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Turning ESG aspirations into results: The role of functional leaders

Functional leaders are making major time commitments to companies’ environmental, social, and governance promises. Clearer priorities and responsibilities could ensure that it’s time well spent.
Raj Luthra

Based in Boston, Raj has a decade of experience in corporate function transformations across sectors, with a focus on artificial intelligence in operations.

Fernando Salas

Fernando works from McKinsey’s San Jose, Costa Rica office on topics including manufacturing engineering, corporate business functions, and quality engineering.

Abhishek Shirali headshot

Based in Atlanta, Abhishek works with senior leaders who are driving the future of general and administrative functions, on topics including cost transformation, forecasting, and capability building.

Edward Woodcock

Ed has more than 15 years’ experience in the transformation of corporate business functions. Working from Stamford, Connecticut, his focuses include shared service strategy, enterprise cost reduction, and end-to-end process optimization.

Companies face two crucial questions as they increase their focus on environmental, social, and governance (ESG) objectives. What sort of commitment will it take from executives to meet these new demands—and who should take the lead?

To understand the impact of ESG activity on corporate leaders’ jobs, McKinsey’s Corporate and Business Functions service line recently surveyed more than 300 CXOs who lead departments such as finance, HR, legal, IT, procurement, and real estate. Covering a wide range of industries and geographies, the survey asked respondents how their roles have evolved over the past couple of years.

The answers show that while corporate leaders are spending a significant and increasing amount of time on ESG, the types of issues demanding their attention tend not to fall into well-defined categories. That lack of clarity leaves executives struggling to articulate their companies’ ESG positions, and may hamper organizations’ ability to show progress on their ESG priorities.

ESG responsibilities have increased

Across all functions, 94 percent of CXOs reported that their responsibilities relating to ESG have expanded compared with three years ago. A large proportion (47 percent) indicated that the increase in responsibilities was significant.

The increased focus on ESG has translated into significant demands on executives’ schedules. According to the survey, 88 percent of CXOs have increased the time that they dedicate to ESG. Almost all—85 percent—report they now spend at least one day a month on these topics, and 44 percent said they spend more than three days per month.

Admittedly, these data points were self-reported, but they form a remarkably consistent pattern. When respondents were asked how much time C-level leaders in other functions were spending on ESG, the replies were almost identical: 88 percent believed their colleagues were also spending more time in this area.

ESG work is spreading across functions and industries

As Exhibit 1 shows, chief legal officers—often the executives with the greatest responsibility for compliance—were the most likely to spend more than three days per month on ESG issues, with the range of time relatively consistent across companies, geographies, and industries. More surprising is that leaders of other functions are often engaged in ESG to a similar degree, albeit with more variability in the amount of time spent. Even among CFOs—the executives who on average spent the least time on ESG—one in four reported spending more than three days per month on ESG tasks. Furthermore, new reporting requirements, such as the United States Securities and Exchange Commission’s proposed emissions rules, are likely to further increase the time spent by this group of leaders in the near future.

Many executives across functions report spending at least 3 days per month on ESG.
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No sector was exempt from increased ESG efforts. The reported time spent on ESG was significant across all industries surveyed: a minimum of one in three leaders said that ESG absorbed at least three days of their activity per month.

Accountability for ESG topics is often unclear

For some functions, responsibility for particular ESG topics is straightforward: HR naturally focuses on labor practices, employee development, company culture, and diversity and inclusion. But other functions, such as IT or procurement, report a more diffuse engagement across a range of issues (Exhibit 2).

For many ESG topics, responsibility is often scattered across many functions.
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Indeed, the IT function may not come first to mind when thinking of ESG topics—but its critical role in measuring, collecting, and reporting ESG data makes this a reasonable finding. And while labor practices might seem to be more in the remit of the HR function, other functions contribute as well, as when a consumer products company uncovered unfair labor practices at an overseas component supplier. In this case, the sourcing team introduced a requirement that all potential suppliers provide documentation of their labor and other ESG practices as part of the standard RFx process.

While to a certain extent such overlaps may be unavoidable, the survey showed that for most ESG issues, no consensus has yet emerged on which function should take the lead. This finding suggests that many organizations would benefit from greater role clarity in allocating ESG responsibilities.

Broader cooperation and alignment needed for ESG momentum

The survey concluded with a final surprise. Despite the recent uptick in time leaders report spending on ESG issues, a serious gap emerged between leaders’ stated confidence in their companies’ ESG efforts and their knowledge of what their company policies and major initiatives were.

Some 62 percent of corporate function leaders said they believe they have allocated sufficient resources to ESG to achieve their companies’ goals—and 84 percent believed that their organizations would substantially meet their ESG commitments. But almost one-quarter of respondents said they were not fully aware of the specifics of their organizations’ ESG commitments.

While significant progress has been made in driving senior leader attention on ESG issues, more robust governance and education may be required for leaders’ lofty aspirations to become reality.

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