Leading Sustainable Organizations
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While global economic and political factors might have predicted otherwise, corporate commitments to sustainability-driven management are strengthening.
But even as enterprises overall are strengthening their commitments, one cohort of organizations is expanding its commitments far more aggressively than others — and a gap has emerged between sustainability strategy leaders (“embracers”) and laggards (“cautious adopters”).
Those are among the key findings yielded by the second annual Sustainability & Innovation survey of global corporate leaders — a collaborative study by the Boston Consulting Group and the MIT Sloan Management Review. How are organizations responding to the challenges and opportunities of sustainability? How are the terms of competition shifting — or not shifting — in the face of sustainability concerns? How is cutting-edge management practice being transformed as a consequence? Those are the questions explored in this study, through both the global survey and a series of in-depth research interviews with thought leaders and business executives. This article contains the study’s results.
Read the full report
This article presents the highlights of our Special Report Sustainability: The ‘Embracers’ Seize Advantage. The full report includes complete survey questions and answers.
The discovery of broad-based growth in sustainability-related investments is explained in part by further findings that companies increasingly believe sustainability will become a source of advantage, should be incorporated strategically in all aspects of a business’s operations and eventually will require a sea change in competitive behavior. “We need to integrate sustainability, not as a layer, but in the fabric of the business,” argues Katie Harper, Sustainable Supply Chain Manager at Sears Canada, voicing a common view.
“The only way to continue growing and continue being a successful business [is] to treat sustainability as a key business lever in the same way that you treat marketing, finance, culture, HR or supply chain,” says Santiago Gowland, vice-president of brand and global corporate responsibility at Unilever. “So really [it’s] core to the ability of the business to grow.”
The Leading Question
How are sustainability pressures changing the drive for competitive advantage?
- Overall, investment in sustainability strategies is rising, despite the downturn.
- A gap has emerged between sustainability strategy “embracers” and “cautious adopters.”
- Embracers have succeeded in creating a compelling business case for sustainability commitments, and see them adding to profitability.
While the survey revealed that most companies view sustainability as eventually becoming “core,” what’s more interesting is the revelation that one camp of businesses — the “embracers” — are acting on the belief that it is core already. Whereas “cautious adopters” see the sustainability business case in terms of risk management and efficiency gains, embracer companies see the payoff of sustainability-driven management largely in intangible advantages, process improvements, the ability to innovate and, critically, in the opportunity to grow. And the embracers, it turns out, are the highest performing businesses in the study.
Who are the embracers? What do they do differently? By tracking what the embracer companies are doing that stands out from the actions of more cautious adopters — and how those strategies are paying off — this study paints a picture of what management may look like in a world increasingly driven by the sustainability agenda.
- Sustainability spending has survived the downturn, with 34% of companies saying that they have seen no change in it in either 2009 or 2010, and almost 60% of companies saying their investments increased in 2010.
- Companies are committing to sustainability but investment levels vary, with companies dividing into “embracers” and “cautious adopters.”
- Embracer companies are driving sustainability through their operations and have largely succeeded in making robust business cases for their investments.
- All companies — both embracers and cautious adopters — see the benefits of strategies such as resource efficiency and waste management.
- All companies recognize the brand-building benefits of developing an approach that minimizes their social and environmental impact, with the largest group of respondents (including both embracers and cautious adopters) citing this as among the top 3 benefits.
- While even embracer companies still struggle to measure the more intangible business benefits of sustainability strategies in financial terms, these companies are nevertheless acknowledging the value they bring to their business.
- Companies across all industries agree that sustainability is essential to remaining competitive.
- Embracers are more aggressive in their sustainability spending, but the cautious adopters are catching up and increasing their commitments at a faster rate than the embracers — by 12 percentage points between 2009 and 2010, compared with 1 percentage point for the embracers.
- Embracer companies are leading the charge, with seven shared traits demonstrated by those organizations that are gaining advantage via sustainability.
The Surprising Downturn Response
While many wondered whether the economic downturn would push sustainability off the corporate agenda, our survey results indicate that the exact opposite is true. In fact, a growing number of companies are now increasing their investments in sustainability. While in our first annual survey, conducted in 2009, only 25% of respondents said they were increasing their commitment to sustainability, in the 2010 survey some 59% said this was the case. “Unlike in previous downturns and recessions, people haven’t necessarily put sustainability on the back burner,” says Nick Robins, head of Climate Changes Centre of Excellence at HSBC.
SUSTAINABILITY INVESTMENT IS RISING
The numbers become even more striking when companies look ahead. Almost 70% expect their organization to step up its investment in and management of sustainability over the next year. Moreover, our survey shows that enthusiasm for sustainability is growing across all industries, particularly in commodities, chemicals, consumer products, industrial goods and machinery retail companies, as well as conglomerates.
