Sustainability is firmly established as one of the most important challenges facing business leaders. In 2022, Gartner reported that sustainability ranked, for the first time, among chief executives’ top 10 strategic priorities. McKinsey recently identified the increasing importance of climate change and the net zero transition as the sixth most important trend impacting CEOs’ leadership.
So, it is clear that senior leaders are thinking more than ever about sustainability. But are they thinking about it in the right way?
The conventional business approach is that sustainability challenges are best managed as risk or compliance issues. On those terms, many businesses have already made significant progress. But that approach is inherently limited. Rather than looking purely from the perspective of damage limitation, businesses need to consider how they can seize the new opportunities being created by the rise of sustainability.
For many, answering that question will require a new mindset and an ambitious rethink of strategy that recognizes the unique opportunity to simultaneously deliver social benefits and drive business performance.
Businesses undeniably face major risks related to sustainability. The current era has seen the emergence of several complex, systemic-level threats, each with the potential to create disruption on a historic, even existential scale. The effects of these threats are already visible:. Little wonder, then, that the Collins Dictionary word of the year for 2022 was “permacrisis”.
As the World Economic Forum points out, the risks facing organizations are primarily environmental and social. Business leaders must navigate systemic challenges ranging from climate change, natural-resource shortages, and extreme weather events to the growth of inequality, rising migration, and the soaring cost of living.
So, it is clear that senior leaders are thinking more than ever about sustainability. But are they thinking about it in the right way?
The inclination to think of sustainability in terms of risk has been reinforced by the remarkable rise of ESG. Yet, as Julia Binder has emphasized, ESG is distinct from sustainability. The former is primarily a risk-management and investment framework; it seeks to evaluate the financial risks that ESG factors pose to a company’s value.
ESG has shaped modern business priorities in certain important ways. Many firms have invested significantly in producing ESG-related data, for example. As reporting and disclosure requirements have become more stringent, businesses have paid more attention to compliance. On the plus side, those developments have improved transparency about businesses’ impact on the world – but they have hardly spurred a widespread reassessment of how value-creation affects the planet. The increasingly influential ESG indices have likewise failed to achieve this goal; they incentivize firms to improve their rankings via incremental changes, such as increasing resource efficiency, rather than considering more radical changes to the value model that would ultimately make a greater contribution to delivering sustainability.
The bottom line is that many organizations view sustainability as bringing more risks to be managed, more impacts to be mitigated, and more reporting requirements with which to comply. They have failed to dedicate sufficient time and resources to understanding and exploring the new strategic opportunities that are emerging. However, as markets shift, this must change.
For some businesses, opportunities will arise from new consumer behavior. Consider, for example, the planned phasing-out of the internal combustion engine and the switch to electric vehicles. Naturally, some executives remain skeptical about the depth of consumer commitment to sustainability: cost remains key to many purchasing decisions, particularly during a cost-of-living crisis. However, business must accept some of the responsibility for that: a lack of innovation over the years means consumers have rarely been offered compelling choices that are both sustainable and competitive on price. Companies that achieve that balance are likely to benefit from consumers’ shifting priorities.
But perhaps more important today is the speed at which the picture in B2B markets is changing. As organizations move toward net zero, they are increasingly focusing on Scope 3 emissions, which includes supplier emissions. Suppliers who can offer lower-carbon solutions now have a sharp competitive edge. The same is true of other aspects of sustainability, such as reducing plastic usage and increasing circularity via reusing and recycling.
The result is that suppliers who are unable to help their customers meet their sustainability goals – on carbon or anything else – are likely to be left behind as new opportunities emerge.
There are four key areas to consider when promoting the mindset shift from risk to opportunity.
Despite the apparent increase in interest in sustainability on the part of senior leaders, it is rarely a core part of strategic narrative. Many boards have maintained a traditional view of what creates value for businesses and how sustainability ought to be managed. Rather, sustainability considerations should shape organizational culture and inform the priorities that leaders define for the business as a whole.
To understand the opportunities unique to their businesses, leaders should follow a rigorous, structured governance process: a materiality framework. Start with a robust model, such as the SASB Conceptual Framework, to identify materially relevant issues. Then, engage with the full spectrum of stakeholders to understand which area has most resonance with each stakeholder group. Using this information, give a weighting to each area based on the contribution each factor makes to business growth. This will allow each business to identify its own priorities and investigate the opportunities – as opposed to simply the risks – for each. This will support businesses in directing their resources towards their areas of greatest strength and that will have the greatest positive repercussions both for their finances and for the societies of which they are a part.
Businesses have been selling a negative message about sustainability, focused on the reduction of harmful impacts – a criticism that can be levelled at the wider environmental movement. To unleash creativity and tap into the problem-solving capacity of their organizations, leaders should spread a positive message about sustainability opportunities.
When Unilever announced its aim of halving its social and environmental footprint while doubling growth, for instance, it was eye-catchingly bold. This got people excited and changed the discussion for everyone in the company. The conversation was no longer about what to do – it was about how. An ambitious yet consistent strategic vision can provide both impetus and a sense of direction, prompting employees to ask: “How am I, in my role and my department, going to contribute to this must-win battle?”
Sustainability opportunities will present themselves in almost every business unit. For HR it could be a way of attracting and retaining talent, for marketing and sales it could be about selling new products, and for product and service innovation, sustainability principles should define the parameters for innovative, sustainable solutions. Each unit should identify and own their opportunities. Aligning KPIs and incentive structures, including performance-related remuneration, will ensure a focus on achieving them.
As sustainability challenges become more acute, the businesses that thrive – and contribute most to society – will be those that have the foresight to identify the new opportunities most relevant to them, and the courage, creativity, and agility to pursue them.
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