Recent years have brought upon the world numerous challenges: surging global temperatures triggering extreme weather, widening income disparities, escalating geopolitical tensions, and now a worldwide COVID-19 pandemic followed by a profound economic downturn. These events disrupt the established order and impact our health, environment, society, and economies.
Nevertheless, amidst this disruption lies a remarkable opportunity for innovation. According to Dr. Oliver Eitelwein and Sean Paquet, this disruption compels us to prioritize sustainability, reevaluate our previously held beliefs, and reshape our interactions with the environment.
Have you ever wondered why is sustainability important? Sustainability emerged as a corporate strategy a couple of decades ago. However, in most instances, it consistently failed to translate into tangible actions by corporations. According to the sustainability essay, usiness leaders hesitated to incorporate sustainability at the core of their strategies, and critics readily denounced insincere or cynical sustainability efforts as mere "greenwashing."
However, skepticism has vastly diminished. In its place, sustainability has become an essential aspect of management, encompassing environmental, social, and financial dimensions. Corporations are now compelled to focus on achieving long-term viability while ensuring a return on investment (ROI). Sustainable management offers significant opportunities for organizations striving to prosper in these challenging times.
This shift—from viewing resource utilization through negative lenses to embracing the opportunities associated with sustainable management—is driven by four key stakeholders: investors, consumers, industry peers, and governments.
In this article, we delve into the rapid transformation of the business landscape towards sustainability. Additionally, we explore the five pillars that collectively underpin an effective sustainability strategy.
Stakeholders Demand Change
The four key stakeholders exhibit specific, non-negotiable operational demands for sustainability, propelling a global movement. Investors, consumers, industry peers, and governments each assert their requirements, solidifying sustainability as an essential strategic imperative for organizations to thrive in the future.
Capital markets now assess performance based on three critical metrics: environmental, social, and governance (ESG), recognizing that strong performance in these areas signifies an organization's ability to achieve long-term competitiveness and financial success.
Business leaders have long been skeptical of integrating sustainability into their core strategies, fearing that such initiatives would contradict short-term profitability and face shareholder backlash. However, evidence now indicates the contrary.
Environmental, Social, and Governance (ESG)
Global institutional investors are willing to revise their investments if companies fail to consider ESG criteria within their business models.
BlackRock, the world's largest investor, recently declared that sustainability would be central to its investment approach, divesting from high sustainability risk investments like coal-based energy. This move highlights an everyday driver behind investors seeking sustainable options: systemic risk. Institutional investors, responsible for a significant portion of global capital, consider individual firm performance and broader factors such as climate change and transparency.
Amid the ongoing COVID-19 pandemic, BlackRock and other major investors are doubling their offerings of sustainable exchange-traded funds (ETFs) and considering ESG risks in their portfolios and processes. This sentiment may resonate throughout the financial community. While the immediate focus may be on navigating the present crisis, remaining investors and firms may emerge with a fresh perspective on risk management and long-term planning.
Consumer demand for sustainable products is rising, prompting them to reconsider their purchasing habits by prioritizing environmental and social benefits. This shift in consumer behavior presents opportunities for market transformation and value extraction.
Revenue from sustainable products is growing six times faster than other products.
50% of consumers are willing to pay a premium for products that positively impact the supply chain socially and environmentally.
By 2021, an estimated $150 billion will be spent on sustainable products in the US.
By 2025, consumers will consistently prefer products or services that minimize environmental harm, human health, and society.
This trend is mainly driven by younger generations who are acutely aware of the potential impacts of climate change on their futures.
What was once a matter of convenience, contingent on other variables aligning, is increasingly becoming a priority in purchasing decisions. This trend initially affects consumer products companies and may subsequently ripple through markets, impacting business-to-business companies as the demand for sustainable products permeates the entire value chain.
The commitment to sustainability from large corporations has reached a critical mass, exerting peer pressure on CEOs who still need to make their commitments. The imperative for sustainability arises from the global business community's recognition that a company's purpose extends beyond profit and that its interdependence with other firms, organizations, and ecosystems significantly influences long-term profitability.
