February 11, 2022
Sustainability has gained momentum as many corporate leaders realize that business has a crucial role in solving urgent problems, such as climate change. Many of these leaders also feel that pursuing a sustainable agenda is contrary to shareholders' wishes. While some large investment companies have leaders who claim they are concerned about sustainability, in reality, the majority of investors, portfolio managers and sell-side analysts don't engage with corporate executives regarding environmental, social and governance (ESG) matters. A common perception amongst business leaders is that ESG has not yet become mainstream in the investment community.
This perception is obsolete.
Investors have voiced concerns about sustainability for decades. They have only recently put their concerns into practice.
The numbers support the view that capital markets are undergoing a significant transformation. When the UN-backed Principles for Responsible Investment was launched in 2006, 63 investment firms (asset owners, service providers and asset managers) with $6.5 trillion in assets under administration (AUM) signed a commitment to incorporate ESG issues into all investment decisions. The number of signatories increased to 1,715 by April 2018 and represented $81.7 trillion in AUM. A 2018 global survey conducted by FTSE Russell found that more than half of global asset owners consider ESG factors when deciding on their investment strategy.
Yet most corporate managers are unaware of this new reality. A recent Bank of America Merrill Lynch survey found that American executives underestimated how much their shares are held by companies using sustainable investing strategies. While the average estimate was 5%, the actual figure is closer to 25%.
In an ever-increasingly unsustainable world, sustainability is a multidimensional and complex problem that requires multi-stakeholder solutions. Our traditional responses are not sufficient to deal with the increasing complexity of the problem.
Governance in complex contexts requires challenging our dominant thinking, practices, institutions and development narratives. Technology and people are the key resources to understanding sustainability's true meaning and implication. However, dominant governance and interpretative approaches tend to reduce complex problems to techno-centric knowledge and pseudo-solutions that focus on specific aspects rather than understanding and capturing their complexity.
A diverse coalition of a corporation's stakeholders drives this global movement. All four significant stakeholders appear to have non-negotiable strategic, operational demands to drive sustainability. Investors, consumers, governments and industry peers have their own demands to ensure sustainability is a strategic requirement for companies to operate in the future successfully.
To make investment decisions, capital markets evaluate performance against three key metrics: environment, social, and governance (ESG). This is based on compelling evidence that performance against these metrics indicates an organization's long-term financial and competitive advantage. Since the beginning, business leaders have been skeptical about incorporating sustainability issues into their core strategies. They believed that it would lead to inconsistency with short-term profitability and be punished financially. Evidence suggests the contrary. A recent EY survey found that 90% of institutional investors worldwide revise their investments if companies fail to include ESG criteria in their business models.
Large institutional investors trade a large amount of the world's capital. They consider the broader factors that impact their portfolios, including climate change and transparency, as well as the factors that affect a particular firm's performance. The world's largest investor, BlackRock, announced recently that it would place sustainability at its core and exit investments that pose a high risk of sustainability, such as coal-sourced electricity.
BlackRock and other large investors seek to double the sustainable exchange-traded funds (ETFs) offerings. They also want to take into account ESG risks in portfolios and processes. This sentiment is likely to be shared by the rest of the financial community. Although the immediate focus is on the current crisis, other investors and firms might have different risk management perspectives.
The consumer demand for sustainable products is growing. Consumers are more willing to change their purchasing habits to include social and environmental benefits in their buying decisions.
Markets may be changing and opening up new opportunities to extract consumer value.
The revenue from sustainable products grows at six times the rate of other products.
Fifty percent of consumers will pay more for products that positively impact the environment and social aspects of the supply chain.
By 2025, consumers will consistently prefer products or services less damaging to the environment, human health and society.
This trend is driven primarily by the younger generation, who are more aware of the possibility that climate change may have significant impacts on their future.
The decision-making process now involves a lot more variables than convenience. This trend is immediate for consumer products companies and could ripple through markets, affecting businesses-to-business organizations as the demand for sustainable products permeates all levels of the value chain.
