Businesses failing to extract best value from sustainability
As corporate sustainability becomes a core business issue companies are struggling to maximise its value, particularly around reputational and performance management.
This was one of the key messages to come out of a McKinsey Global Survey, which has assessed how businesses are dealing with environmental, social and governance issues, including the practices they use to manage sustainability and the value at stake.
The study found that as sustainability rises in significance, capturing its full value grows more challenging. The absence of performance incentives and the presence of short-term earnings exerts a pressure that is at odds with the longer-term nature of these issues.
Accountability is an increasing concern. One-third (34%) of company executives stated that too few people within their organisations were accountable for sustainability - compared with 23% in 2011. At companies that aren't pursuing sustainability activities, respondents continue to cite a lack of leadership prioritisation as the top challenge to taking action.
In terms of core sustainability activities, most respondents said their companies were reducing energy use in operations (64%), minimising waste (63%) and managing corporate reputations for sustainability (59%). A growing number of executives now identify reputation management as a core activity, believing that reputation management has the highest value creation potential for their industries over the next five years.
However, the study found a lack of clarity around reputation management, compared with other, better-defined activities, such as reaching new markets with sustainable products. Executives were ask what actions their organisation were taking to manage reputation - the results varied by industry, suggesting that businesses are interpreting and valuing reputation in very different ways.
In manufacturing for instance, implementing policies on ethical issues or business practices, external reporting/transparency on activities, and communicating sustainability activities to consumers were cited as the top three actions (70% of respondents and above). External reporting and transparency practices are being adopted to a lesser extent however in other industries, such as finance and high tech sectors.
In the extractive services market, investing in communities where these companies operate was the top action (76%) in terms of reputational management, whilst employee volunteering (69%) was also felt to be of significant benefit. The study noted: "These results confirm that there's no one-size-fits-all approach to reputation, possibly one reason why reputation, like sustainability more broadly, is hard for many companies to manage."
When asked which activities maximise financial value, respondents most often cited customer communications. Beyond that, there were disparities between reputation management activities and those are most critical to value creation. These results also vary by industry and reflect the importance of understanding and communicating sustainability's financial value, from the leadership down.
To better understand the defining traits of well-performing corporate sustainability programmes, McKinsey researchers examined the organisational practices that underpin these. What companies tend to struggle most with is certain components of programme execution such as employee motivation, capability building, and coordination of their sustainability work.
Fifty-eight percent of executives said that sustainability was fully or mostly integrated into their companies' culture, compared with 38% for performance management.
Interestingly, McKinsey has identified four distinct approaches to how sustainability is organised with a business: leader supported, execution focused, externally oriented, and deeply integrated.
The first approach is characterised by actively engaged leaders across the company, employee encouragement, and clear strategy. The second is defined by clear structure, accountability, and middle-manager engagement.
The third by the use of external ideas, networks, and relationships, as well as top leader and middle manager engagement. And the fourth by employee incentives for sustainability work, a focus on talent, and engagement on sustainability at all levels of tenure.
The study found that sustainability leaders were represented in each of these four approaches, confirming that there's no single formula for sustainability success.