Chapter 4: Follow the Leaders

This is part 7 of 11 from “Sustainability: The ‘Embracers’ Seize Advantage,” a report on the findings of the 2010 Sustainability & Innovation Global Executive Study and Research Project.

How to Do What the Embracers Do

It is not surprising that most companies (all but the 3.5% of respondents who qualified as true sustainability skeptics) believe sustainability will be necessary to be competitive in the future and so see the need to accelerate their adoption of sustainability-driven management. But what does that mean, exactly? How can it be done? What are the high-leverage tactics and strategies that will transform the way an organization competes on sustainability?

Our study suggests that the behaviors and experiences of the embracers may provide a starting point. If the embracers are in the vanguard and present a picture of what management increasingly will look like as businesses turn to sustainability for competitive advantage, they also portray the early-stage steps that any company could take to advance along that path. What do the high-performing embracers do that other organizations might benefit from adopting?

In our study, along with identifying who the embracers are, we discovered seven practices that typical embracers share. What do embracers do? They:

1. Move early — even if information is incomplete. First, they tend to be bold, see the importance of being an early mover and be prepared to accept that they need to act before they necessarily have all the answers. Business leaders we interviewed tend to agree. “Much of what you do in business can’t be reduced simply to a formula or to a financial return calculation,” says Brian Walker, CEO of Herman Miller. Many decisions, he says, “require a bit of instinct, a gut feeling for where you’re ultimately trying to go. It can’t be reduced to simply a piece of paper.” Duke Energy’s Roberta Bowman sees sustainability-driven management as a journey, in which different businesses are at different stages. “It is an evolutionary process, and companies go through stages of growth in adapting sustainability to their business,” she says. “Even within a complex company, we are starting at different places, we are evolving in different ways with our approach to sustainability.”

Embracers are not paralyzed by ambiguity, and instead see action as a way to generate data, uncover new options and develop evidence iteratively that makes decision making increasingly effective. Movement diminishes uncertainty.

2. Balance broad, long-term vision with projects offering concrete, near-term “wins.” Leading companies are striking a balance between an overarching vision and being specific about the areas where they can gain competitive advantage. An ambitious vision might generate brand premiums, transform organizational culture and help attract capital, talent or public collaborators. But smart embracers balance those aims with narrowly defined projects in, say, supply chain management, which allow them to produce early, positive bottom-line results. They exhibit relentless practicality.

Dan Esty, professor of environmental law and policy at Yale University, sees this two-mindedness dividing the leading companies from the laggards. “The emphasis on execution is going to separate a few leaders from the pack who may have seen change coming but have not positioned themselves to act on the opportunity.”

3. Drive sustainability top-down and bottom-up. Leading companies recognize that sustainability must not only be driven from top down — with leaders prepared to talk openly about the challenges and opportunities it brings their organization — but must also involve employees, creating incentives (both financial and managerial) to contribute. SAP’s Graf believes that employees have a key role to play. In fact, he says this was something that, initially, his company underestimated. “The first surprise was that some of our employees were much more aware of sustainability challenges and potential solutions than our management team,” he says. “Our employees have long understood the role SAP can play. We saw a lot of grassroots activities happening around the globe, and were amazed by the degree of passion that went with it.”

Embracers have learned that working to enlist employees in sustainability at all levels has many benefits. In addition to gaining ideas and insights from multiple sources, the genuine involvement of staff in that process drives up levels of employee engagement and productivity, and nurtures a culture that is attractive to talented recruits.

4. Aggressively de-silo sustainability — integrating it throughout company operations. Embracer companies do not treat sustainability as a separate function but have established a culture in which sustainability is applied to all existing business processes. “We are now looking at much more precise ways to build sustainability into our core business processes, whether that’s our integrated resource plan or our view of merger and acquisition candidates,” Duke Energy’s Bowman says. She argues that it may not even need to be called “sustainability” to be wired into the business. “It’s the approach, it’s the process, it’s the mindset.”

In some cases, integration means embracing opportunities; in others, it means addressing risk. For HSBC, for example, bringing sustainability into lending practices is one way of integrating it into the business. “HSBC has a series of very clear and unambiguous policies around the standards we have for financial relationships with clients in forestry, water, chemicals, energy, metals and mining,” says Robins. “That goes straight through the credit risk function, and I think it’s a well-understood and formal process. And so that provides a very clear way of integrating material risk into the business decision making.”

5. Measure everything (and if ways of measuring something don’t exist, start inventing them). Embracers establish baselines and develop methods of assessment so that starting positions can be identified and progress measured. Some of these assessments are of tangible or physical activities, such as waste and energy efficiency or water conservation. However, forward-thinking companies are also trying to establish ways of quantifying the impact of sustainability on brand, innovation and productivity.

Assessments that make the link between a company’s sustainability credentials and its employee engagement are of particular interest to companies as they recruit skilled executives who want to work for a company they believe is doing the right thing. This issue is extremely important to most employee populations, particularly millennials. And although many people see this as a big, complex, intellectualized issue, the employee population in sustainability is going to become bigger, and employees are simply going to demand it from organizations.

Of course, the way companies develop their approach to the measurement of intangibles is likely to vary according to their sector and activities. Mechanisms already exist that companies can adapt, such as employee satisfaction and exit interviews or the number of times analysts ask to see sustainability-related information. Initially, these kinds of metrics make intangibles more tangible — and, critically, they may help develop data that can tie less tangible sustainability-related rewards to the organization’s financials.

6. Value intangible benefits seriously. Embracers are clearly distinguished from cautious adopters in their readiness to value intangibles as meaningful competitive benefits of a sustainability strategy. Smart companies are realizing that conservation of natural resources they need is a fundamental part of risk management, as the work being done by companies such as Coca-Cola and PepsiCo on water conservation clearly demonstrates. And starting a sustainability journey by focusing on waste and energy inefficiencies makes sense for any business.

However, embracers accept that it takes time to develop their ability to measure — or even to understand fully — intangible advantages, and they need to make their investment decisions on the basis of a combination of tangible benefits, intangibles and risk scenarios. That certainly applies to oil companies, according to MIT’s Moniz. “They are looking at step-outs — things that are not part of the core business today but are preparing them for a potentially very changed portfolio in 10 or 20 years,” he says. “But they’re also doing work that goes to their core business.”

7. Try to be authentic and transparent — internally and externally. Finally, companies leading the charge on sustainability are fundamentally realistic. They do not overstate motives or set unrealistic expectations, and they communicate their challenges as well as their successes. That was something embraced early on by companies such as Nike and Gap, which in the mid-2000s started producing labor supply chain reports that included details of the supplier factories in which they had encountered noncompliance with labor, environmental and health and safety standards. Unilever has also demonstrated that it is looking toward long-term horizons, even if that means less impressive results on its short-term margins.

Unilever is taking an open approach to communications, as was seen recently in its public pronouncements about its Sustainable Living Plan, in which company CEO Paul Polman emphasized the need to move away from a focus on short-term profit margins. Polman also stressed the fact that Unilever had not yet come up with answers to many environmental and social sustainability challenges in its operations but would work in partnership with other sectors to do so.

The “warts and all” approach to reporting and communication has yet to be adopted by many companies — embracers included. Those that do communicate openly find that this shores them up against accusations of “greenwashing,” both internally from employees and externally from stakeholders, customers and activists.