different markets where we could get it profitably. And that was our focus, was our driver of a sustainable or a constant supply chain uninterrupted, predictable, at a predictable cost. So, that’s where their energy went. Their energy still has to go there, they explained, but they also have to look at “Is the farming community there for the long-term?” Or “Are we having a ‘take what is most advantageous to us today’ and then we abandon those farmers for the future?” Because in the past they would’ve. They would’ve because they’ve gone where they could get an uninterrupted supply at an advantageous cost to them. And now they have to think about “What are we doing that farming community? Are we making it better because we partnered with them? Are we making it something that we can now predict will be there for the long-term? Are those farmers having a positive impact on the land in the communities around them?” And so it keeps getting bigger and bigger and bigger, so much so that it starts to become the infinite number of stakeholders that you mentioned earlier, or almost infinite number of stakeholders, when you start looking at the complexity of doing work within the world we live in. Now, what did I get wrong about that viewpoint or what would you add to that viewpoint?

21:12 – 21:27
Johannes Wassenberg

I like it, I like the way, the example, the way you expressed it. I think the one thing perhaps I would say that you got wrong is their definition of price and cost.

21:27 – 21:33
Chris Thornton

Okay. I’m simplifying so I’m going to be fair to those people but yeah, you could come at me for the definition of price and cost.

21:33 – 23:52
Johannes Wassenberg

I don’t want to bring in another dimension, but I think when I use this term within Moody’s, the economists among us understand that but those who haven’t gone through economic training struggle, or don’t understand immediately what this is. But what we see with ESG is nothing else but the internalization of external effects – if that rings a bell. So, you as a company use resources for what you don’t pay an adequate price – because often there is no market to determine a price. But the price often is completely relative. Let’s say the air you made depends on how the people are impacted, or how they value air. And that value may change over time, it’s not stable. So those prices, therefore, the fair price, let’s say, you are seen as paying (or not paying) is determined, again not by accounting standards, but by those expectations. And those expectations are shaped, of course, by norms, standards – whether it’s the United Nations, ILO norms, CDC norms, etc., or just norms that you see developing in your influencer group, etc., social media sort of bubble. But that is basically shaping therefore the price of let’s say your cost of your production. So, you, as a company, ought to understand what is the real price of me sourcing from that agricultural community? And impacts on the price of course could be there’s the tangible cash that you pay, but there’s the use of water, the use of air, and then you have to sort of assess how likely are these elements of price going to materialize? So, you obviously have to make a certain assumption and certain prioritizations, but if you realize that there’s a big delta between what you pay and what you ought to be paying, you have a huge vulnerability where you’re realizing the price you’re paying is not the right price. So, I would look at it like that a bit in terms of there’s one example – think about the price, using the right price, not just the one that is the one you’re paying in cash but the one that is seen as fair by the affected constituents – in this case, value chain/supply chain, etc.

23:52 – 24:11
Chris Thornton

Excellent. Yeah, the price is more than the dollars or euros or pounds paid. So, what does this all mean for the future of business and the relationship that companies have with their stakeholders? When you think about the risk of not paying attention to ESG, what comes to mind?

24:11 – 24:36
Johannes Wassenberg

It’s like missing out on digitization. So, it’s missing out on a step change in the industry, so if you want to remain analog, everyone else is going digital. It’s one of these things that I think you don’t have an option if you want to be a player – a serious player – in your markets in the next decade, next 10 years, twenty years…

24:36 – 24:43
Chris Thornton

You’re going to get left behind and the market’s going to change. And how we do business is going to change and you’re not going to get out and compete.

24:43 – 25:10
Johannes Wassenberg

And it’s more complex because, as I said, you were in your comfort zone of five stakeholders that you, a good leader, manager really well. But now suddenly – you still need to do that, you can’t neglect them – it’s no longer enough. So, how do you fit all that in to an already tight schedule? How do you manage that? We talked about this already, but it is becoming much more difficult.

25:10 – 26:05
Chris Thornton

So, implications then for operationalizing this within the people of the organization – thinking about skillsets that you need now, what you’re going to need in the future, what our commitments are now, and what they need to be in the future, how we’re going to actually meet those commitments, do we need mindset shifts from our people, can they even think this big because we then ask them often we ask employee base to just execute the heck out of something and be wonderful at executing and getting it done in an efficient and effective way. And now we’re asking them to think completely differently about what needs to change – in some cases to meet some pretty huge commitments that companies are making externally. We’re thinking about do we have the systems and processes to support that, do we have the data to help us make the right decisions and anticipate where we need to be next. Anything else come to mind where we need to be focused on operationalizing it?

26:05 – 26:34
Johannes Wassenberg

It’s pretty comprehensive, and look, I’m not even saying that I begin to know what we’ll need to do, so I think we’re at the beginning of this journey and it’s going to be an interesting find, but I’m at the beginning. So, I’d be the last one to say here’s the recipe om how to succeed, but we all need to work at that and face that challenge and embrace it, otherwise we’re going be there with the dinosaurs.

26:34 – 26:42
Chris Thornton

Fantastic. Johannes, thank you for this call to action. Johannes Wassenberg, Managing Director at Moody’s Corporation, thank you so much for joining us today.

26:42 – 26:45
Johannes Wassenberg

It’s been a pleasure, Chris. Thank you very much for asking.