Why smart companies are developing sustainability strategies to stay in the game
As UN Secretary General Ban Ki-moon said: "Science has spoken. There is no ambiguity in the message. Leaders must act; time is not on our side."
Whilst the official enforcement of the Paris Agreement provided welcome confirmation that political leaders are finally listening, business leaders are already ahead of the game. In February 2014, McKinsey ran a survey over 3,300 executives in which more than half of chief executives ranked sustainability in their top three priorities. It is worth noting that this survey was conducted nearly three years before we reached a landmark agreement to curb global emissions.
Times have changed. Reporting on sustainability is no longer the preserve of the early adopters and the innovating fringes. With 95% of the world’s 250 largest companies regularly producing sustainability reports, it has gone beyond mainstream and is now expected. If transparency and disclosure on Environmental and Social Governance (ESG) issues are not already mandated, they increasingly form part of a company’s license to operate.
So, if companies are reporting on sustainability, what should they be doing with this information? Reporting and strategy go hand-in-hand. The old adage “you cannot manage what you do not measure” applies to sustainability as much as any other business function, and once you have the data, you can work out how and where to improve. With standardised tools and processes in place for collating sustainability data on environmental and social impacts, organisations have a newfound capacity to compare and contrast their performance. This ability provides the necessary basis for defining strategies and targets to improve performance.
Why do some businesses embrace sustainability whilst others drag their feet? That businesses will play a central role in the transition towards a low-carbon economy is uncontroversial. An EY survey of 1,661 recent Global Reporting Initiative (GRI) conference participants found that 49% respondents felt businesses would lead the transition, well ahead of the next largest percentages ‘Civil society’ (32%) and ‘Regulators’ (33%). There is both money to be made in new markets, products and services and considerable risks inherent in clinging to old and unsustainable business models. No company wants its market share eroded, and although every company has its burgeoning ranks of those who want to act, the roadblocks are familiar.
Significant action on sustainability requires funding and securing funding means getting senior buy-in. In an environment often dominated by shorter term pressures, obtaining this support is no easy task. It involves establishing a consensus view of the benefits and demonstrating how action on sustainability is integral to the company’s wider business mission, purpose and values. So for those wishing to promote and embed sustainability within their organisations, how should you respond to the first question that inevitably arises: “What’s in it for us?”
Let’s start with the bottom-line benefits: -
1) Improve financial performance. It is entirely unsurprising that strong action on sustainability results in improved financial performance. Environmental objectives, such as reducing emissions or energy consumption directly link to increased cost savings and the equation is simple: Greater efficiency equals reduced costs equals increased profit. The results are in. Multiple studies now confirm the correlation that companies with stronger ESG performance outperform the market over the medium and long term, producing better financial performance and stock market returns.
2) Increase innovation. Action on sustainability also enables companies to create new value by identifying new market opportunities and developing new products and services. For longer-term goals, it is highly likely that the technologies, tools and approaches needed to meet them do not yet exist. By setting aspirational long-term targets, companies can motivate staff to find new, innovative ways to meet them. In short, companies progress from “doing old things in new ways to doing new things in new ways”.
3) Gain competitive advantage. Governments and businesses alike have a vested interest in reducing costs, so more efficient delivery of products and services also creates a competitive advantage. Companies increasingly focus on sustainability within their own supply chains and incorporate ESG criteria into tender processes, so a credible and compelling story around action on sustainability could prove pivotal in winning or retaining an important client.
4) Meet investor demand. Investors are already wise to the fact that better sustainability performance links to better financial performance. As Blackrock CEO Larry Fink rightly flagged in a letter to S&P500 CEOs, “Over the long-term, environmental, social and governance (ESG) issues have real and quantifiable financial impacts”. Where investors can see companies defining and hitting sustainability targets, it speaks volumes about the management team’s ability to hit targets in general. The response is unambiguous. Where large institutional shareholders have successfully intervened on corporate social responsibility issues, share price rose by 4.4% a year on average and more than $13trn is now invested in Asset Under Management (AUM) incorporating ESG metrics.
5) Meet customer demand. Supply chains have become increasingly globalised and the delivery of products and services is often a collaborative effort between multiple companies. Customers are demanding products and services that are ‘free-from’ environmental and social harms. Larger companies are increasingly pressurised to review supply chain emissions and a number of financial institutions are now looking at financed emissions in their investment portfolios. As leading companies, ESG goals and targets extend beyond their own organisational and operational boundaries, B2B companies are drawn into focus as much as B2C companies.
6) Reduce compliance costs and meet regulatory requirements. The GRI has identified some 180 sustainability reporting initiatives across 45 different countries and regions and the number of regulations continues to grow apace. From 1 January 2017, the EU Non-Financial Reporting (NFR) directive is expected to affect around 6,000 companies and requires the disclosure of information regarding performance, policies and identified risks across a range of ESG issues. In the UK, many companies either missed the deadline or struggled to comply with ESOS, thereby increasing the costs of compliance and risking penalty charges for late or non-compliance. Companies that rely on an entirely reactive approach to meeting new legislation will inevitably face higher short-term compliance costs.
7) Effectively managing risk. The following statement from McKinsey is well put: “Companies that adopt circular economy principles will outcompete other actors in a world where scarce resources expose companies to high costs and unforeseeable risks”. There’s no shortage of potential ‘trigger events’ that could force a company to focus on sustainability: Reputational incidents, rising costs of commodities and raw materials, supply chain disruption or losing a key client to a more proactive competitor. By collating, analysing and reporting on sustainability, companies can identify and mitigate risks that lie hidden within their operations and supply chains.
8) Retain staff and increase collaboration. Finally, there are many internal benefits that can be derived from more concerted action and a strategic approach towards addressing sustainability. Today’s employees and tomorrow’s leaders increasingly want to work for companies that value CSR. A proactive stance on sustainability helps to attract and retain talented individuals, thereby protecting and building your company’s stock of human and intellectual capital. Furthermore, due its inherently cross-cutting, multidisciplinary nature, tackling sustainability issues establishes a common aim and invariably leads to enhanced collaboration between different business units.
Leading companies in ESG performance do not view sustainability as a side issue to address in parallel. They consider it to fundamentally integral to their business and identify relevant strategies and goals aligned to their wider mission and company values. They set focused, ambitious, multi-year targets that are cognisant of the fact that they cannot fix everything tomorrow and that it is “better to aim at the stars and reach the moon than to never leave the village”. In doing so, they outperform their peers, not only on sustainability measures but against the traditional yardstick of financial performance.
So, for today’s companies questioning whether it makes commercial sense to adopt sustainability strategies and targets, the right question is not ‘what do we stand to gain?” but rather “what do we stand to lose?”
Martin Sedgwick, principal consultant, Carbon SmartCarbon Smart