How to improve long-term business value through sustainability
As stakeholder expectations become more focused on sustainable development, companies must fully embrace this paradigm shift to create value.
Companies are under increasing pressure to focus on sustainable development and long-term value creation beyond generating profits for shareholders.
Is there a relationship between sustainability and value creation?
The correlation between corporate sustainability initiatives and long-term value creation is clearer today than in the past.
By embracing sustainability at the strategic and operational levels, companies can realize greater long-term business value.
When the COVID-19 pandemic hit the world, images of crystal clear waters along the canals of Venice and clean air in many major cities emerged during lockdowns.
This once again highlighted the human impact on the environment and increased interest in sustainability and environmental, social and governance (ESG) risks. This interest is not new, but it has been increasing. Investors are paying more attention to how companies manage their ESG risks.
The Fifth EY Climate Change and Sustainability Services (CCaSS) Global Institutional Investor Survey of 2020
An overwhelming 98% of investors surveyed were found to evaluate non-financial performance based on corporate disclosures. Among them, 72% said that they carry out a structured and methodical evaluation.
However, it appears that ESG considerations have not been adequately addressed.
Investor dissatisfaction with ESG risk disclosures has increased since 2018, and 86% of investors dissatisfied with the environmental risk information they receive said it is critical that disclosures in this area improve.
Dissatisfaction with environmental risk disclosures
86% of investors dissatisfied with the information received on environmental risks said that it is essential to improve disclosure in this area.
Interactions between companies and customers
This emphasis on corporate sustainability extends beyond the investment community and increasingly underpins interactions between companies and their customers, supplier networks, partners and employees.
With the increasing importance of sustainability in business, corporate executives are hard-pressed to adopt a paradigm shift away from the sole purpose of generating profits for shareholders and toward sustainable development and long-term value creation. in their organizations.
Sustainability initiatives and improved business performance
In recent years, numerous studies have linked the implementation of corporate sustainability initiatives with improved business and financial performance.
Similarly, from a valuation perspective, it is believed that strong corporate ESG practices would increase the value of a company.
This can be attributed to the impact of ESG practices in three areas:
– cash flow accumulation.
– lower costs and better access to capital.
– specific market factors.
Advice on sustainability and supply chain
It is important that specialist consultancies help business owners and management in general understand the risks to supply chains, such as human rights issues, resource constraints, climate change and government payments.
Therefore, it is important that you integrate ESG considerations to drive revenue growth and cost efficiency.
12 trillion dollars of market opportunities
The Business and Sustainable Development Commission estimates that achieving the United Nations Sustainable Development Goals could generate at least $12 trillion in market opportunities annually for the private sector by 2030.
And how much does this represent in the pie of global wealth generation?
This represents around 10% of the global GDP expected for that year. Opportunities span a multitude of sectors, including food and agriculture, energy, as well as health and wellness.
Capitalize on opportunities
Corporate executives who manage to integrate ESG considerations as a core driver of their corporate strategy and differentiate their organizations within the global sustainability ecosystem will be well positioned to capitalize on these opportunities and generate new revenue streams for their businesses.
The growing influence of environmental and social factors on consumer purchasing decisions has also allowed sustainable companies to charge higher premiums for their products and services, controlling a greater proportion of existing customers’ wallets.
ESG factors and decision making
At the same time, integrating ESG considerations as part of company decision-making often leads to operational and process efficiencies within the business, helping to improve profitability.
This can typically be achieved through improved resource management policies to reduce and eliminate waste, sustainable supply chain management practices to reduce environmental impact across the value chain and costs, and cultivating an innovative culture to reinvent existing processes.
Enter a chain of operational efficiency
Integrating ESG considerations as part of company decision-making often leads to operational and process efficiencies within the business, helping to improve profitability.
Sustainable companies win in the rankings
This is corroborated by an EY analysis, which measured the profitability of the world’s leading sustainable corporations according to the Corporate Knights Global 100 2020 ranking2 against that of their respective industry medians. Sustainable companies in the ranking outperformed their industry peers in terms of gross profit, EBITDA, EBIT and net profit.
These companies recorded higher EBITDA and net profits than their peers in 73% and 61% of the industries analyzed respectively, with a degree of outperformance ranging from 3.1 to 6.3 percentage points.
