This is part 4 of 11 from “Sustainability: The ‘Embracers’ Seize Advantage,” a report on the findings of the 2010 Sustainability & Innovation Global Executive Study and Research Project.
Embracers Are Top Performers
If sustainability embracers tend to be larger, in heavier industries and in growing markets, these are not the only characteristics they share. Critically, embracers not only claim that sustainability strategies are necessary to be competitive — they also believe these strategies are helping them to gain competitive advantage. Indeed, the overwhelming majority of these companies see themselves as outperforming their competitors, with 70% of respondents stating this to be the case, compared with only slightly more than half (53%) of the cautious adopters. Moreover, a larger number of cautious adopters lack confidence about their competitive position. Some 14% told us that they were underperforming relative to industry peers — more than double the number of embracers that see their business in this light.
Embracers are also confidently making the link between sustainability and profitability. Part of this is the ability to increase sales by providing new products valued by consumers who care about issues such as ethical supply chains and energy efficiency. P&G’s director of global sustainability Peter White sees these as including “products that allow consumers to save energy and save money, products that have clear social sustainability benefits in terms of saving people time, empowering women and so on.” Developing these products, he argues, is a way “to actually build your business.”
In some cases, the downturn has even offered companies an opportunity to sharpen their focus on areas in which sustainability can deliver competitive edge. “In the economically challenging environment that we’re in, there is really no room for activities that are not core to the business,” says Duke Energy’s Bowman. “So we have had to do some triage of our corporate services and corporate programs and separate those that are nice to do from those that are necessary to do. That has given us an opportunity to really showcase the business value of sustainability … on many different levels — everything from reputation to new products and services.”
Duke Energy is not alone. Embracers are in fact three times as likely to believe that their sustainability decisions have been profitable. While almost the same number of embracers and cautious adopters believe they are losing money on their sustainability investments, some 66% of the embracers say their organization’s sustainability-related actions or decisions have increased their profits, compared with only 23% of cautious adopters that believe this to be the case.
Embracers Conceive of Sustainability Advantage Broadly
But profitability is not the only evidence of advantage seen by companies that are embracing sustainability as part of their business. While cautious adopters have not moved beyond considerations of cost cutting and risk management, embracers have identified a range of drivers that support their sustainability-related investments. These include increased margins or market share, greater potential for innovation in their business models and processes and access to new markets. And when it comes to competitive advantage, a significantly larger group of embracers (38%) picked it as one of the top three benefits sustainability had brought to the organization (only 21% of cautious adopters selected it).
The corporate leaders we interviewed told us the same thing. HSBC’s Robins points to growing markets in renewable energy, energy efficiency and battery technologies — segments that are closely linked to the bank’s core markets, giving the company the potential to develop new financing products. “Our clients are already moving heavily into these areas, some of them big industrial groups,” he says. “We have a reasonable share. And with investment coordination, we could claim a greater share.”
But while Robins is looking to claim a greater share of the market for sustainable products, companies such as HSBC and other embracers are already engaging in a significant amount of sustainability-related activities. And for HSBC, some of these activities represent disruptive rather than incremental change. For example, the bank has made a considerable investment in Better Place, the company that supplies services for electric cars. “That’s a private placement that we took, obviously in a sector which is highly disruptive both in transportation but also wider energy systems,” says Robins.
While the cautious adopters focus on efficiency, risk mitigation and regulatory compliance, the embracers say they are engaged in a range of activities, including sustainability analysis. Embracers say, for example, that they are analyzing the risks associated with not fully addressing sustainability issues. They are also assessing the expectations of investors and other stakeholders with respect to sustainability issues, including these issues in scenario planning and strategic analysis.
However, embracers’ focus varies according to their company size, with smaller embracer companies focusing more intently on revenue streams and innovation than their larger counterparts. Meanwhile, larger embracer companies tend to pay more attention to the regulatory environment and the concerns of investors.
Some are also looking ahead to try to predict future regulatory changes. “One of the great uncertainties in my business every day is will there be a price on carbon,” says Duke Energy’s Bowman. “And if there is a price, what will it be, and when will it start?”
