Section I: Sustainability Is Firmly on Managers’ Agendas

This is part 2 of 8 from “Sustainability Nears a Tipping Point,” a report on the findings of the 2011 Sustainability & Innovation Global Executive Study and Research Project.

Given the current economic outlook, one might expect most companies to be scaling back on their sustainability investments. We find the opposite to be true. Some 70% of companies that have put sustainability on their management agendas have done so in the past six years, 20% in the past two years. In both our survey data and interviews with senior executives on the management structures that support sustainability, we see continuing strength in the focus of global business on sustainable business practices.

“You would expect people to say, ‘Sorry, sustainability is nice, but it’s only really appropriate for boom times,’” says Nick Robins, head of the Climate Change Centre of Excellence at HSBC, the London-based bank and financial services organization. “Actually, the perception has been the other way around. People are seeing that sustainability is part of that next phase of development, and that it will be disruptive and structural rather than an incremental change here and there.”

Once on the management agenda, sustainability stays there. Seventy percent of organizations say sustainability has a permanent place on the management agenda, and almost none say they plan to reduce their commitments. Moreover, 68% say their organization’s commitment to sustainability has increased in the past year (in 2009 just 25% of companies said this was the case), and an even larger proportion say they plan to increase their commitment to sustainability. (See “Companies Are Upping Their Sustainability Commitments.”)

Companies Are Upping Their Sustainability Commitments

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We see these trends occurring within and across all industries. Resource-intensive industries — energy and utilities, consumer products, commodities, chemicals and automobiles — are leading the way. (See “Resource-Intensive Industries Lead the Way.”) As the global regulatory environment in some resource industries becomes more uncertain, more progressive companies are seeing benefits from having a strong sustainability brand reputation with governments and NGOs.

Respondents from service and technology industries are less likely to say that sustainability is necessary to be competitive. Even so, compared to last year’s survey, service and technology industries today are more likely to see the merits of competing on sustainability.

The reasons for the strengthening trend toward sustainability are numerous, complex and interrelated, involving factors both external and internal to the organization. (See “External and Internal Drivers of Sustainable Business Practices.”)

Resource-Intensive Industries Lead the Way

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According to our survey data, customers are the most common reason for companies to change their business models: 41% of all respondents listed customer preferences for sustainable products and services as a sustainability-related reason for changing their business models. But customer preferences for sustainable products and services do not always translate into a willingness to pay for sustainability premiums.

The comments of Chris Librie, director of environmental initiatives at HP, reflect this complex picture. “It’s very difficult to motivate individual consumers around sustainability,” he says. “It’s a nice-to-have, but they’re generally not going to pay more for it. Enterprises are different, because with enterprises sustainability can also be presented as energy savings, which translates to dollars, which translates to improved bottom line.” If heightened consumer preference for sustainable products is driving the sustainability agenda forward, it is doing so unevenly across sectors and geographies.

External and Internal Drivers of Sustainable Business Practices

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Another complex factor is the role of investors. Institutional investors, such as universities and state pension plans, are demanding more information on companies’ sustainability performances and are looking for sustainability-oriented investments, either through their own investment vehicles or through private equity and venture capital firms that focus on these areas.

According to Roberta Bowman, senior vice president and chief sustainability officer of Duke Energy:

In addition to the more traditional “socially responsible investors,” we are finding that some of our mainstream investors are now looking at sustainability performance as an indicator of overall business value. They’re acting on the theory that our sustainability measures — our efficiency with resources, our employee retention, etc. — are predictors of overall business profitability.1

The growing demand for better information about corporate sustainability performance has increased the value of — and need for — accurate sustainability measures, the proliferation of which has helped create an environment in which large companies find themselves being publicly compared with competitors in unaccustomed ways. Some companies, of course, pay little attention to their performance on these measures even if (perhaps especially if) their performance is nothing to brag about.

More companies are drawing connections between innovation and sustainability. When selecting the top benefits of sustainability, 25% of respondents this year picked improved innovation in products and services, compared with 16% who selected this in 2010. Business model and process innovations also rank among the perceived advantages, with 22% of respondents choosing this, compared with 15% last year. Why such a large jump in these categories from one year to the next?

The strategic importance of sustainability-based innovation explains why Nike changed the title of its chief sustainability officer, Hannah Jones, to vice president of sustainable business and innovation. “Sustainability is key to Nike’s growth and innovation,” said president and CEO Mark Parker last year in launching the company’s corporate responsibility report. “Making our business more sustainable benefits our consumers who expect products and experiences with low environmental impact, contract factory workers who will gain from more sustainable manufacturing and our employees and shareholders who will be rewarded by a company that is prepared for the future.”2 It is the reason that Peggy Ward, director of the Enterprise Sustainability Strategy Team at Kimberly-Clark, says her company has “added a net sales goal of 25% of our 2015 net sales coming from environmentally innovative products.”

Both Nike and Kimberly-Clark were once subjects of blistering criticism for their production methods — Nike for sweatshops and other human rights violations; Kimberly-Clark for cutting down old-growth boreal forests. In 2010, the Ethisphere Institute named Nike one of its World’s Most Ethical Companies. Kimberly-Clark was ranked first in the Dow Jones Sustainability World Index in the personal products category from 2005 through 2009.

Whichever factors prove most compelling for an individual organization, a growing number of companies are recognizing the need to focus on sustainable business practices, with a larger share of respondents this year saying their companies will increase those investments.

References

1. R. Bowman and M.S. Hopkins, “What’s Your Company’s Sustainability Filter?,” January 18, 2011.

2. http://www.businesswire.com/news/home/20100122005661/en/Nike-Outlines-Global-Strategy-Creating-Sustainable-Business

3. We acknowledge, of course, that some businesses in developing countries may have substantively contributed to the environmental degradation that other, more sustainability-oriented businesses must contend with.

4. Worldwatch Institute, “State of the World: Our Urban Future,” 2007.

5. S.L. Hart and S. Sharma, “Engaging Fringe Stakeholders For Competitive Imagination,” Academy of Management Executive 18, no. 1 (Feb. 2004): 15.

6.IDB to Support Expansion of CEMEX Microfinance Program for Low-Income Families,” June 28, 2011.

7. World Economic Forum and the Boston Consulting Group, “Redefining the Future of Growth: The New Sustainability Champions,” Geneva, Switzerland, 2011.