Companies with higher ESG ratings have also been associated with lower market valuation risks.
According to The Journal of Portfolio Management, sustainable companies experienced a lower frequency of large adverse stock price movements between 2009 and 2019, compared to those that had a lower ESG rating.
This could be attributed to better risk management and compliance standards across the globe, its operations and supply chain practices, resulting in organizations that are more resilient and less susceptible to the risks of black swan events, including compliance violations and supply interruptions.
Valuation, Modeling and Economics
Strategic planning and transactions are critical moments for companies. Therefore, we will now look at the implications of valuation and business model to better understand the impact of any business.
Demonstrate a strong commitment to sustainability to reduce financing costs
Another factor that links sustainability to value creation is the impact of corporate sustainability on a company’s cost of capital.
Companies that focus on corporate sustainability tend to be less vulnerable to systematic risks. This, in turn, results in higher risk-adjusted returns for investors.
For example, a company that considers ESG-related metrics in its operations would be shielded from the impact of increasing regulations due to increased government scrutiny of the environmental impact of economic activities.
Corporate executives of such a company would already have measures in place to mitigate the impact of operations on the environment, thus reducing the burden of new legislation on the business.
According to Bloomberg, global ESG assets are on track to surpass $53 trillion by 2025
Which represents more than a third of the total assets under management projected for that year.
Most institutional investors incorporate ESG considerations into their investment framework and apply negative or positive ESG considerations.
Selection techniques to integrate ESG elements with traditional financial analysis
In this context, companies that demonstrate a strong commitment to sustainability will be viewed more favorably by these capital providers and will therefore have access to more sources of financing at a lower cost.
Investments in ESG-related initiatives undertaken by companies can also be valued at an “ESG-specific multiple” that is at a premium compared to the rest of the business.
Long-term value creation metrics
Long-term value teams can help shape what type of strategy the organization should pursue, to drive transformation and measure progress in delivering sustainable value by using metrics that are routinely applicable and verifiable by its effectiveness.
The good use of metrics means that you are in a unique position to adopt sustainable measures and the consequent positive impact that it will have on investors and the market in general.
Make the sustainability agenda operational
Despite the overwhelming evidence validating the arguments for corporate sustainability, many companies may struggle to develop a clear business plan that incorporates a sustainability strategy.
This further highlights the importance of putting rhetoric into action.
Embarking on the journey towards sustainability involves an iterative process from start to finish
This starts with board-level conversations about an organization’s reason for being, cascades down to management decisions about its portfolio strategy and capital allocation, and ultimately influences day-to-day activities.
The Long-Term Value Framework, conceptualized by the Embankment Project for Inclusive Capitalism
It offers a path forward for companies that want to articulate a compelling and actionable sustainable value creation story for stakeholders.
Importantly, this would involve identifying, tracking, and reporting relevant metrics to communicate the organization’s progress toward desired long-term outcomes to stakeholders.
It would also entail a corresponding increase in related IT infrastructure, data collection and analysis capabilities to support such initiatives.
Results measurement
A pragmatic business approach helps organizations create new evaluation frameworks that measure and value financial and non-financial results. For this reason, specialized consulting firms help companies eliminate the noise of measuring results.
The interested parts
Corporate executives are increasingly being held accountable for their organization’s role in sustainable development.
As the links between long-term value creation and sustainability become more evident, companies are under increasing pressure to perform and remain relevant in the business landscape of the future.
A comprehensive approach must be promoted
Instead of advocating complementary programs with the sole aim of appeasing stakeholders, companies should drive a comprehensive approach to integrating sustainability principles into company activities to help maximize long-term business value.
A summary of what has been described so far
The correlation between sustainability and long-term value creation is increasingly clear. A comprehensive integration of sustainability principles into the activities of the entire organization is vital for the company to be competitive.
The importance of environmental awareness when managing a business
Sustainability is an increasingly important topic for many people, especially in the business world.
Climate change continues to affect our lives, as well as the fate of all other species on the planet. For business owners, leaders and managers, sustainable business practices are becoming imperative.
According to NASA, there is more than 95% probability that human activity is causing global warming.
Human industry is an important part of the climate change landscape due to its dependence on land, resources, fossil fuels, and relentless production and consumption.
