Leading with Ambition with Aron Cramer

Transcription

David Stearns:
Welcome to BSR Insights. I'm your host, David Stearns. Today, we're joined by Aron Cramer, President and CEO of BSR. Aron is recognized globally as an authority on just and sustainable business. In addition to leading BSR, Aron is a senior advisor to many of BSRs more than 300 member companies, and other businesses on the wide range of environmental, social, and governance issues that businesses are facing today. And I'm also happy to say that this month, Aron is celebrating 28 years at BSR. So welcome, Aron, and thank you for being here today.

Aron Cramer:
Thanks, David. Good to be with you.

David Stearns:
So I wanted to talk today...we are going to talk today about the evolving landscape of reporting disclosure frameworks that are happening around the world. There's a new wave of disclosure rules, which are calling for a much wider range of issues and regulations which are going to align previously disparate yet complimentary voluntary standards and turning many of them into more mandatory standards.

Now, this is being widely lauded as a sea change, a step forward for the world of just sustainable business. And I wanted to start with a question around what exactly is exciting about this to you. What words would you have for businesses as to why they should be enthusiastic about these changes?

Aron Cramer:
Well, there's a couple of main things that I would point to, and it is a development of really huge significance. So, first of all, if all companies are disclosing, then the companies that have been doing it on their own will find that their peers are doing the same thing. And there's more equity in terms of having all companies demonstrate, communicate about what they are doing on just and sustainable business. So it raises the floor of performance. So that's number one.

Number two, we're moving in the direction, there's a long ways to go still, but we're moving in the direction of more harmonized standards, which means that, ultimately, there will be greater consistency and simplicity in reporting and disclosure as the standards and the practices begin to converge. The third thing I would say is this is a great chance to achieve greater progress faster towards a truly just and sustainable economy.

Because if all companies are disclosing, there is almost certainly going to be a heightened level of performance, that means that the things that it requires the entire economy to be working towards are likelier to happen instead of depending on the heroic efforts of an individual company. So I think, for a variety of reasons, this is a really positive development.

David Stearns:
So one of the things that you've noted in commenting on these changes is this tension between compliance and ambition, you touched on it just now, suggesting that the need to comply could cause some companies to reduce their ambition, engage more in check the box exercises. So can you please talk a little bit about that tension and where the pitfalls might be for companies?

Aron Cramer:
Well, let's face it. When compliance matters come into play, the lawyers come into the room. I can say, as someone who's got a law degree in practice law for five years, lawyers sometimes, certainly not always, but sometimes tend to focus on risk aversion. "Let's say the least that we have to say. Let's not say anything we cannot back up with 1000% certainty."

That kind of mindset may follow the letter of the law of some of these regulations, but I think it's both inconsistent with the spirit of these laws and it is also counterproductive because if every company stopped performing at the line where compliance is satisfied, we wouldn't see the kind of innovation, we wouldn't see the kind of creativity, we wouldn't see the kind of collaboration that is so essential to achieving sustainable business goals.

So I think there is a real risk that people just will walk up to the water's edge, follow the law as written, do no more, and I think that is not in the interest of an individual company, and it's certainly not in the interest of achieving the kind of progress that we want to see, whether it's on DEI, whether it's on climate or nature or human rights, et cetera.

David Stearns:
So that's a really interesting point. I'm wondering if you could talk now about the flip side of that in terms of is it also possible that these new requirements in reporting rules might actually unlock greater ambition. Is there that possibility that companies will actually go beyond this compliance mindset? And what would you...what advice would you have for companies as to how they might pursue that?

Aron Cramer:
Look, no business leader gets up in the morning and says, "What can I do to ensure I'm in compliance with the law?" Business leaders get up in the morning, hopefully, to create an exciting strategy that reflects a sense of purpose that positions a company for ongoing success and that is connected to the needs of, well, all stakeholders to use that term, whether it's customers or employees or the communities, the environment, investors, et cetera.

And so these are questions that are channeled through, will be channeled through, regulation, what do I disclose? But that doesn't give you the answer for strategy. So the fact that now, because of the way regulations work, boards of directors are going to take a greater interest, everyone in the C-suite is going to take a greater interest, investors will be looking at these disclosures.

That is a golden opportunity to say, "What is it that is in our interest in terms of setting the pace, in terms of doing new things, in terms of getting ahead of the regulation so that my company can thrive and succeed and grow?" And again, it's really, don't wake up in the morning to focus on, "I've just got to follow the law." Get up in the morning in terms of something that can be created, and then, the reporting requirement becomes an expression of that strategy, not the end of that strategy.

David Stearns:
What words of advice would you have for business leaders who may go beyond the compliance mindset to see the value of ambition but then to make the argument that there's actually an intrinsic business value in doing it in a more ambitious manner? What advice would you have for them?