Such enthusiasm appears to have survived not only the downturn but also the distinct lack of progress toward international agreement on how to combat climate change. Given “Climategate” and the failure of Copenhagen, many expected that corporate interest in and commitment to sustainability would decline, but companies continue to launch new sustainability programs every day.
Hal Hamilton, who codirects the global Sustainable Food Lab with support from Massachusetts Institute of Technology’s Sloan School of Management, sees the downturn as prompting an even broader shift. “The ways of doing business that we’ve accepted are up for grabs,” he says. “We’ll all, inevitably, be thinking more about resilience — resilience to all sorts of shocks. And I rather like the word ‘resilience’ — sometimes it’s better than the word ‘sustainability.’”
Universal First Moves — Waste Reduction and Resource Efficiencies
In some ways, sustainability is a repackaging of more traditional approaches to lean manufacturing and running an efficient organization. “In this type of economic environment, we are seeing the greatest opportunity in identifying opportunities for resource and cost efficiency,” says Roberta Bowman, senior vice president and chief sustainability officer for Duke Energy. And Bowman’s view is echoed by respondents to our survey, in which waste reduction and energy efficiency emerge as the top priorities, with respondents citing improved efficiency and reduced waste as the activities their organizations currently engage in most frequently.
In fact, this “low-hanging fruit” is often used to make the initial business case for implementing sustainability strategies. For Clorox, it was an entry point into sustainability. “We had done the measurement on footprint and the groundwork on projects so that people could buy into the greenhouse gas reduction, solid waste reduction and water reduction goals,” says Beth Springer, executive vice president of international and personal care at Clorox. “They could see the path.”
For Johnson & Johnson, resource management is also an efficiency measure that contributes to profitability. According to its 2009 Sustainability Report, between 2005 and 2009, the company completed more than 60 energy-reduction projects, representing $187 million in capital investments, which it expects will collectively reduce carbon dioxide emissions by 129,000 metric tons annually and provide an internal rate of return of almost 19%. The projects have so far generated about 247,000 megawatt hours of cumulative energy savings a year.
During the same period, Johnson & Johnson made a 32% cut in both hazardous and nonhazardous waste. “It’s been better for the bottom line, especially in terms of energy costs,” says Al Iannuzzi, senior director of worldwide health and safety at Johnson & Johnson. “Waste is cost to the corporation … and, of course, the less waste you send out of your gates, the less expensive it is to make your product.”
Companies are also recognizing the benefits of driving resource efficiencies outside their own four walls and into those of their suppliers. Over the next five years, Walmart Canada expects to save somewhere in the range of $140 million just through improvements in supply chain resource efficiency, according to an executive there. “It is very good for business to drive waste out of the supply chain, and … in the Canadian operation alone, we estimate we will save somewhere in the range of $140 million just through waste and energy and package reduction.”
‘Embracers’ and ‘Cautious Adopters’: Two Views of the Business Case
However, while resource efficiency is a good way to start out on a sustainability strategy, our report reveals a striking difference between two groups of companies in how they are incorporating sustainability into their business operations — those whose activities are limited to short-term, strictly measurable investments such as resource efficiency and those that say they have established a business case for sustainability, have put it permanently on their agenda and maintain that it is necessary in order to remain competitive.
SUSTAINABILITY EMBRACERS FIND COMPETITIVE ADVANTAGE
THE ROLE OF EXPERTISE IN MAKING THE BUSINESS CASE
The philosophies, commitments, strategies and actions of these two broad groups of companies — those that have embraced sustainability (the embracers) and those that have not (the cautious adopters) — differ on many points. More embracers, for example, tend to have recognized the potential for sustainability strategies to deliver new customers for their goods and services as well as to increase their market share and profit margins in existing markets.
And when it comes to views on the relationship between sustainability and competitiveness, the views of the embracers diverge even more markedly from those of cautious adopters, with a far larger proportion of embracers seeing sustainability strategies as a means of gaining competitive edge than cautious adopters.
Of course, being an embracer need not mean that a company is embracing every aspect of sustainability. Depending on their sector and business activities, companies can be embracers and drive the agenda of individual topics within sustainability.
Moreover, views differed among senior leaders when we asked them about the challenges of making the business case for sustainability. “Nobody’s asked me to talk about the business case for several years,” says Peter White, director of global sustainability at P&G. “From our point of view, it’s a done deal — it’s proven, let’s get on with it.”
By contrast, Kim Jordan, founder of New Belgium Brewing, points out that things such as “intellectual curiosity and collective community enthusiasm” are hard to value in monetary terms. “Even more difficult is the consumer side of this because consumers say, ‘This is really important to me,’ but when push comes to shove, when they’re standing at the beer aisle, there are a lot of things that come into play.”