More businesses are adopting sustainability as a core corporate strategy due to the financial potential of sustainable opportunities and the desire for "purposeful" work among employees. Consequently, these businesses exert substantial pressure on other companies to follow suit:
One hundred forty major global companies seek a standardized framework to report non-financial ESG factors.
Over half of US businesses have intensified their renewable energy commitments.
More than 9,500 companies, including 28 with a combined market cap of $1.3 trillion, have pledged to increase their climate ambitions.
These announcements compel executives to reflect on their businesses' long-term purpose and impact while legitimizing the movement's logic and value proposition.
Although corporate interest in sustainable management primarily stems from the advantages it offers investors, consumers, and corporations themselves, governments are increasingly pressuring companies to operate sustainably. For instance, the German Bundestag is considering legislation requiring companies to scrutinize their entire supply chain and penalize unsustainability.
Governments worldwide are mounting pressure on companies to ensure sustainable operations. If further action is not taken, government penalties for non-compliance with climate regulations will continue to impact companies across various industries.
If the free market fails to demonstrate evidence-based control over externalities that harm society and the environment, regulatory bodies may increasingly impose restrictions on business operations. The significant number of stakeholders, the capital involved, and the social and environmental risks at play make it likely that governments will intervene in this movement.
Transforming the Core: Building a Successful Corporate Sustainability Strategy Using the Five Pillars
The sustainability imperative has arrived, and executives choose between two paths.
The first path involves companies taking a high-risk, surface-level approach by capitalizing on the sustainability movement through marketing efforts while maintaining existing operations.
The second path is to truly embrace sustainability, transforming the core of the business from within. This corporate strategy may be more challenging, but it will distinguish thriving organizations from those struggling in the long run. Our perspective is intended for organizations embarking on the second path.
Pillar 1: Sustainable Products and Value Chains
Consider the entire value chain, integrating sustainability into each step and the structure of the chain itself.
Three product strategies can be explored. The simplest and most common is rebranding an existing product in the portfolio that meets internal and external sustainability standards. It is essential to conduct due diligence to avoid accusations of greenwashing.
The second strategy involves addressing a partially unsustainable supply chain to make an existing product genuinely sustainable. Rushing this process to capture market share or avoid heavy investments can backfire.
The most disruptive option is creating entirely new sustainable products and solutions. Startups may have an advantage over established companies with innovative business models, sales strategies, and strong branding. Tesla's disruption of the automotive market serves as an example of this strategy.
Pillar 2: Sustainability Culture
An organization's culture encompasses the collective mindsets, behaviors, and decisions that shape its direction. A sustainable culture goes beyond encouraging employees to reduce printing or choose sustainable commuting options. It should foster a long-term mindset and connect to a collective purpose beyond profit, driving long-term value for consumers, people, and society. A sustainability-oriented culture typically evolves in two stages:
Leaders act as role models, clearly articulating the organization's purpose aligned with sustainability goals. This purpose ignites individual and organizational transformations, leading to sustained improvement and innovation.
The Kantar Purpose 2020 study, which surveyed more than 20,000 global consumers and conducted 100 interviews with leading brands, revealed that brands perceived as having a positive impact or being purposeful experienced growth of 175% over 12 years, compared to 70% to 86% for brands perceived as having a low or medium purpose.
Empower the organization to embrace the new vision. Balancing long-term metrics and short-term targets create space for individuals to embrace the idea. When personal and corporate purposes align, employees are often willing to go above and beyond, driven by their values.
Pillar 3: Integration into the Corporate Operating Model
Managing the required changes to operate sustainably is crucial for delivering on sustainability commitments.
For instance, imagine a hypothetical business announcing a comprehensive strategy to source all its products sustainably, eliminate poor labor practices in the supply chain, and invest in the communities where it operates. The next step involves altering the steering infrastructure of the operating model to execute this vision effectively. Consider the following:
Define responsibilities and roles. Determine who will be accountable for driving and maintaining the commitment to source sustainable raw materials.
Establish new skills, tools, and processes to evaluate sustainability based on a new set of uniform criteria.
Create data assets, frameworks, and metrics to evaluate the performance of managers and business units. Corporate sustainability stems from the strategic alignment of the entire company. Therefore, sustainability performance can be measured by the objectives of business units integrating with the company's core.