Aron Cramer:
Requirements on reporting and disclosure on specific issues, they may mandate that a company takes something more seriously so that they can report on it accurately. But the act of doing that is going to provide information that is going to enable better decision-making and more forward-thinking behavior. So let's give a couple of examples. So in the International Sustainability Standards Board requires reporting on scope 3 climate performance. So that means that a company that is using the ISSB is going to need to understand the carbon footprint of its supply chain. That's a really complicated question.

It requires a lot of different layers. And to achieve real progress, it means a company's going to have to dig in more deeply to that question. And let's face it. If a company is reporting on scope 3, there are going to be a lot of people who are going to say... who are not going to ask the question, "Oh, did they report on that or not report on that." They're going to say, "What does the report tell me? How is this company doing? Is it making progress because, let's say, 80% of its climate impact is through its supply chain?" And so yes, it may be mandated, but it's actually golden opportunity to make more progress on a topic that is really important.

The same is true with human rights due diligence. It means that questions are going to be asked, and you can put it either in terms of risk or opportunity. But when it comes to human rights if a board is asking more serious questions about human rights performance because of the due diligence requirements, guess what? That board is probably going to be uncovering some risks that might not have been as visible. And that means that if logic and even a basic amount of action follows, that means that performance is going to improve.

And so if you think about it, maybe this is a silly analogy, but think about as a parent, you get your kid's report card. You don't just say, "Great, I got the report card. I know what my child's grades are." No, you look at what the grades are, and you work with your child to improve where improvement is needed and really promote more excitement where performance is great. So there's something about this process that I think is actually very basic to how we process information. And if we bring to the boardroom some of the basic human principles that we bring in more personal settings, I think you'll see that better performance will follow.

David Stearns:
So at the center of many of these changes is going to be the Chief Sustainability Officer, whose role will probably never have been more important, influential, or critical in helping to ensure a whole of business response to these changes. And so the increasingly complex role of the CSO, whether it's on strategy, on leadership, on external communications, or on internal culture, is going to evolve.

So I'd like to spend a couple of minutes doing a little bit of a deeper dive, looking at this evolving role of the CSO. So on strategy, for example, how would you say CSOs can and should help their companies to address the new requirements in a way that really strengthens a more strategic approach to just and sustainable business?

Aron Cramer:
Well, I think the answer is embedded in your question, and it's to remind the company that, "Yes, we need to report according to the rules of the game, but let's understand the purpose of these laws. Let's understand the strategic risks and opportunities that are present and use the reporting requirements as a lever to help think about a more ambitious approach to things." So the good news is I think this is further evidence of the fact that the Chief Sustainability Officer's role is growing more important and more business-critical and also more complex.

And I think this will test CSOs to ensure that there is real rigor behind the information that is out there so that whatever reporting happens is going to stand the scrutiny of investors and stakeholders and regulators. Now, I would also say that a bit of a caution because not everything can be measured in a verifiable and quantifiable way. And so part of the chief sustainability officer's role is to remind companies that the old adage that, "What matters is what gets measured" is only true up to a point. In fact, there are a lot of things that matter that are very hard to measure in a quantifiable way.

And so, the CSO really needs to keep the company's attention on those kinds of things, including nascent topics. So there's very little benchmarking right now. I don't know that there is a quantifiable test to gauge what a company is doing on the just transition. If compliance with regulatory requirements on reporting and disclosure means that either that's overlooked or diminished in importance, that's a problem. And so the CSO has to remind companies, "We don't stop at the things that are quantifiable. We need to focus on the things that are material and important and strategic, regardless of whether they can be measured to the nth degree or not."

David Stearns:
On the question of leadership, I'd love to ask, what type of best practices would you offer to CSOs and CEOs so that they can improve their leadership on sustainability and specifically to ensure that the strategies remain ambitious and forward-looking?

Aron Cramer:
Well, in the context of reporting and disclosure requirements, here's what I would... how I would answer that. The reporting and disclosure by law and by implication looks backwards. It's about what do I report about what my company has already done. And that's really good and really important, but the CSO's job is also to keep his or her company fixed... fix its focus on the future.

And so reminding that today's decisions about what we do over the next one, two, five, 10 years will shape both the validity and also the ambition of the reports of the future. And so we have to live in the near past in order to report accurately, but companies have to think about, anticipate, and ultimately ideally shape the future. And the CSO is a crucial voice in making sure that that timescale is considered as seriously as the past is when it comes to reporting.

David Stearns:
One of the other really important impacts, potential impacts of these changes is around how companies are communicating outwardly to external stakeholders, to customers, to investors, and specifically on how they are communicating around sustainability claims. So what advice would you have for CSOs on how to engage with their external stakeholders to ensure that their claims around sustainability are legitimate and meet expectations?