Yet Jordan’s comment, while underscoring the difficulties of monetizing sustainability and measuring it in financial terms, reveals another important trait that distinguishes the embracers from the cautious adopters. While all companies struggle with quantifying the return on their sustainability investments, in the case of the embracers, this does not dampen their enthusiasm. And while embracers are working to develop the kind of quantification practices that will help link their sustainability activities to the bottom line, they also demonstrate a characteristic not seen among cautious adopters — the readiness to take a leap of faith.
Besides being distinguished by their approach to sustainability, the embracers are distinguished from the cautious adopters by structural characteristics such as size and sector. For a start, embracers tend to be found among large global or regional companies. Only 9% of the small companies (with fewer than 1,000 employees) that responded to our survey are embracers, for instance. Meanwhile, 34% of the companies with workforces of more than 10,000 are embracers.
In addition, embracers tend to be part of resource-intensive industries. While our survey found 23% of embracers operating within the service sector, it found a higher proportion (30%) in the product industry sector, where it is more common to find companies that see sustainability as necessary to be competitive and have developed a business case for pursuing sustainability. Product industry embracers focus more closely on efficiency and regulations, care more about the environment and are nearly 25% more likely to consider intangibles in their sustainability-related investments.
That is perhaps unsurprising since heavy industries have larger environmental footprints than sectors such as media, technology, financial services and health care. Heavy industries must also tackle a business risk not faced by service industry companies: the risk of losing their license to operate (or being unable to win a contract in the first place). And for companies in sectors such as mining, auto manufacturing and oil and gas, investments are substantial and they cannot pick up and move elsewhere.
HOW DO EXECUTIVES RANK SUSTAINABILITY BENEFITS?
That means they have to think long-term and adhere to a broader definition of sustainability than some companies, paying attention to human and worker rights and community health and security. “For us, this is a key part of the business driver behind sustainable development,” says Tom Albanese, CEO of Rio Tinto. “It is the license for our asset base to operate.” Klaus Kleinfeld, CEO of Alcoa, agrees. Integrating sustainability into the company’s philosophy and operations is, as he has stated in Alcoa’s 2009 sustainability report, about “earning our license to operate each and every day.”
Long-term thinking is also something embraced by privately held companies. Consider New Belgium Brewing. It has invested in a water treatment plant, which has an anaerobic digester and a combined heat and power plant that recovers energy and methane and converts it into electrical energy. “It is not a two- to three-year payback,” says Jordan. “It’s an eight- to 12-year payback, depending on what happens to waste water plant investment fees and a whole list of costs.”
Who Are the Embracers?
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.
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.”
IS SUSTAINABILITY ADDING TO PROFITS?
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 3 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, embracers such as HSBC and others are already engaging in a significant number 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.
EMBRACERS WEIGH ALL SUSTAINABILITY FACTORS MORE HEAVILY
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 by including these issues in scenario planning and strategic analysis.
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 Canada 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.
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, although senior leadership is seen as most strongly influencing an organization’s attention on sustainability, customers are the next most important group in this respect. 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.
The World Is Tilting Toward the Adopters
The external pressures prompting the adoption of sustainability-driven management — pressures the embracers are already noting and acting on — are increasing. First, public policy is having an effect, as governments continue to work toward carbon reduction and other targets. While much legislation remains at a national or local level, the global nature of business means local rules can be far-reaching. In Europe, for example, legislation requiring electronics producers to recycle their products at the end of their lives does not only affect European companies. Any business wanting to sell into this market must be compliant.
Second, institutional investors and pension funds are starting to look at their investments through a sustainability lens. The Carbon Disclosure Project, which pushes companies to disclose their climate change-related risks, now represents investors with some $64 trillion under management. And access to finance could also be a consideration in the future. Some banks are introducing sustainability-related loans, and even private equity firms are starting to consider the sustainability risks and opportunities in potential acquisitions. Meanwhile, as requests for capital come under increasing scrutiny, sustainability is becoming a factor in lending decisions.
Third, employees are driving the agenda. As job candidates, they are holding potential employers under increasing scrutiny regarding their track records on sustainability. And while this does not necessarily trump pay and benefits, sustainability credentials are having an increasing influence on the decisions of job seekers.
Customers, as our survey has shown, are also proving a powerful force in shaping the new business landscape. P&G’s director of global sustainability Peter White first noticed this in 2006. “That was very much a point of change,” he says. “We had, for the first time, customers asking us for more sustainable products … that was the point at which we set a new sustainability strategy.” Walmart Canada has seen this consumer attention intensify among the business community, the general population and its customer base.
Some additional strengthening megatrends, such as the trends toward green and accountability, also underpin moves to incorporate sustainability into business operations. Increasing demand for green products such as energy efficient appliances, green mortgages and hybrid vehicles is shaping companies’ development of new products and services, as is demand for organic and health and wellness products. And the new era of accountability means measurement and reporting of companies’ environmental and social impact will take on greater prominence.
