Three steps to embed sustainability in strategy

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.

Three hidden barriers and what to do about them

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and the availability of data and technology talent, deeper within, at the root of the issue, three familiar (yet outdated) management practices silently get in the way: 

1. In corporate strategy, fixating on zero-sum competition – which discourages companies from coming up with competitive solutions to big societal and environmental problems
   
   
2. In business strategy, clinging to the legacy businesses – which deviates attention and investment from promising sustainable businesses
   
   
3. In general management, relying on financial value as the only measure of performance – which leads business leaders to miss the bigger picture

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.

Three steps to take

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:

Corporate strategy: Expand the dish to grow the pie

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:

• Under what scenarios might your business model face lockout in the next decade?
• What alternative markets or business models could help your organization thrive beyond 2030?

Business strategy: Redirect resources to make an impact

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.

Key questions to ask include:

• To what extent are you putting your money where your mouth is?
• How are you organizing your people to facilitate your company’s reinvention?

General management: Measure what matters

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:

• How can you assess the direct and indirect social and environmental impact of your operations and supply chain?
• To what extent can you ensure end-to-end sustainability data management beyond your organization?

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.

Action plan for the CEO and C-Suite

In the next 6 months: Planning for action

• Assess how your top business priorities are affected by sustainability challenges and opportunities, in and out of your “industry boundaries”; use scenario planning to estimate value at stake.
• Refresh your corporate and business strategy (including growth [business & product portfolio], profitability and ecosystem strategy) to integrate sustainability as a core business-value dimension, along with market and financial considerations.
• Articulate a detailed business case for the board, working closely with the CFO, with expected growth and profitability metrics, and funds needed for multi-year strategy execution.

In the next 12 months: Mobilizing action

• Secure sizable funding for the short-, medium- and long-term execution of the refreshed corporate and business strategies.
• Deploy an action-oriented sustainability governance and operating models, nurturing talent, and ensuring reskilling.
• Deploy an end-to-end sustainability industrial accounting capability, as robust as the current financial and operating ones, supported by digital platforms able to evolve as sustainability matures.

In the next 2 years: Scale action

• Execute the growth agenda, including mergers, acquisitions, and divestments, as well as changes to the products and services portfolio.
• Execute the ecosystem agenda to bring sustainability at scale through suppliers, partners, and clients.
• Integrate sustainability in core business processes across the value chain, and its supporting digital systems to make the transformation robust and enduring.

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:

• Minting a sustainable future
• Energy efficiency – where cost and sustainability first meet
• Rebalancing the books on nature and biodiversity
• So long Black Friday: Reinventing consumption
• Measuring up: Achieving resilience through ESG
• Don’t forget the “S”
• Harnessing the power of boards to embed sustainability
• Clearing the hurdle: Scope 3 emissions
• Making generative AI green