Aron Cramer:
Reporting should not be applied in such a way that it prevents companies from articulating an ambitious vision. Now, an ambitious vision, by definition, is something where company may or may not ultimately meet its goals. To stay on the right side of integrity in those communications, you have to then be clear that, "This is an aspiration. That we're not guaranteeing anything. We're not letting our message get out ahead of our performance, but is rather a good faith statement of intention. I think there's still a lot of room for that.

And if reporting rules are interpreted so that that gets taken out of the system, I think we will lose a lot. We will lose a lot of potential progress. The other thing I'd say is, while regulations will do a lot to create a more streamlined reporting and disclosure system if you will, it is almost certain that there will be topics that will not be the subject of regulatory requirements that will remain very, very important for certain key stakeholders.

So companies just need to walk into this with open eyes and recognize that the formal reports that they are going to be required to submit will not answer all of the important questions from important stakeholders and be ready to talk about that as well through other fora, whether it's through direct dialogue, whether it's through community engagement, whether it's through a sidecar report that gets into some other topics outside the realm of regulation, that's going to remain important because the agenda on just and sustainable businesses, is just in a constant state of evolution. And so regulations move more slowly than our understanding of what's important. And so there's got to be space for that additional top-up in a sense to some of the formal reports that are going to be coming.

David Stearns:
We've been talking about these important new changes and how they are going to impact companies, and what companies can do to embrace them and effectively work against them. And I'm wondering now, just from a broader perspective of our mission around just and sustainable business, do you think these regulations and compliance frameworks go far enough? Would you have liked to have seen more ambitious requirements from companies to address some of these ambition versus compliance tensions that we've been talking about?

Aron Cramer:
So, first of all, you mentioned BSR's mission, working with business to create a just and sustainable world. We don't...The mission is not work with business to create a just and sustainable world so long as you don't go beyond regulatory requirements. That's not our mission. So our mission has ambition baked into it. And so, sure, I mean, I think there's a lot of debate over scope 3 and all of that. That's a shining example.

It's unclear whether the US Security and Exchange Commission will require meaningful reporting on scope 3, I would like to see scope 3 reporting come. Now, there's a lot of complexities. Those things need to be addressed. That's all very, very important. I would like to see the regulations be very explicit about safe harbor provisions to give companies the legal license to be a little more ambitious, a little more aspirational, and maybe even a little more provocative in their reporting.

That's an important principle that can be applied to great importance. And I would love to see the regulations evolve. It'll take some time but evolve to get into some of the thornier questions about equity, whether it's racial equity, gender equity, economic equity, and that's not only about reporting on executive pay or the gender or racial breakdown of a board of directors.

That stuff is all good but get into some of the more fundamental questions about a business's contribution to truly equitable economies. Not easy to do. There isn't necessarily... We all know what a ton of carbon is. And a ton of carbon is a ton of carbon, is a ton of carbon. Equity is a more complicated subject, but I would like to see that become a more significant part of the reporting requirement over time.

David Stearns:
So, of course, all of this is really the beginning of the story here, not the end of the story. And obviously, the next several years is going to require a lot of hard work, both from BSR as well as the companies we work with and beyond, to actually get down to the brass tacks of actually working on all of these regulatory changes. And so, it may be premature to think about what is coming next five to 10 years down the line, but I'd be curious to hear your thoughts, Aron, on what might be coming around the corner in the world of regulation and reporting and disclosure.

Aron Cramer:
Well, I think we're going to learn a lot. So I would like to think that whatever regulatory requirements are put in place, that they will be allowed to evolve as we get more real-world experience of what this wave of requirements is going to create. That's sort of a generic answer, but I think it is important. But there's one thing that we need to keep in mind. The fact is that we already have a great deal of warming, heating, baked into our world, which means that the urgency of addressing climate change is going to grow more acute because more people are going to experience more interruptions in their lives in a more profound way.

And I think that is going to build political support and still some opposition, but political support for more requirements, not only on reporting and disclosure but also on behavior and what companies are doing to mitigate warming and to promote adaptation where given that we are already experiencing these things. So I think this is another reason why companies taking a more ambitious approach makes sense. A, we will make more progress on securing a reasonably stable climate.

But I think it will also, if you want to be just self-interest for business, if things get worse, fast, then I think the regulations that come may be less palatable for businesses. So look, we should all try to shape our destinies the best we can as early as we can. And so, I would hope that a more decisive action on climate, let alone climate reporting, will help us accelerate the action that we need. Because if not, not only will the oceans send us a loud message, not only will extreme weather send us a loud message, I think new regulations will also send a loud message.

David Stearns:
Thank you again, Aron. We appreciate those words of wisdom and look forward to chatting with you again soon.

Aron Cramer:
Thank you, David.

David Stearns:
Thanks for listening. For more in-depth insights and guidance from BSR, please check out our website at bsr.org and be sure to follow us on LinkedIn.