Why Your Business Should Embrace Sustainability
Sustainability has become a part of life for many companies. For many, it’s simply a matter of meeting demands from customers seeking socially responsible goods and services. For others, it’s about addressing pressure from stakeholders or pursuing their own corporate values.
For still others, business sustainability is a strategic responsibility, especially those in a resource-constrained environment. Whatever the reason, sustainability is sufficiently pervasive that defining it and executing business programs, products, and practices with an eye to their environmental and social implications has become a demanding managerial exercise.
Sustainability Identifies Opportunities
For some, sustainability has identified opportunities that they might have otherwise missed. Whether it was to cut costs, reduce risk, and generate revenues. Consider the multinational consumer-goods company Unilever, which changed the shape of deodorant to use less plastic in packaging and created a concentrated laundry product that sharply reduces its use of water.
German pharmaceutical company Bayer expects to save more than $10 million a year with a resource-efficiency check it developed to improve operations by using by-products and reducing wastewater. Global chemical company DuPont has recorded $2 billion in annual revenue from products that reduce greenhouse gas emissions and another $11.8 billion in revenue from improvements in nondepletable resources.
Why Do Some Struggle Over Sustainability
To better understand the challenges that companies face with creating value from sustainability. We worked with sustainability groups to identify managers to collaborate on analyzing their programs.
What we found is that companies often have more initiatives than they can effectively manage. The sustainability movement is flexible, including everything from environmentalism, resource management, corporate governance, and human rights.
Some managers in different regions may be enthusiastic about their efforts without taking a company-wide perspective. In most cases, their efforts are too fragmented to create much value, either for the company or for society.
How Sustainability Provides Solutions
Thankfully, that kind of problem’s solution is well known. We found that if they applied performance management principles to their sustainability initiatives most companies would benefit. Companies must keep their sustainability programs focused, set specific goals, create accountability for performance, and communicate the financial impact.
Where To Focus Must Be Agreed
Getting leadership attention to sustainability initiatives is one of the biggest challenges companies face. In a recent report for the United Nations Global Compact, 84 percent of the 1,000 global CEOs surveyed agreed that business “should lead efforts to define and deliver new goals on global priority issues,” but only a third said that “business is doing enough to address global sustainability challenges.”
Why Do Some Fail To Focus
The problem at many companies is often one of focus. Two-thirds of companies in a representative sample from the S&P 500 have more than 10 different sustainability focus topics. Some have more than 30.
That’s too many, making it difficult to imagine how a sustainability agenda with more than 10 focus areas can break through and get the necessary buy-in from leadership to be successful. If top management doesn’t prioritize, then departments won’t either.
The result is fragmented, decentralized, and not aligned with one another or with overall top-level goals. This slows the social and environmental impact but also the economic value. A recent McKinsey Global Survey found that companies having a unified strategy and no more than five strategic priorities were almost three times as likely to be among the strongest performers. Both financially and on measures of sustainability.
Coca-Cola, for example, has set for itself a strategy it describes as “me, we, the world,” which is it’s approach to improving personal health and wellness among the communities in which it operates and the environment.
The company reports making material, tangible progress on metrics related to three specific areas of focus: “well-being, women, and water.” The company does not ignore other issues such as climate change and packaging, but it has made it clear that this is where it wants to lead.
Why You Need To Analyze Your Value Chain
To develop your priorities, it’s important to start by analyzing what matters most along the entire value chain. You can accomplish this through internal analysis and consultations with stakeholders, including customers, regulators, and nongovernmental organizations (NGOs).
This process should enable companies to identify their sustainability issues with the greatest long-term potential and thus to create a systematic agenda. You don’t want to create a laundry list of vague desirables.
After consultations, BASF, the global chemical company, put together a “materiality matrix” exhibit which is shown above. This chart ranked the importance of 38 sustainability-related issues, based on their importance to BASF and its stakeholders.
This type of exercise helps companies to recognize the important issues early and get internal stakeholders to agree on what will create the most value. Their focus needn’t be mechanical but should instead reflect discussion on the strategic, reputational, and financial merits of different efforts.
Set Specific Sustainability Goals
After completing your initial analysis, the next step is to translate this information into external goals that can be distilled into business metrics. These goals should be specific, ambitious, and measurable against an established baseline, such as greenhouse-gas emissions. Your goals should have a long-term orientation and be integrated into your business sustainability strategy. Finally, the intent of your goals should be unmistakable.
One company stated as a goal: “Reduce the impact of our packaging on the environment.” From a different company came a sharper version: “Eliminate 20 million pounds of packaging by 2016.”