She is not alone. “We should mitigate the risks that regulation poses for the company and its business model,” says Graeme Sweeney, Shell executive vice president for future fuels and CO2. In fact, many corporate leaders told us that predicting the direction of national and global policy is an important part of their organization’s planning process. In this undertaking, companies are acting wisely, argues Ernie Moniz, director of the MIT Energy Initiative. “Certainly in the United States, cap-and-trade as a mechanism seems to have lost some of the bloom,” he says. “But it does not change the fact that we are moving toward explicit or implicit carbon constraints.”
Whether or not their activities are governed by climate change regulations, embracers place consideration of environmental issues at the heart of their approach to sustainability (and they are much more likely to do so than cautious adopters). However, senior leaders told us that the way that they include environmental issues in their business strategy has changed.
For a start, they are moving away from relying on specialists to manage it. Walmart took this approach when it established 12 sustainable value networks across its business — covering everything from waste and energy reduction to sustainable products and supply chain. Each one was led not by an environmental expert but by a businessperson, so it became integrated into the business.
Shifting consumer demand is another reason for the change in approach to environmental issues. “We are a very customer-driven organization … and we started to see in our customer research that an issue like the environment was becoming much more important. So, that’s one of the things that led us down that path,” says Mike Pedersen, group head, wealth management at TD Bank.
P&G’s vice president of global sustainability Len Sauers traces the company’s environmental focus back to the 1960s, when it set up its first environmental lab to evaluate the safety of its products. “We largely saw sustainability as a corporate responsibility — as a large multinational company, it was simply the right thing to do to be environmentally responsible,” says Sauers. More recently, he continues, as the company began to see more external attention being placed on sustainability, the approach changed. “We began to think that sustainability could be more than a responsibility, it could be an opportunity to build the company’s business.”
Managing Change on the Adoption Curve
Where companies struggle when it comes to making sustainability an integral part of the business is often not so much with the technical side of things but with the human dimension of managing it. When TD Bank introduced its sustainability policy, Pedersen says many of the issues were new to its risk committee and board. Part of this was lack of familiarity with environmental issues, something that has changed in recent years. “I realized I was engaged in an exercise in lifting the collective IQ of the board around the environment, and I could see … all the lights going on and [people] realizing what the issues were.”
Since then, the company has made efforts to bring more of the staff on board to spread understanding of everything from energy markets to customer preferences. “We engaged all our internal constituents, all the employees, management, senior management and the executives,” says Pedersen. “Because to understand [what it means to be] carbon neutral, you have to understand carbon markets, you have to understand energy dynamics, you have to understand what’s in it for customers and so on.”
Responses from our survey suggest that, among embracers, similar strategies are being implemented. To drive sustainability internally, embracers assign managers to dedicated roles focused on sustainability and rely on line leaders and non-leadership employees more than other companies do. While top management teams determine strategy of their organizations as a whole, executives focused on sustainability range from chief sustainability officers or managers in dedicated sustainability units to managers in certain functions, such as supply chain management or units focused on particular offerings or customers.
In fact, for both embracers and cautious adopters alike, while senior leadership is seen as most strongly influencing an organization’s attention on sustainability, customers are the next most important group in this respect. That is reflected in corporate initiatives. At Johnson & Johnson, the consumer products division has hired a vice president of sustainability. For Unilever, shifting consumer demand is fueling innovation. “Consumers increasingly resonate with some of the social, economic and environmental messages of brands,” says Unilever’s Gowland. “Consumers want to buy brands that are good for them but also good for others.”
It is interesting to note that while embracers appear to be approaching sustainability in more sophisticated ways — making a better business case for it, and integrating sustainability strategies in everything from procurement and supply chain management to marketing and brand building — they say they face just as many difficulties overcoming sustainability challenges as do the cautious adopters. These include difficulty in predicting the value of customer responses to sustainability-related strategies, challenges in capturing comprehensive metrics about the sustainability-related impacts of their organization’s operations, and difficulty quantifying and valuing effects of sustainability-related strategies on the reputation of their brand, company or consumer offerings.
And some things are harder to measure than others. “Some of the strongest business cases we have seen are in the area of reducing energy consumption. Savings can easily be measured and credibly communicated,” says SAP’s chief sustainability officer Peter Graf. “That’s much easier than, for example, quantifying the positive impact of a more sustainable product on your sales figures or the brand value created by a social project in a developing nation.” Duke Energy’s Bowman agrees. “What I wrestle through, and what we work with as a management team on a day-to-day basis, is giving real value to some of the softer costs of business that may not necessarily be valued by the financial community,” she says.