Making businesses more sustainable starts with being aware of the problem at hand
But especially understanding how important it is to make changes, both for the company and for the planet.
The intent of this resource is to help business owners, managers, and leaders make their organizations more environmentally conscious.
We will attempt a practical definition of sustainability in business, an explanation of its importance, identification of key players, a discussion of the benefits and challenges, as well as information on how to improve sustainability in business.
Sustainability in business: What does it mean?
Business sustainability is the practice of operating a business without negatively impacting the environment.
A green business works to benefit the local and global environment, meaning it supports the community and economy that depend on a healthy planet.
The impact on society
An environmentally conscious company considers more than just profits: it considers its impact on society and the environment. Such a business is sustainable because it contributes to the health of the structure within which it operates, thus helping to build an environment in which the business can thrive.
A sustainable business adheres to the triple bottom line
Term coined in 1994 by John Elkington, founder of a British consultancy called SustainAbility. The three components of the triple bottom line are:
– the earnings.
– people.
– the planet.
A sustainable company profits by being socially responsible and protecting our use of the planet’s resources.
Why is sustainability important in business?
The “Great Pacific Garbage Patch” is illustrative of why it is extremely important for companies to prioritize sustainability.
According to the scientific journal Environmental Sustainability, an island of plastic twice the size of Texas (approximately 1.6 million square kilometers) floats in the Pacific Ocean. This plastic harms marine life and microplastics from shellfish can end up in humans.
This plastic would not exist if it were not for the companies that use it to create and package products.
Simply put, if companies do not act responsibly as members of the global community, the majority of many species will not survive beyond the 21st century.
Environmental Sustainability notes that “the rate of human-caused extinction of both plant and animal species today is hundreds of times greater than the natural rate of the past.”
According to Environmental Sustainability, we are on track to produce 27 billion tons of solid waste by 2050 due to a business environment that prioritizes rapid production and product turnover for maximum profits.
Uncontrolled CO2 emissions are projected to contribute to a temperature rise of two degrees Celsius by 2050, leading to rising sea levels and an increase in catastrophic weather events.
A study found that just 100 companies are responsible for 71% of global emissions
Now is the time for companies to be part of the solution, reduce emissions and waste and help cultivate a liveable planet.
The good news is that companies can have a major impact and account for 60% of emissions cuts by 2030, according to the Paris Climate Agreement.
Sustainable Business Statistics
The following statistics illustrate where the business world is when it comes to sustainability:
Consumer perception
According to Cone Communications’ corporate social responsibility study, 63% of Americans want corporations to drive social and environmental change in the absence of government action.
87% of American consumers will make a purchase because a company advocated for an issue they care about.
76% of Americans expect companies to take action on climate change.
73% of Americans would stop buying from a company that doesn’t care about climate change.
Business perception
According to the 2018 BSR/Globescan survey of business leaders in charge of sustainability and corporate social responsibility, respondents identified ethics and integrity as the number one reason for pursuing corporate sustainability.
75% of corporate sustainability professionals say companies must do better at including sustainability in business strategy to address global megatrends.
64% of North American respondents said sustainability should influence core business activities, such as strategy and value creation; 84% of European respondents and 89% of rest of the world respondents agreed.
Less than 33% of respondents said their companies are actually committed to sustainable strategic planning.
Business impact
According to a report by The New Climate Economy, 95% of plastic packaging (the equivalent of $120 billion a year) is wasted after the first use, and microplastics have been found in 114 aquatic species.
More than 140 million people will be displaced from their homes by 2050 if things continue as they are.
Industries must reduce carbon emissions by 40% by 2060 to prevent the planet from warming more than two degrees Celsius
Combined with action by governments and other stakeholders, companies that take action on climate change by adopting green policies, technologies and strategies for growth could realize a total of $26 trillion in economic benefits.
The arguments for sustainability are strong
To become sustainable, your company must involve everyone who can contribute.
Who can improve business sustainability?
Every individual can take steps to live and work more sustainably, but when it comes to improving sustainability in business, there are some people who are uniquely positioned to make changes:
– Business owners and organizational leaders
Making changes throughout an organization requires training and organizational leadership skills to make effective top-down decisions.
Business owners and leaders who possess organizational skills have the knowledge to make strategic sustainability decisions that benefit the company, its employees, its customers and the planet.
Leaders are perhaps the most important link in the chain. Owners and executives have the intellectual acumen to identify the most effective sustainability strategies and initiatives, as well as the power to change policies and stimulate innovation.
– Business Administrators, Managers and Supervisors
Administrators, managers, and supervisors have unique insights into a company’s daily operations.
The future of business administration requires preparation to solve complex problems through unique perspectives and the combination of skill and experience to think about creative sustainability solutions.
Administrators, managers, and supervisors can provide valuable information; Due to their more practical role, they have a different perspective and understanding of how to improve business sustainability.
– Human resources professionals
In a survey of 148 CEOs from the world’s largest and most high-profile companies, all respondents said that human resources practices are essential to building and maintaining sustainable businesses.
Your organization’s human resources department can play an important role in developing, creating and implementing company-wide sustainability policies. They can help integrate these policies into company culture and create lasting change in your business.
It’s important to create a company culture that reflects your values and makes employees feel comfortable enough to share their ideas, including those related to sustainability. The HR team can act as cultural ambassadors, helping employees and new employees feel recognized and valued as key drivers in efforts towards sustainability.
– Employees
Sustainability initiatives don’t always have to come from the top down; Employees can also make valuable contributions. For example, according to the Stanford Social Innovation Review, employees at a Unilever tea factory in England saved the company €47,500 and reduced the waste of 9.3 tons of paper by suggesting the company change the size of tea bags. paper tea. Because these employees worked directly with the product, they knew exactly what could be improved.
Encourage employees to speak up and share their opinions on how their company can become more sustainable. The results could contribute to both sustainability and profitability. Additionally, the Stanford Social Innovation Review reports that this can improve “employee retention, productivity, and overall engagement.”
The benefits of sustainability in business
Sustainability in business is not only good for the environment or society in general: it is also good for the business itself. These are just a few of the many benefits of running a more sustainable business:
Reduce business costs
Making your business greener requires an upfront investment, but over time, you’ll save money by prioritizing sustainability. A 2011 McKinsey survey on the business of sustainability found that 33% of companies were integrating sustainable practices to improve operational efficiency and reduce costs, resulting in a 19% increase from the previous year.
Over the course of 10 years, clients of managed services provider Elytus saved more than $11 million through sustainable waste management and transparency.
You can reduce your business costs by going green
For example, using more efficient lighting or creatively reusing existing materials will save money. Although it requires an upfront investment, converting to solar energy is worth it: the average commercial property owner will save about $500 per month on electricity, which equates to a savings of $587,377 over the life of the solar energy system. Most companies amortize the cost of panels in five to seven years.
The federal government in the United States even offers tax credits, rebates, and savings for going green. Ultimately, the more sustainable your business is, the less you will spend on energy and materials.
Improve business reputation
Reputation management in companies consists of establishing a good image by aligning messages with actions.
Among the companies with the highest reputation for corporate social responsibility, Lego ranks third due to its decision to make Legos from plant sources. After making the announcement, Lego immediately moved forward with products produced from leaves and sugar cane.
The Danish toy company plans to use sustainable materials in all of its core products and packaging by 2030. The company’s reputation has skyrocketed as a result.
People see sustainability as an advantage and companies with green values are eager to show them because of that fact
Going green shows the world that you care about more than just making money. You can use this to your advantage when marketing your business and developing your brand identity.
Provides competitive advantage
S&P 500 companies that have sustainability built into their strategy perform better than those that don’t: they get an 18% higher return on investment (ROI) because they manage and plan for climate change.
According to Jeffrey Hollender, a sustainability professor at NYU Stern, “you’ll do better financially if you do things like have a great sustainability program.”
Harvard Business Review researchers agree: “We have been studying the sustainability initiatives of 30 large corporations for some time. “Our research shows that sustainability is a motherlode of organizational and technological innovations that produce both bottom-line and superior returns.”
Increase the final result
You can make more money and improve your bottom line by making your business more sustainable. Reduced business costs, more innovative strategies, a better reputation, and more new customers who value sustainability all contribute to increasing the amount of money sustainable businesses make.
