Winds of change blowing from two different directions are converging into a perfect transformative storm in the global economy.
Digitalization and sustainability are two of the most powerful market influences in today’s corporate landscape. Each has spawned a massive amount of research about how it will change management practice, and more broadly, business and society. The intersection of these trends, however, remains largely unexplored territory.
Examples of these two trends converging within the organization abound, from clean technologies to greening production processes to transforming a company’s brand equity as a sustainable company. While attention is paid to these shifts individually, less attention is directed to understanding how these trends combine to reshape the market conditions in which organizations operate.
The Digitalization-Sustainability Convergence
The promise of digitalization — big data, artificial intelligence, the internet of things, cybersecurity, and more — is often described with hyperbole. Pundits and academics alike have described “big data” as the “new oil,” “the new soil,” and the primary driver of a “management revolution,” the “Fourth Industrial Revolution,” and a “second machine age.”
Artificial intelligence is receiving similar hype, with AI being compared to the rise of electricity during the Industrial Revolution. Russian President Vladimir Putin says whatever country controls AI will become the “ruler of the world.” What’s more, renowned scientist Stephen Hawking warns that development of full AI could spell the end of the human race.”
There is similar hype around sustainability, albeit of a different flavor. “Sustainability is the primary moral and economic imperative of the 21st century,” says Mervyn King, former governor of the Bank of England. “It is one of the most important sources of both opportunities and risks for businesses. Nature, society, and business are interconnected in complex ways that should be understood by decision-makers.” Many of the most influential institutions in the world — the International Monetary Fund, United Nations, G20, Financial Stability Board, the Catholic Church — actively support sustainable development, with many focusing their support on efforts to achieve the UN’s sustainable development goals.
The digitalization-sustainability convergence in business and society offers executives both opportunities and challenges, within the organization and across organizational boundaries. Within, companies are using digital tools to map their environmental footprint and assess the impact of environmental shifts on their business. New digital technologies are improving sustainable innovation, even as they create new vulnerabilities like cybercrime and privacy loss.
Beyond the organization, the digitalization-sustainability convergence is producing a digital transformation in three areas that influence market conditions: investor behavior, urbanization, and economic demand.
Digitalized Investing for a Sustainable Future
Many executives embrace the conventional wisdom that mainstream investors care little about an organization’s environmental, social, and governance (ESG) performance. Correspondingly, few companies make it a priority to communicate sustainability performance to investors. Fewer still develop a robust story about why their sustainability performance matters at all. If stockholders won’t shift their portfolio allocations based on ESG performance, the thinking goes, why should executives spend time managing ESG performance? This conventional wisdom about ESG, however, is increasingly out of step with the times. A growing number of investors are not only paying attention to ESG performance, they are profiting from it. As evidence mounts that sustainability-related activities are material to the financial success of a company, investors increasingly care more about ESG performance than many executives believe.
This is an increasingly important issue for corporate leaders since a wide range of investment organizations — from retail investors to asset managers to institutional investors — are making investment decisions using digital assessment tools that connect ESG performance with corporate performance. Investors themselves are digitalizing sustainability portfolio management, joined by a diverse community of toolmakers, consulting groups, and multinational organizations. Sustainability-oriented investment funds have proliferated, garnering assets worth trillions of dollars.
The risks of digitalized sustainability investing for companies is real. As executives abdicate the responsibility to understand ESG performance and craft a credible investor narrative for why ESG is important, they leave an informational void in the marketplace. Investors themselves are stepping into that void and crafting their own stories about corporate ESG performance, a story executives have little influence over.
This is not just an issue for the C-suite, but also for boards of directors. How should boards guide their companies over the long term, when major shareholders have different time horizons and use different sustainability metrics to assess financial performance? With investor interest in quantifying corporate ESG performance growing, what is or will be the response from corporate executives? Will companies develop their own sustainability ESG story — perhaps, by using data themselves in new ways — or will they let financial analysts tell one for them, entrusting their ESG destiny to others?
Smart Cities and Managing Public-Private Trade-Offs
The digitalization-sustainability convergence is the foundation of many smart-city initiatives. Technology vendors, data suppliers, and city governments are using digital technologies to explore new ways collaboratively to improve sustainable living conditions and reduce costs. The UN estimates that 1 million people move to cities globally every week and that by 2050, 70% of the world’s population will be urban. This shift will drive the need for new, efficient infrastructures, including transportation, energy, utilities, housing, and many others. Systemic efficiencies will be data-driven, innovative, and focused on solutions to sustainability challenges created by growing populations and increased urbanization.
Both efficiencies will arise as these infrastructures increasingly converge thanks to digitalization. Already, Tesla can sell you a converged home energy system composed of a Model S sedan, a Solar Roof, and a Powerwall battery. Similar configurations are scaling up in hospitals, university campuses, and industrial parks. Smart cities are just an extension of existing technologies on a larger scale.
With the need to improve systems to support vast urban populations, city managers are increasingly turning to big data to make efficient use of scarce resources, limit municipal operating costs, and enhance livability for its citizens, including improving air quality, securing water access, and increasing safety.
As cities strive to find solutions to urban challenges, technology companies are already playing an important role in creating software to drive urban innovation and design. How will city managers in the near future address trade-offs between civic and commercial interests inherent in many smart city initiatives, especially trade-offs around efficiency and privacy? Creating smart and equitable cities means new ways for business and municipal governments to work together.
The Future of Demand
In the U.S. and other countries, converging megatrends are creating clear and near-term threats to the future of consumer demand. A changing climate is multiplying catastrophic loss events — such as hurricanes, tornadoes, droughts, and floods. Uninsured losses from these events are pressuring household wealth, in some cases exploding household debt.
What’s more, business automation and technology-driven efficiencies enable companies to do more with fewer workers, driving down wages, constraining growth of (median) household income and exacerbating already alarming income inequality. Credit and other forms of debt are dubious economic tools for sustaining consumer demand as households struggle to maintain living standards in the face of increasingly common once-in-a-century natural loss events.
As the natural environment creates greater economic strains on households, businesses — beyond the financial sector — will be called on to play a more progressive role in helping cultivate more resilient communities, including changing the way it works with, and supports, government. How can business leaders move past their adversarial relationships with government (as burdensome regulator) to develop a more collaborative relationship with government (as an enabler of markets)?