Instead of asking whether an organization can afford to act on its sustainability opportunities, Christopher Wedding asks: what is the cost of not acting?
Sustainability is one of the most used and least understood words in business today. It can mean many things.
Or it can mean nothing. It often refers to goals that fall into four different categories:
- Environment — for example, reducing greenhouse gas emissions, eliminating toxic substances
- Society — for example, paying fair wages, investing in the community
- Economic goals — for example, lowering operating costs, mitigating liability
- Governance — for example, increasing transparency, balancing executive compensation
But it can also be seen as an ambiguous buzzword, based on too much talk and too little substance.
According to a 2013 MIT-BCG study of thousands of executives and managers across 118 countries, the leading sustainability issues include the health and wellbeing of employees, the community and customers; energy efficiency, pollution and waste management; and competitiveness, market pressure and revenue growth.
In this article I will address four aspects of sustainability in the corporate world:
1. What it is vs what it is not
2. Why it matters to stakeholders and shareholders
3. Challenges in progressing from vision to application
4. Best practices for execution and value creation
1. Sustainability is not about tree hugging
Despite common perceptions, sustainability is not just about the environment, philanthropy or generating goodwill.
Trust me: I say that in my capacity as a strategy and finance professional with a PhD focused on green real estate and clean energy, having spent most of the past 10 years in private equity and start-up investing. I have had hundreds of conversations about what sustainability is and what it is not. For any investment in a new project or company to have merit in this field, the business strategy has to be based on market differentiation, consumer preference, risk management, cost-savings and related business benefits.
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Other research supports this perspective. Deloitte notes that corporate sustainability leaders are 400% more likely to be considered innovation leaders, and roughly 50% of corporate chief financial officers’ (CFOs) see a strong link between sustainability performance and financial performance. MIT and BCG have found that more than 50% of companies have changed their business models as a result of recent sustainability opportunities. Bain & Company has observed that most employees care more about integrating sustainability into business operations than taking the easier approach of donating to causes that matter to the organization. And Ceres’ research indicates that 53 of Fortune 100 companies reporting on climate and energy targets have saved $1.1 billion annually.
In addition to these more concrete benefits, leadership in sustainability can indeed also build stronger brands. Executive interviews often indicate that improvement in corporate reputation may hold the most potential value in this context. As an example of the dollar value of corporate brands, Millward Brown estimates that the value of the 100 strongest global brands exceeds $2.9 trillion.
2. Sustainability is not a passing fad, but instead a juggernaut
Companies measure, manage and report on topics that they, their stake- holders and shareholders consider to be material. With that in mind, consider that 5,000 companies around the world, including 66% of the Fortune Global 500, publish annual sustain- ability or corporate responsibility reports, according to Ernst & Young and CorporateRegister.com.
Why do they do this?
Employees care about it. In an ever-changing and increasingly competitive global marketplace, talent is one of the most significant contributors to value creation. Executives at leading global organizations agree that the ability to attract and retain the best employees creates a major competitive advantage. In fact, this was part of the motivation for Bank of America’s chairman Ken Lewis to build its Tower at One Bryant Park in New York City as one of the greenest skyscrapers in the world. Market research by Bain & Company supports this perspective in noting that a company’s “nobler mission” (such as sustainability) is an important factor for 60% of employees and a powerful weapon in the war for talent.
Customers think it is important
An increasing number of customer surveys around the world seem to indicate the same thing: buyers of products and services prefer to engage with companies that pursue a mission higher and broader than profit motive alone.
A 2012 Edelman survey of more than 8,000 people, in multiple countries, revealed these results:
- 53% said that a company’s social purpose is the most important factor for them, when quality and price are the same
- 47% reported that they make purchases of cause-supporting brands at least monthly
- 43% said they were willing to pay a premium for products associated with purpose (word of caution: be wary of the difference between customer intentions and actions)
Investors increasingly see the value it creates
As in so many situations, the “golden rule” applies here too. But in this case, we are talking about a slight variation: the one with the gold makes the rules.
The investment community is justifiably sceptical about most new business models. As fiduciaries entrusted to steward capital, their duty is to mitigate risk while seeking new opportunities. Accordingly, the task with regards to sustainability is to demonstrate its ability to improve profits, manage liabilities and deliver on its promises. In so doing, investors can bring the power of capital markets to shift business towards greater sustainability on a massive scale.
Consider four examples of how this is happening now:
- A 2013 study by professors at the Harvard Business School and London Business School showed that an investment in companies that voluntarily adopted corporate-level sustainability policies would have delivered almost 50% greater returns between 1993 and 2010 compared to an investment in their peers doing almost nothing with sustainability policies and programmes.
- Research from 2012 by Deutsche Bank found that 85% of studies on the topic show that companies that demonstrate leadership and excellence in sustainability exhibit market-based and accounting- based financial outperformance of their peers over the medium term (three to five years) and long term (five to 10 years).