Challenges to improve sustainability in business
While sustainability has many positive impacts on businesses, it can also be difficult to implement these changes. These are some of the biggest barriers that businesses, especially small ones, face when trying to be more sustainable:
– Lack of resources
Some companies believe that they do not have the necessary resources (i.e. time and money) to implement sustainability strategies appropriately and effectively.
However, it is not necessary for you to become a green business all at once. Solar panels, a LEED certification for your building, and sustainably sourced materials aren’t the only measures a business can take.
You can start small and make affordable changes, which is much better than doing nothing. Later, as you continue to cut costs, you can afford broader changes.
– Uncommitted staff
Whether it’s with senior management or your employees, it can be difficult to implement your sustainability initiatives when other people in your organization don’t support them, take them seriously, or don’t care. Do your best to solicit everyone’s input when creating initiatives. It is very likely that some employees and managers have their own ideas and problems.
– Consider creating incentives (such as office parties and prizes) and adding gamification to the experience
Some disengaged staff need their ideas to be recognized, considered and implemented if viable, while others need external motivation to participate.
– Inability to evaluate success
It’s impossible to know if your efforts are worth it if you can’t accurately measure the outcome. Instead of worrying about what other companies are doing, take steps to do what makes sense for your organization. What can you do to measure your own sustainability success?
For example, when it comes to going green, Chron’s Kim Durant notes that “a logical starting point is the raw materials the company uses for its products or services.”
But if you are a software-as-a-service company, your raw materials are just the computers, electricity, and office equipment you need to create software. Can you buy computers from green manufacturers and recycle the old ones? Can you buy green electricity? Can you buy office equipment made from recycled materials? The ability to check these boxes positively will be your measure of success.
– For other companies, it is important to collect data on costs and sales and compare it with their results
This is once you have implemented sustainability initiatives. If your sales haven’t improved, you may have underestimated your value as a sustainable consumer business.
– Lack of focus or plan
A confusing and unfocused plan for going green can easily overwhelm your business while you’re trying to turn a profit at the same time.
Try to narrow your focus to one or two key topics that interest you the most or where you think you would have the most impact, then expand from there.
Your plan should include an assessment of how sustainable initiatives can reduce long-term costs and increase profits, if possible. If you can’t find a profitable strategy, focus on the cost reduction aspect.
You can turn around and invest your savings in investments and campaigns that will generate profits for you.
How to make your business more sustainable
Effectively becoming more sustainable may not be easy at first, but the challenge is well worth the reward.
Successful entrepreneurs, owners and leaders see problems as opportunities. Now is your chance to embrace sustainability and implement innovative strategies in the process.
A little creative business planning can help you determine specific and unique strategies that will work for your business.
Here we go over some tips to help you get started:
– Start recycling at work
Recycling is beneficial: it keeps trash out of landfills and incinerators, and creates 757,000 jobs a year. If your workplace doesn’t already do so, start recycling.
If your workplace already recycles, take a moment to read up on the recycling laws in your area to make sure you’re doing it correctly.
It’s easy for everyone to get lazy and throw items in the trash when they’re at work. Provide ample recycling bins at the workplace, make sure they are labeled for the types of items placed in them, and if your city has a composting program, take advantage of it.
– Promote ecological travel
The daily commute is a daily burden on the environment: In the United States alone, each day, people waste 2.9 billion gallons of gasoline trapped in traffic, and each person loses $710 in productivity each year.
Green commuting could have a big impact on the environment by reducing daily emissions; encourage employees to do so when possible.
Bicycling, carpooling, and taking the bus are all forms of green commuting that can help your employees contribute to sustainability both inside and outside the workplace.
Additionally, there are inexpensive electric scooters and bikes for those employees who live too far away to ride a regular bike.
– Offer remote work options
Remote work is technically another type of green travel, as it keeps drivers and cars off the roads.
Some positions don’t allow remote work, but if the work can be done outside of the office, allow people to take advantage of it.
Remote workers have the same impact on the environment as planting a forest of trees: they eliminate 3.6 billion tons of greenhouse gases caused by commuting annually. Working remotely also helps people avoid the health risks associated with commuting.