Measure ESG (Environmental, Social, and Governance) KPIs as digitally and automatically as possible to minimize friction and enhance organizational efficiency and accuracy. This streamlines the adoption of new working methods, reducing the burden of manual efforts.
By embracing these five pillars, organizations can build a thriving corporate sustainability strategy and position themselves for long-term success in a changing world.
Driving External Value: The Fourth and Fifth Pillars
Pillar 4: Positive Reputation
Sustainable business practices have the power to drive brand value growth. However, companies should only embark on this path when they can demonstrate genuine intention and tangible results in meeting sustainability targets.
More than merely marketing sustainability targets is required since consumers and investors seek real impact. Building sustainability into the organization's core strategy and addressing the first three pillars is essential.
Companies that commit to embracing sustainability can expect remarkable growth fueled by a positive reputation.
A study from the University of Cologne revealed that sustainably engaged companies have a brand value 50% higher than that of average companies.
In 2014, Nielsen reported that half of young consumers would pay a premium for sustainable products. By 2018, that number had increased to approximately 85%.
Superficial greenwashing can be counterproductive in leveraging brand value. Greenwashing, as defined by Greenpeace, involves misleading consumers about a company's environmental measures or the environmental performance of its products. Only companies that have genuinely transformed to be sustainable in the future global economy may be rewarded.
Pillar 5: Capital Market Access
Investors now place significant value on sustainability and withdraw capital from businesses with unsustainable practices.
Companies should consider establishing a formal strategy for investor engagement to maximize capital access and ensure that their sustainable transformation efforts are recognized. However, it is crucial to note that capital can only be secured if the first three pillars of the sustainability strategy have genuinely been addressed.
To effectively engage with investors, consider the following strategies:
Establish formal channels for communicating the long-term purpose to institutional investors.
Incorporate more long-term rhetoric during earnings calls. While companies regularly report downturns, presenting positive outlooks can boost share prices.
Collaborate with investors to gain insights and learn from their perspectives on sustainability.
Five Clearly Defined Steps for Effective Implementation
Step 1: Establish the Business Context
In the initial phase, determine the optimal purpose and strategy to align with the long-term context of your business. Address critical questions such as:
- What is the present and future context in which the company operates?
- Which trends will impact your business model?
- Why does the company exist?
- What are the implications for stakeholders?
Step 2: Assess Stakeholder Outcomes
Identify business opportunities and risks from a stakeholder perspective, and adapt your strategy to maximize potential. Consider the following:
- Which stakeholders are at the core of your value-creation model?
- What outcomes do you aim to deliver to meet stakeholder expectations?
- Are specific outcomes more significant than others?
Step 3: Identify Strategic Capabilities
Define, develop, and reinforce the necessary strategic capabilities to generate and safeguard financial, consumer, human, and societal value. Reflect on the following:
- Are some outcomes more critical than others?
- What resources and capabilities are required to create long-term value?
Step 4: Develop a Measurement and Valuation Approach
Measure performance from an outcome and impact perspective. Consider the following:
- Which existing metrics can be utilized?
- What additional metrics are necessary to create long-term value?
Step 5: Manage Execution for Success
Plan, monitor, and report on project development and outcomes. Identify potential risks and seize additional opportunities while facilitating stakeholder communication.
A Potential Path Towards Sustainability
Building a truly sustainable enterprise can lead to long-term value. Prioritizing the first three pillars — sustainable products and value chains, sustainability culture, and integration into the operating model — is crucial for an effective transformation, as they directly contribute to the overall sustainability of the enterprise. Once these pillars are successfully addressed, the value encapsulated in the final two posts — positive reputation and capital market access — can be fully realized in the long run. This unlocks increased brand equity and more favorable capital structures.
The sustainability imperative is a lasting force. While the turbulence caused by the COVID-19 pandemic may eventually subside, it has drawn attention to the pressing sustainability issues. It is shaping a world that is even more attuned to the importance and purpose of sustainability for human well-being. This reinforces the need for organizations to be proactive early adopters, as it provides more robust justifications and advantages for achieving substantial long-term value.