Large companies are now putting pressure on their chief executives (CEOs) to make sustainability commitments. The global business community seems to have realized that sustainability is a critical factor in long-term profitability. A firm's purpose outside of profit and its dependence on other companies, organizations, and individuals within the ecosystems in their operation are significant factors in achieving this.
More businesses are adopting sustainability as their core corporate strategy because of the financial benefits of sustainable opportunities and employees looking for "purposeful" work. These businesses significantly influence other businesses by encouraging them to follow their example.
One hundred forty companies worldwide are looking for a standard framework to report ESG factors that are not financial.
More than half of US companies have increased their commitments towards renewable energy.
Over 9,500 companies, which includes 28 companies with a combined market capitalization of US$1.3 trillion, have pledged to increase their climate ambition.
After this wave of announcements, executives should reflect on their businesses' long-term impact and purpose. This also legitimizes both the logic and the value proposition behind this movement.
Corporate interest in sustainable management has been driven primarily by its benefits to consumers, investors, and corporations. Companies across all industries are already suffering from the government's penalties for not following climate regulations. Because of the importance of climate regulations, governments could increasingly codify aspects of sustainable management in law.
Governments around the globe are putting pressure on companies to operate sustainably. For example, the German Bundestag is currently looking at legislation that would require companies to examine every step of their supply chains and penalize them for not being sustainable.
Bottom line: The more the free market fails to demonstrate an evidence-based control over externalities that adversely affect society or the environment, the more regulatory bodies will try to restrict business operations. This movement may prove too large for governments to ignore due to the sheer number of parties involved, the capital available, and the impact on the environment and social well-being of the participants.
i) Analyze/Understand: To develop a sustainable business strategy, the first step is to examine your business practices and identify areas for improvement. It is crucial to understand your company's impact on the environment, your community, and the people who live there. So, take the time to review your policies, operations, and position. Other issues might not be as apparent or be actively problematic, but they could be areas where positive changes can be made. Others may require more complex solutions, such as reducing pollution and waste. This is not necessarily a problem if your company hasn't been active in the community in the past. However, it is still something you can do to improve the situation by making donations or volunteering.
ii) Talk to stakeholders: It is vital to involve your stakeholders in creating a sustainable strategy. Stakeholders might have more excellent knowledge of the needs of a particular community and may be able to offer ideas for real change through a sustainable strategy. They can be a valuable resource.
iii) Set specific and realistic goals: Next, establish goals that guide your sustainable strategy. These goals should be achievable and realistic. You can identify multiple problems in your company's operations and decide which ones you need to fix. These issues should be prioritized when you set your goals. It may be based on the time sensitivity of these issues or their impact on your company's environment.
iv) Make a plan: Once you have a clear idea of what you want to accomplish, you can create a plan to get there. The plan should be realistic and actionable for your company. Set a time frame for the implementation of new programs and company changes. Many companies have a time frame of several years for reaching their sustainability goals. It may take longer to realize some goals. You can break down the steps to reach your goals if they are too large.
v) Keep track of your progress: It is crucial to keep track of your progress to ensure that your sustainable strategy is effective. You might need to review your strategy if you don't see the expected progress. This will help you achieve your goals. Remember that change takes time. It would be best to have a realistic plan for tracking your long-term goals. Keep your clients and customers informed about your progress. This shows that your company is committed to sustainable practices and assures customers that your company is working towards your goal.
Get connected with the issue: A personal connection with the need to care for the planet is the first step in a business's commitment to sustainability. Business leaders can watch documentaries and look at studies showing the damage done to the environment. However, progress will be slow unless business owners feel connected to these issues.
Rebuild social trust: Since the global financial crisis, businesses have eroded trust. Business leaders need to regain the trust of their customers, employees, communities and mend their license to continue to operate. It is essential to partner with the government, workers, civil society and contribute positively to the community. Then, openly communicate their sustainable interactions with society. Doing this will go a long way in rebuilding society's trust in the business.