– Go Digital
Despite the rise of digital technology, many organizations still use more paper than necessary. Computers, smartphones and other devices are integrated into the workplace; Use them to their full extent and avoid the use of paper whenever possible.
– Create a Sustainability Committee
Selecting a team of volunteers who are responsible for workplace sustainability initiatives can do wonders for your efforts.
– Create accountability: There are people specifically responsible for this, and they can be responsible for following up with others and reinforcing a culture of sustainability in the workplace. Additionally, a committee will keep ideas flowing. Task them with talking to other employees about challenges and ideas and give them the power to make decisions.
Why all companies should embrace sustainability
The message from COP26 rang loud and clear for global corporations: align your business strategy with sustainability goals and reap monetary rewards. Drag your feet and you will lose.
Paying attention to environmental, social and governance (ESG) issues is increasingly critical for all companies in all sectors.
In McKinsey’s latest global survey, 83% of C-suite executives and investment professionals believe ESG programs will generate more value for shareholders five years from now than they do today.
And in Accenture’s research on responsible leadership, companies with high scores for ESG performance enjoyed average operating margins 3.7 times higher than those with lower ESG performance.
Shareholders also received higher annual total shareholder returns, outperforming the worst ESG performers by 2.6 times.
Focus to create long-term value
Simply put, sustainability is a business approach to creating long-term value by taking into account how a given organization operates in ecological, social and economic environments.
Sustainability is based on the assumption that the development of such strategies promotes the longevity of the company.
As expectations around corporate responsibility rise and transparency becomes more prevalent, companies recognize the need to act on sustainability. Professional communications and good intentions are no longer enough.
The following industry leaders illustrate what sustainability initiatives look like:
– Rated one of the most sustainable corporations in the world (Corporate Knights Global 100) and an environmental advocate for more than two decades, Schneider Electric offers technology and energy solutions to help companies reduce their carbon footprint. Schneider has accelerated its formidable climate commitments to generate 80% “green income” by 2025 and help its customers avoid up to 800 million metric tons of emissions.
– The Finnish refinery Neste is a pioneer in solutions for conventional fuels and in the refining of alternatives to plastic and other materials. In March, Neste announced a $1 billion investment in a joint venture with US oil company Marathon Petroleum that it says will make it the world’s first and only renewable fuels manufacturer with global capabilities.
– Danish state energy company Orsted has revolutionized the energy industry in its attempt to reduce the effects of climate change. By divesting from coal-fired plants, it has reinvested in wind farms and is now the largest developer of offshore wind farms in the world. Orsted achieved this feat by encouraging alignment of its supply chain ecosystem and in doing so, reduced carbon emissions and achieved its net zero emissions goal.
– In the airline industry, JetBlue is at the forefront of achieving carbon neutrality by offsetting its emissions, which in turn are invested in forestry, landfill gas capture, solar and wind projects. The airline has aligned itself with the United Nations Sustainable Development Goal 13 (Climate Action) and is exploring renewable aviation fuel options for its fleet.
– Nike and Adidas have taken a serious step forward. Nike has focused on reducing its waste and using renewable energy, while Adidas has created a greener supply chain and has promised that by 2025, nine out of 10 Adidas items will be made from sustainable materials.
– Unilever and Nestlé have made important commitments; Unilever aims to achieve net zero emissions from its products by 2039 and a deforestation-free supply chain by 2023. Nestlé has committed to achieving net zero greenhouse gas emissions by 2050 and having 100% recyclable or reusable packaging by 2025 .
– Walmart, IKEA and H&M have moved towards more sustainable retail, largely by leading collaboration in their supply chains to reduce waste, increase resource productivity and optimize material use. Walmart has committed that by 2040 it will have reduced emissions from all its vehicles to zero and transitioned to low-impact refrigerants, IKEA is moving toward using only renewable energy across its value chain, and H&M is moving toward using only renewable energy across its value chain. has committed to using 100% recycled or sustainable materials by 2030.
– In biopharma, Biogen and Novo Nordisk have worked to achieve energy efficiency, waste reduction and other ecological measures. Biogen even tied part of its employee and management compensation to achieving its ESG goals, while Novo Nordisk has committed to achieving net zero emissions across its value chain by 2045 at the latest.