- On behalf of 767 institutional investors representing an excess of $92 trillion in assets, the Carbon Disclosure Project (CDP) is a non-profit organization that surveys the world’s largest companies regarding their carbon, energy and water footprints, risks and business opportunities. With this group of investors taking interest, the mere act of asking can be a powerful catalyst for change.
- To date, 13 stock exchanges around the world have joined the Sustainable Stock Exchanges Initiative, which Forbes called one of the best sustainability ideas in the world, in order to require or begin asking companies to disclose the environmental and social risks that might affect their business.
3. It faces challenges in execution, despite thousands of lofty public commitments
Make no mistake: more companies are making an ever-greater number of sustainability commitments today than in years past. As an example, Pivot Goals, an initiative of Winston Eco-Strategies, is currently tracking nearly 4,500 public goals by Fortune Global 500 companies.
However, translating these goals into programmes and products that generate new revenue, reduce costs, mitigate risks or build brand has been difficult. Despite recognition of the major sustainability issues, and the belief that corporations should play a leadership role in addressing them, most employees do not believe their organizations are doing what they should be doing.
Barriers to implementing sustain- ability initiatives include competing priorities, short-term investment horizons, insufficient accountability, lack of personal financial incentives, difficulty in measuring the intangible benefits, inadequate engagement of supply chains, metrics that are disconnected from financial outcomes, internal misunderstanding of the benefits and poorly- defined goals.
4. It can be easier to implement; find out how
Despite all these challenges, a set of best practices is emerging to help companies capitalize on these opportunities. Focus, focus, focus. McKinsey & Company research suggests that corporate sustainability leaders concentrated on approximately five main priorities. In contrast, they found that most other companies spend resources on about 10 sustainability goals, and often the number was as high as 30. This shotgun approach is confusing, internally as well as externally. To illustrate this point, note that 70% of consumers do not understand the messages companies use to talk about their corporate social responsibility initiatives, according to 2013 Cone Communications/Echo Global CSR Study.
Set specific and ambitious goals
Only one in five S&P (Standard & Poor credit rating agency) 500 companies sets quantifiable, long-term sustain- ability goals, based on analysis by McKinsey & Company.
Most importantly, these objectives need to be measurable, in order to assess progress along the way, and aggressive, in order to inspire teams to aim for something big and exciting.
Use performance rather than prescriptive goals By only setting targets – for example, energy use reduction per year against a certain baseline – and allowing management teams in each facility to create their own sustainability action plans, instead of following a prescriptive top-down path, a larger portion of the company is empowered, vested and accountable for seeing those targets being met.
Do not pigeonhole sustainability programmes and professionals Neither sustainability nor the teams engaged in identifying and capitalizing on the opportunities it presents should be narrowly focused. Sustainability must be a corpo- rate-wide initiative that touches all departments. Luckily, many years ago, my doctoral adviser, Dr Douglas Crawford-Brown, also understood this and set me on the right path. He said:
“The university is your department, but make a compelling case for what you are going to do with this knowledge.” Hence, study and practice in environmental management, city-planning and business strategy equipped me and similar hybrid professionals to speak “multiple languages” and be more effective team leaders.
Create accountability and incentive alignment
Where does the buck stop? And who cares? If too many people, or the wrong people, are charged with seeing a sustainability idea through from concept to profit and loss, its odds of success are greatly diminished. Moreover, most of these team members have mortgages to pay, college funds to seed and healthcare costs to manage. If they are rewarded financially, they have one more very important reason to succeed.
Measure and communicate differently
Communicate the financial impacts of sustainability. Build strong business cases. Educate the team about what is possible and how it will happen, step-by-step. Focus on business opportunities not environmental problems. Consider new metrics frameworks such as S/ GPR, put forth by David Lubin and Daniel Esty, which provides a method for companies to share data on their sustainability-driven (S) growth (G), productivity gains (P) and risk mitigation (R). In fact, it is this more rigorous way of communicating about sustain- ability that led us to create our own market intelligence company, g-bit.com. Quantitative trends and analysis make for much better pitches.
Use creative financing alternatives
Frequently, it is financial, not techno- logical, innovation that serves as the game-changing catalyst to facilitate new product adoption. As an example, consider rooftop solar PV systems.
Often thought to be too expensive to make economic sense, now incentives in about a dozen US states, allow for third parties such as SolarCity or OneRoof Energy, to design, install, own and maintain these rooftop electricity generation assets. In doing so, the building owner agrees to pay these companies roughly 80% if their existing electricity bill.
This means they start saving on their power bills the first month, and the third party delivers strong financial returns to its investors, too. This clever innova- tion has captured about $10 billion of investor capital in just the past five years.
Succeeding in sustainability requires us to be practical visionaries – simultaneously focused on the big picture, on what could be, on new models for generating profit, while also being action-orientated, concentrating on only a handful of priorities and speaking the language of finance to turn “maybes” into “yes’s”.
So, instead of asking whether your organization can afford to act on its sustainability issues and opportunities, consider asking the opposite: what is the cost of not acting?