Along the same lines, “reducing emissions” is a vague and almost meaningless phrase. It doesn’t say by how much the company should reduce emissions, by when, or compared with what benchmark. The approach taken by another sustainability leader is stronger and more specific: “Reduce 2005 CO2 emissions by half by 2015.”
Build Internal Support For Your Sustainability Goals
It is important to build adequate internal support to meet your goals. Our analysis found that the companies that excelled at meeting sustainability goals made sure that they involved the business leaders responsible for implementing them from the start.
One global manufacturer announced in 2010 that it would reduce greenhouse-gas emissions and energy consumption by 20 percent by 2020. To reach their goal, they set up energy assessments and energy-management plans, established global programs to optimize procurement and building standards, trained and developed internal “champions” and coordinated best practices, and began to use renewable energy where possible.
They communicated their early wins internally through a newsletter and regular conference calls. Four years into their ten-year effort, the project is already net present value positive.
Encourage Sustainability Innovation
Setting ambitious external goals motivates your organization. It also forces resources to be allocated and promotes accountability. An analysis of companies that are part of the Carbon Disclosure Project found that those that set external goals did better when it came to cutting emissions. They also had better financial returns on such investments.
Stronger goals, seem to encourage innovation. People may feel more motivated to find ways to meet them. Lack of goals is a sustainability killer: “What gets measured gets managed” is as true of sustainability as it is for any other business function.
And yet that is not happening. An independent analysis of S&P 500 companies suggests that as of this writing only one in five S&P 500 companies sets quantified, long-term sustainability goals. Half of the companies do not have any published sustainability goals.
Communicate Sustainability’s Financial Impact
Despite growing evidence of the value of investing in sustainability, many executives still have doubts. Senior management gives sustainability lip service but not capital if they do not see financial benefits. “Sustainability metrics can seem like random numbers and don’t do much,” one chemical-industry executive told us. “For our businesses, sustainability efforts have to compete directly with other demands, which means that financial impact is key.”
Nearly half of the research participants reported that the pressure of short-term earnings performance is at odds with sustainability initiatives. A constructive response is to make the case that sustainability can pay for itself, and more. This needs to be done rigorously, reinforced with fully costed financial data and delivered in the language of business.
Make Sustainability’s Business Case
This is much easier said than done. At Intel, although business leaders were interested in saving water, they saw little financial justification to do so: water was cheap. Advocates of the initiative were able to calculate that the full cost of water, including infrastructure and treatment, was much higher than the initial estimates.
Saving water, they argued, could create value in new and unexpected ways. Because of those arguments, Intel went ahead with a major conservation effort. The company now has a finance analyst who concentrates on computing the financial value of sustainability efforts.
Making the business case for sustainability might sound like an obvious thing to do, but apparently, it isn’t. Only around a fifth of survey respondents reported that the financial benefits are clearly understood across the organization.
Measure Sustainability’s Savings
Sustainability initiatives can be difficult to measure because savings or returns may be divided across different parts of the business. Some benefits, such as an improved reputation, are indirect. It is important, not only to quantify what can be quantified but also to communicate other kinds of value.
An initiative might improve the perception important stakeholders have of the company, the better to build consumer loyalty, nurture relationships with like-minded nonprofits, and inform policy discussions.
Create Sustainability Accountability
The top reason that respondents gave for their company’s failure to capture the full value of sustainability is the lack of incentives to do so, whether positive or negative. According to the United Nations Global Compact, only 1 in 12 companies links executive remuneration to sustainability performance.
While 1 in 7 rewards their suppliers for good sustainability performance. Among survey respondents, 1 in 3 named earnings pressure and lack of incentives as reasons for poor sustainability results; 1 in 4 named lack of key performance indicators and insufficient resources.
Exhibit Good Sustainability Practices
In this area, a number of companies exhibit good business sustainability practices from which others learn. Some are strong when it comes to tracking data and reporting indicators, tracking carbon emissions and energy use, monitoring water use and waste, and recycling.
Adidas demonstrates one useful approach. The sporting-goods company breaks down its long-term goals into shorter-term milestones. Its suppliers, for example, are given strategic targets three to five years ahead, as well as more immediate goals to encourage them to focus. The effort makes it very clear what is expected of suppliers for the current year.
The beer company MillerCoors does something similar. It tracks and quantifies progress in ten areas, ranging from water to energy to packaging to human rights, using its own sustainability-assessment matrix. The idea is for MillerCoors to understand its performance, in quantitative terms, in areas that are often difficult to quantify.