– Pepsi and Coca-Cola have set ambitious targets for reusable and refillable packaging, as well as improving water management and replenishment.
All of these companies have made strong commitments to sustainability, largely through transparency and addressing material issues. They are embarking on a more sustainable journey and all companies should follow suit over the next decade.
Two gaps to consider
To adequately address sustainability, companies must close two critical gaps:
“The gap between knowing and doing”: A study conducted by BCG/MIT in which I participated found that while 90% of executives consider sustainability to be important, only 60% of companies incorporate sustainability into their strategy. , and only 25% have it incorporated into their strategies. its business model.
“The gap between compliance and competitive advantage”: more and more companies see sustainability as an area of competitive advantage, but it remains a minority: only 24%. However, all companies must comply. Management should address these issues separately, not combine them. Compliance is holistic, a “must do.” To achieve a competitive advantage, only a few material issues count.
Companies that excel in sustainability address both gaps
They have evolved from knowing to doing and from compliance to competitive advantage. They also know the risk of making mistakes. For example, promising and not delivering, or addressing material issues without being strong in delivering.
As with the overall strategy, there is no “one right solution” when it comes to sustainability. The best solution depends on the ambitions and interests of each company.
Below are some useful actions for all management teams to improve sustainability practices.
1º) Align strategy and sustainability: management must ensure that the company’s strategy and sustainability efforts are aligned. We often see divergence, which of course makes sustainability efforts fragile and lacking real commitment and prioritization. But there are many good examples. One such example is Unilever’s Planet Positive initiative, designed to give back more than the company takes from the planet through plans to protect and regenerate 1.5 million hectares of land, forests and oceans by 2030. Unilever says that It is more land than it already uses to grow. the renewable ingredients included in its range of beauty and personal care products. And by 2025, the company claims that any plastic used in its packaging will be recyclable, reusable or compostable.
2º) First compliance, then competitive advantage: First, companies must address compliance, which often relates to waste management, pollution and energy efficiency regulations, as well as human rights and job responsibility. Compliance is also an issue of concern to investors. A recent survey suggests that investors are increasingly avoiding compliance risks. According to the 2021 EY Global Institutional Investor Survey, 74% of institutional investors said they were more likely to divest from companies with poor sustainability performance, while 90% said they would now pay more attention to the performance of sustainability of a company when making investment decisions.
3º) From reactive to proactive: many of the current leading companies in sustainability, such as Nike, Coca-Cola, Telenor, IKEA, Siemens and Nestlé, have taken a step forward largely as a result of a crisis. Oil giant Shell, already the focus of activist protests over Arctic drilling, faced calls for a boycott over its purchase of cheap Russian crude oil after Russia invaded Ukraine in February. Shell quickly backtracked and said it will abandon all of its operations in Russia and write down up to $5 billion as a result.
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4º) Quantify, including the business case: all companies struggle to quantify the return on their investments in sustainability. When it comes to compliance, this is a simple issue. However, when it comes to areas of competitive advantage, companies must link sustainability to a business case. But those who do form a relatively small group.
5º) Transparency as a precondition: It is essential to evaluate and improve sustainability practices. You can’t judge without transparency, it’s that simple. Transparency is based on the idea that an open environment both within the company and with the community will improve performance. The only way for companies to achieve transparency is through open communications with all key stakeholders based on high levels of disclosure, clarity and accuracy of information, as well as an openness to recognize failures and improve practices.
6) Engage the Board of Directors: In the latest McKinsey Global survey, respondents were asked if their companies track the impact of ESG programs on various stakeholder groups. The highest percentage among these interest groups, 51%, was the one that considered the impact on the directors “totally or to a large extent.” This reinforces the importance of boards in collaborations with key stakeholders such as NGOs, governments and international organisations.
7º) Engage your ecosystem: We see that collaboration is essential for efficient sustainability practices, particularly to resolve crises and shape broader solutions. MIT/BCG data showed that 67% of executives see sustainability as an area where collaboration is necessary to be successful.
8º) Finally, and most importantly, involve the organization broadly: a good example of commitment is Salesforce, a company so committed to making every employee and department responsible for sustainability that it recently enshrined it in its core values. Now that sustainability is part of its DNA, the company can harness its full power to advance climate action and operationalize sustainability across its business.