Cautious Adopters Are Aiming to Catch Up
If the embracers already know much of this, so, too, do rising numbers of cautious adopters. Two survey findings suggest that the cautious adopters have begun to recognize that where the embracers are is where the world is headed, and that the embracers’ behaviors offer a provisional blueprint for how management practice and corporate strategy will evolve.
WHICH INDUSTRIES ARE PLAYING CATCH-UP?
One piece of evidence emerges in the answers to the question, Is pursuing sustainability-related strategies necessary to be competitive? Respondents in some industries answer “yes,” in many other industries, “no.” The variances are wide, ranging from 80% “yes” from respondents in the auto industry to just 29% in media and entertainment. However, when you add those executives who responded, “No, but will be in the future,” the gaps close across the board, particularly in the currently lagging industries, with 88% of respondents saying that sustainability-driven strategies will be necessary to be competitive — if not right now, then soon.
The second finding returns us to the question of planned increases in sustainability-related management attention and investment. The embracers are well in the lead here, with 87% saying they increased their spending in 2010 and 88% predicting that they will increase their spending in 2011.
However, significantly, the cautious adopters appear to have grasped how the sustainability agenda is changing and so are catching up with the embracers.
From 2010 to 2011, the number of cautious adopters planning to increase their sustainability spending jumped 24%, while the embracer numbers, though high, remained flat. In 2010, 51% of cautious adopters said they had stepped up their sustainability investments, compared with 63% who said they would show increases in 2011. The commitment of the cautious adopters is increasing at a far higher rate than that of the embracers.
What these trends indicate is that most companies — whether currently embracers or not — are looking toward a world in which sustainability is becoming a mainstream, if not required, part of the business strategy. And those not already putting sustainability at the heart of their business are planning on doing so in the near term. Sears Canada’s manager of sustainable supply chains Katie Harper agrees with this analysis. “It seems that even people who aren’t really doing much of anything right now are getting the message that this is something they’re going to have to be thinking about,” she says. “This is just part of the way things are going to happen now.”
Follow the Leaders (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 to 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 invested in sustainability is growing, and employees are simply going to demand it from organizations.
Of course, the way companies develop their approach to measuring 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 that 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.
A Picture of the Management Future
Like most business trends, sustainability has not emerged in a vacuum. First, it is a reaction to the growing risks and uncertainties companies face, such as scarcity of natural resources, the rising price of carbon and looming environmental legislation, as well as external pressures from consumers, supply chain customers, advocacy groups and investors. Consequently, what the boldest companies are finding is that once they view their business through a sustainability lens, opportunities are emerging that might not have been identified otherwise.
That relates partly to the readiness of some companies to learn while doing, accepting that they do not yet have all the answers or measurement metrics in place, but pushing ahead regardless. In the course of this research, many business leaders described the process as a journey with surprises and discoveries emerging along the way.
CAUTIOUS ADOPTERS ARE CHASING EMBRACERS
Of course, many companies — cautious adopters included — understand that resource efficiency benefits the bottom line. But while measuring resource use and waste efficiency is a good way for companies to start the process of measuring sustainability and basing investment decisions on that information, the more intangible rewards of embracing sustainability, such as employee engagement or the ability to innovate, are equally if not more important to business success.
Companies still have some way to go in measuring these intangibles, and they are wrestling with the financial side of how to use them to make the business case for investing in sustainability. Yet in our research, business leaders say that these are important and beneficial side effects of adopting sustainability, and they are starting to look for ways to assess them.
Moreover, in embracing sustainability, leading companies are shaping the agenda. Cornell professor Stuart Hart cites the example of SC Johnson, which removed chlorofluorocarbons before their removal became enshrined in legislation. He points out that this did the company’s financial performance no harm; in fact, the decision ended up driving innovations that later paid off handsomely. “They just rip it,” he says. “They’re a highly, highly profitable company.”
But whether shaping industry landscapes or making new discoveries and innovations in their own operations, companies that are moving most aggressively on the sustainability agenda are doing more than reducing their environmental impact.
These companies are measuring sustainability commitments in the way they would any other investment. They are setting realistic expectations for the return on those investments. And yet by heading down one path — by taking that leap of faith — they are finding that unexpected benefits emerge. Employees are more engaged in meeting environmental goals than had been anticipated. Brand value is enhanced, often in unexpected ways. Partnerships generate unanticipated sources of innovation. In short, sustainability is revealing new paths that will enhance companies’ long-term ability to compete.
Companies hoping to gain advantage in a more sustainability-driven world should therefore be looking at the practices and approaches being adopted by the embracers identified in this survey. Our results show that many cautious adopters are starting to follow these leaders. Embracers provide a crystal ball through which to view the future business landscape — one in which risks and opportunities will be increasingly shaped by what it means to be a truly sustainable business.