Most companies have not yet come to terms with what it means to be truly sustainable.
The signs are clear: Sustainability is a key corporate priority. Nearly 9,700 companies have committed to the United Nations Global Compact, more than 90% of the world’s largest companies issue sustainability reports, and survey after survey shows businesses want to play a leading role in advancing sustainability.
However, most companies have not yet come to terms with what it means to be truly sustainable or the systemic change this requires. It is well-established, for example, that sustainable companies must prioritize material issues, explore business model innovation, and engage stakeholders. These sensible actions lay the foundation for sustainability. What is not yet established, however, is identifying when companies have become sustainable.
To determine whether they are sustainable, companies must change how they view sustainability. Most companies currently focus on reducing environmentally destructive or unethical behavior. These are good goals, but they are not the same thing as being sustainable.
Two Views of Corporate Sustainability
Corporate sustainability is often framed using the triple bottom line (TBL) of economic, environmental, and social performance. The TBL is based on an integrated view of sustainability — the three dimensions are viewed as interrelated and equally important. In applying the TBL, companies often look for areas where the dimensions overlap and are mutually reinforcing.
But the TBL does not connect company performance to the economic, environmental, and social resources on which they rely. Performance is assessed relative to the company itself or its peers, rather than against thresholds linked to those resources. This makes it impossible to assess true sustainability.
The embedded view makes explicit connections between a company’s performance and its place in the wider world. It sees companies as existing within the broader society, which itself exists within the natural environment. This perspective provides a basis for defining true sustainability: A sustainable company must operate within economic, environmental, and social thresholds.
Thresholds can represent upper or lower limits, such as for water consumption or living wages, respectively. Work is under way to translate potential reference thresholds, such as the “planetary boundaries” and the Sustainable Development Goals (SDGs), to companies, but it is just beginning. Individual companies must also identify specific thresholds to pursue.
Many companies are already linking some of their activities to environmental thresholds. For example, 380 companies have committed to the Science Based Targets initiative (SBTi), which is focused on reducing greenhouse gas (GHG) emissions in line with climate science. Another 144 companies have endorsed the CEO Water Mandate, which provides guidelines on linking disclosures to regional water resources. Mars Inc. based in McLean, Virginia, and Unilever PLC based in London, are examples of companies that have supported both initiatives.
Establishing and pursuing social thresholds, however, has proven more challenging. Consider living wages as an example. Many companies, such as H&M based in Stockholm, Sweden, and Patagonia Inc. based in Ventura, California, have focused on this issue. However, there are many definitions of living wages, levels vary widely around the world, and they can be difficult to quantify. There are emerging reference points, such as the Fair Labor Association’s (FLA) fair compensation strategy, but further work on what constitutes a living wage is needed.
A Transition Pathway
To adopt the embedded view, companies should consider four points. The first addresses establishing thresholds; the other three focus on achieving them.
Thresholds are best set through multistakeholder initiatives (MSIs). Relevant thresholds must be identified and translated to the company level. Setting thresholds, however, involves judgment; it is not a purely scientific exercise. Guidance is available to help companies set thresholds themselves, but MSIs based on companies working with government, civil society, and others are best positioned to institutionalize thresholds. The SBTi, CEO Water Mandate, and FLA are all examples of relevant MSIs, and other efforts are under way. MSIs can institutionalize thresholds through providing learning platforms, standards, enforcement mechanisms, and labels and certifications.
Sustainable companies employ both incremental and radical innovation. Companies may need to change their products, processes, and business models to operate within defined thresholds.
Incremental innovation improves performance through small, steady changes. Over time, this can lead to substantial improvement, but performance eventually levels off. Most current sustainability initiatives, such as improving efficiency, focus on incremental innovation. Few companies, however, will become sustainable through incremental innovation alone.
Radical innovation focuses on doing things differently. It occurs intermittently, and can shift markets or create new ones. The increasing uptake of additive manufacturing, for example, could disrupt supply chains. After implementing a radical change, the incremental innovation process begins again.
The pathway to true sustainability is nonlinear. The pathway varies by company; it both starts and ends in different positions. Different companies will have different paces of change. Progress depends on market, technological, and regulatory factors, among others. Moreover, disruptions from radical innovation result in performance discontinuities. To navigate the transition, companies must set aggressive, attainable trajectory targets. Trade-offs between economic, environmental, and social performance will most likely be required along the way. Companies may make trade-offs differently, but they should align with the priorities from the trajectory targets.
Companies widely influence sustainability. Sustainability requires companies to consider the whole picture. Companies rightly focus most on things they directly control, such as internal operations, but they must consider their broader influence. Consider three examples.
First, a company’s products matter. There is, for example, no such thing as a sustainable biological weapons manufacturer. Second, supply chains are integral to corporate sustainability. Having a sustainable supply chain means sourcing from sustainable suppliers. Third, advocacy is also important. Reducing GHG emissions is commendable; it is unsustainable, however, if accompanied by efforts to discredit climate science. Companies can act unsustainably, even while operating within thresholds.
Corporate commitments to sustainability should be celebrated. Thousands of companies are making good-faith efforts to exceed legal requirements. There is a need, however, for companies to shift their perspectives on what sustainability means.