Three steps to embed sustainability in strategy
August 10, 2023
August 10, 2023
I recently discussed sustainability with the CEO of a global industrial manufacturing company. He was facing a considerable challenge. On one hand, he and his leadership team understood the importance of sustainability. His company had made public commitments to both integrate sustainability into its products and to achieve net zero. On the other hand, he believed that his company still lacked a robust strategy for hitting its targets while boosting the firm’s competitiveness.
It's a conversation I’ve had with many CEOs. These days, they are not asking why they should embrace sustainability – most CEOs now understand that it can help increase growth, profitability, trust and resilience to business-related risks in their value propositions and supply chains. Commercially, sustainable products have been growing twice as fast as traditional ones. Operationally, sustainability-driven resource efficiency programs save costs and increase supply chain resiliency to unexpected shocks. Companies with high sustainability performance ratings had 3.7x higher operating margins and 2.6x higher total returns to shareholders than lower sustainability performers. Today, 8 out of 10 investors under 41 years of age want investment firms to use their size and voting power to accelerate their portfolio companies’ transition to sustainable practices. Not surprisingly, 98% of CEOs now believe it is their responsibility to make their businesses more sustainable.
Instead of focusing on why, today CEOs are mostly wrestling with how and how quickly to embed sustainability into their strategies and organizations – to build sustainability in rather than just bolting on isolated initiatives. They struggle to articulate clear yet compelling business cases and robust yet actionable strategies supporting their ambition. It’s a formidable task, especially when the business cases and strategies challenge existing business models that, today, can still deliver results.
While companies are focused on tackling barriers related to funding, resource allocation, and the availability of data and technology talent, deeper within, at the root of the issue, three familiar (yet outdated) management practices silently get in the way:
These three practices, useful as they have been in the past, are ill-suited to the challenges and opportunities that businesses and society face today.
To continue to deliver value, strategy and management need to be reinvented to suit the changing environment in which they are used. Here are three steps that can help companies successfully embed sustainability into their strategy:
Zero-sum mindsets have been effective for companies in the past. But, in today’s complex and fluid landscape, it’s not an outlook suitable for discovering and creating mid- to long-term business value. First, it limits companies from finding opportunities beyond their current market definition (e.g., customers, players, rules). And second, it discourages the high level of cross-value-chain collaboration that is needed to solve the big problems we face today.
To shift away from a zero-sum mindset, business leaders must recognize that success today is about creating value for a wider range of stakeholders. This means addressing social and planetary challenges and opportunities – and potentially redefining your organization’s purpose in the process.
Key questions to ask include:
Protecting profitable business lines is an important priority for companies. But doing so can mean maintaining outdated practices and resisting change. Over time, this can lead to missed opportunities and reduced competitiveness. Business leaders need to embrace radical change in how they allocate resources, by integrating sustainability into their core business.
For example, many companies that have committed to sustainability are focused on their legacy business reducing emissions and using resources more efficiently. It’s a good first step; yet to truly embed sustainability into strategy, they need to actively redirect resources, and reorganize for substantial value and impact to be realized.
Unprofitable businesses cannot change the world for the better. But focusing excessively on the bottom line can lead to short-sighted performance measurement, which in turn will lead to myopic business management – impeding sustainable value creation.
Measuring multidimensional value, meanwhile, involves tracking the financial and non-financial impact of your business, tearing down silos and taking an enterprise approach to focus on your organization’s wider value chain and ecosystem. It requires adopting a new set of financial, operational and sustainability metrics, as well as adjusting return on investment benchmarks for projects that deliver multidimensional value.
Key questions to ask include:
Embedding sustainability into your corporate and business strategies can be relatively quick but doing so across your entire operations takes time. This means it’s even more urgent to start the process as soon as possible. It also means that you might need to “bolt-on” sustainability into selected business elements (models, processes, assets) for quick wins and momentum while their reinvention takes place.
So, how to get started? The plan below summarizes key actions to focus on, starting now.
Embedding sustainability into strategy requires treating it as a core aspect of creating value, equally important as market and financial considerations.
To make their organizations more sustainable, business leaders must question traditional mindsets and reinvent long-established practices. Leaders that achieve this will mint a legacy of impressive growth that benefits not only their companies’ bottom lines but also society and the planet.
This blog is part of a series discussing how leaders can embed sustainability into different aspects of their organizations to create value and impact. The other topics are: