Case study for business school education: Unilever leader signals rethinking of ESG

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In April this year, Unilever CEO Hein Schumacher announced that the company was entering a “new era for sustainability leadership,” signaling a shift from the central priority promoted under his predecessor Alan Jope.

While Jope saw a lack of social purpose or environmental sustainability as the way to eliminate brands from the portfolio, Schumacher has taken a more balanced approach between purpose and profit. He emphasizes that Unilever must meet both its sustainability commitments and its financial targets. This approach, which we call ‘realistic sustainability’, aims to strike a balance between long- and short-term environmental objectives, ambition and results.

As a result, Unilever’s updated sustainability agenda focuses harder on fewer commitments that the company says remain “very significant.” In practice, this means extending deadlines for taking action and reducing the scope of targets for environmental, social and governance measures.

Such disengagement is becoming increasingly widespread – with many companies withdrawing commitments on climate targets, for example. According to FactSet, a US financial data and software provider, the number of US companies in the S&P 500 index that mention “ESG” on their earnings calls has fallen sharply, from a peak of 155 in the fourth quarter of 2021 to just 29 two years later . This trend of downplaying a company’s ESG efforts for fear of increased scrutiny or accusations of empty claims even has a name: “greenhushing.”

The change in approach is not limited to regulatory compliance and corporate reporting; it also affects communication with consumers. While Jope believed that brands sold more when they were “guided by purpose,” Schumacher states that “we don’t want to force the fit. [purpose] unnecessarily.”

His more nuanced view is consistent with evidence that consumer responses to the sustainability and purposeful communications associated with brand names depend on two key variables: the type of industry in which the brand operates; and the specific aspect of sustainability that is communicated.

When it comes to the sustainability message, research in the Journal of Business Ethics found that consumers may be less interested when product functionality is the focus. Additionally, a 2022 British survey found that around 15 percent of consumers thought brands should support social causes, but almost 60 percent said they would prefer brand owners pay taxes and treat people fairly.

Anti-purpose and anti-ESG sentiment is also growing among investors. One (unnamed) leading bond fund manager even suggested to the FT that “ESG will be dead within five years”.

There are now certainly more reports in the media about the negative impact of ESG controversies on investments. For example, while Jope was still at the helm, the FT reported criticism of Unilever by influential fund manager Terry Smith for demonstrating sustainability credentials at the expense of the company’s management.

Yet some executives feel pressured to take a stand on environmental and social issues – in many cases because they feel they are morally obligated to do so or because they want to improve their own reputation. These pressures can lead to conflict with shareholders if sustainability becomes a promotional tool for managers, or for their personal social responsibility agenda, rather than creating corporate value.

Such opportunistic behavior can lead to the perception that corporate sustainability policies are only pursued because of concerns about public image.

Alison Taylor of the NYU Stern School of Business recently described Unilever’s old materiality map—a visual representation of how companies assess which social and environmental factors are most important to them—to Sustainability magazine. She portrayed it as an example of “baggy, vague, overly ambitious goals and self-aggrandizing commitments that make little sense and falsely suggest that a mayonnaise and soap company can solve intractable social problems.”

In contrast, Schumacher’s ‘realistic’ approach is trumpeted as both fairer and more feasible. Former investment banker Alex Edmans of London Business School has coined the term ‘rational sustainability’ to describe an approach that integrates financial principles into decision-making and avoids using sustainability primarily to improve social image and reputation .

Such “rational sustainability” includes any business activity that creates long-term value – including product innovation, productivity improvements or corporate culture initiatives, regardless of whether they fall under the traditional ESG framework.

Similarly, Schumacher’s approach aims for fewer goals with a greater impact, while keeping financial targets in sight.

Complex goals, such as having a positive impact on the world, are best achieved indirectly, as outlined by economist John Kay in his book: Obliquity. Schumacher’s “realistic sustainability” approach involves focusing on long-term value creation, putting customers and investors at the forefront. Saving the planet starts with meaningfully helping a company’s consumers and investors. Without their support, broader sustainability efforts risk failing.

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