Make sustainability a core principle: Sustainable companies believe that pollution, climate change, and unethical resource use are top concerns and can help solve them. The leadership team must be educated about sustainability and how it can help businesses. Reading articles on the topic and attending conferences that focus on sustainability is a good start.
Do your research: Businesses with a superficial interest will pursue eco-friendly strategies that are popular at the moment. This will typically be part of a company's marketing strategy to increase brand equity and consumer engagement. These activities are often used to check the sustainability box rather than part of a deeper-thinking sustainable approach. Sustainability initiatives are more complicated and require more leadership from true leaders. Business leaders can do deep dives to understand the impact of their business. They can uncover the status of their community, the environmental and social impact throughout their supply chain and the material life cycle. Research is essential for sustainability to grow. Businesses must examine every aspect of a decision, including the involvement of sustainability experts and the use of life cycle analysis (LCA) tools.
Innovate: Using a sustainability lens on every aspect of a business may mean that there might be a need for business strategies to change. The need to adapt the business to greater sustainability will lead to innovations. These include:
Empowering business leaders and board members to drive execution and sustainability by empowering them
Strategically planning and developing products and services that lead to sustainable outcomes.
Market products and services that encourage consumers to make sustainable choices.
Leadership development strategies informed by the Global Goals.
Diversity in leadership is key to sustainability: Sustainable companies look to the Global Goals for a roadmap to greater sustainability. These goals are about the environment and include fair wages and greater equality. According to the "WomenRising2030, Better Leadership Better World" report, gender equality at work can unlock more than $12 trillion in new global market value and create up to 380 million jobs by 2030. It is not surprising that Chr. Hansen Holding has a 30% female board. The most sustainable business on the Corporate Knights Global 100 list, Hansen Holding, is made up of women.
Dr. Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship at London Business School, whose research focuses on sustainability and corporate social responsibility (CSR), provides four principles business leaders need to understand to embed sustainability culture into their organization's DNA. This will translate purpose into practice and ultimately lead to results.
First, a company must be committed to a purpose, in this case, sustainability. This is reflected through their governance structure. Dr. Ioannou says that the top of an organization sets a tone and signals a commitment to purpose, monitoring and advising. "And leaders who set ambitious goals are more likely to inspire, enable and empower their people to find innovative solutions."
Second, Dr. Ioannou's research shows that companies driven by a "high-sustainability" purpose are more focused on understanding the needs of and creating purposeful engagements with stakeholders. He acknowledges that "We're far beyond the world where you only deal with employees when they strike or with customers when they boycott." The stakeholder-management process essentially is an investment that will create relationships. These relationships are intangible assets you can use to create value in your value-creation process. "More satisfied customers and employees can increase the quality and effectiveness of your innovation process."
The third principle is about long-term decision-making horizons. It explains how responsible leaders play an essential role in communicating the organization's direction beyond the immediate. Dr. Ioannou advises that instead of focusing on today when developing a strategy, it is important to communicate that change will require time, effort, and investment. He says, "Communicating this will afford you external legitimacy as well as the patience of your stakeholders."
Fourth, Dr. Ioannou notes that companies high in sustainability are more likely than others to report on social and environmental metrics. He advises that investors be provided with reliable and trustworthy financial data so they can get a complete picture of your business. Leaders must be transparent and accountable to determine how they fulfill their purpose. It's not about what you do inside your business. Your supply chain will be affected if you demonstrate that your business meets environmental and human rights standards. Being accountable allows you to bring more people aboard - and ultimately, impact more lives."
Dr. Ioannou says that while all four principles are essential, they are also intrinsically related. Of course, embedding these principles into an organization's DNA is not free, but is that a cost or an investment?" If you get sustainability right, it will lead to more successful businesses. Although there are always compromises in management, the best companies use them to stand out in the sustainability space.
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