Corporate America has dramatically increased its attention and leadership in sustainability. Recent announcements highlight plans for carbon-footprint reductions, publications of sustainability reports, creation of multi-billion dollar clean energy investment funds, and the formation of sustainability coalitions with corporate customers, suppliers, and even competitors.
These efforts underscore mounting evidence from investors and the public for companies to move “corporate sustainability” strategies and initiatives beyond the silo of a CSR or compliance department and into board rooms and executive offices. As one example, a 2008 McKinsey survey found that even though 60 percent of executives believe climate change is strategically important, less than one-third are actually doing anything substantive about it.
Why the disconnect? One leading explanation is around the relative newness and increasing complexity that executives face in having to embed sustainability in the context of corporate strategy and global operations. As a first step, executives and companies must understand “why” they actually engage in sustainability activities.
There are seemingly three primary drivers, or levels, of corporate sustainability initiatives – meeting regulatory requirements, incentives to go “beyond compliance,” and seizing new market opportunities.
Firstly, some company sustainability initiatives are not a matter of choice—they are required by laws or regulations, such as United States or European Union (EU) environmental protection rules. For example, the U.S. Environmental Protection Agency (EPA) recently proposed revised requirements for new power plants, factories, and oil refiners for obtaining permits allowing for the emission of greenhouse gases. Acute public pressure from activists, and failing to respond, can harm a company’s brands, profits, and overall reputation.
Companies that choose to exceed minimum mandates may be awarded with a voice in shaping future regulations. Apple, for example, uses its 2009 sustainability report to identify several toxic substances present in most electronic products as the greatest environmental challenges facing the industry. The company then discusses its products being free of such materials, saying, “In keeping with our philosophy over the last decade, Apple is not waiting for legislation to ban these substances.” For a market leader like Apple, this philosophy is based on leading by example and even shaping the public and regulatory dialogue.
At the leading edge are companies who have discovered operational, financial, and reputational benefits in developing an overall proactive sustainability strategy. Many have dramatically decreased costs, reduced environmental risks, and created profitable sustainability initiatives centered on new products, markets, and even entire business models.
As a result, leading firms are viewing sustainability as a core strategic topic that needs to be integrated into their broader corporate strategy. DuPont’s CEO, Ellen Kullman, describes her company’s integrated approach with sustainability as “a central factor in [DuPont’s] research and development…marketing and sales functions.” GE’s “Ecomagination” strategy provides another clear example of this approach.
Yet despite the potential benefits to incorporating one’s sustainability strategy into the broader corporate strategy, there continues to be a gap in integrating sustainability as a critical component of overall strategy. David Blood of Generation Investment Management acknowledges the higher expectations and potentially greater risks in incorporating sustainability actions into strategy, but views this context “as an opportunity for companies to establish competitive positioning, grow revenues, and drive profitability.” For investors like himself, it’s “the holy grail of sustainability investing – to seize the opportunities, not just avoid the risks.”
Having a clear and comprehensive sustainability strategy is critically important to business leaders for at least two reasons.
Knowing (and Communicating) Who You Are
First, understanding the objectives of sustainability efforts allows all of the firm’s executives to have their units in alignment with respect to strategic, long-term goals and to communicate a consistent message to the various stakeholder groups with whom they interact. PROXY Governance reported in October 2008 that issues such as climate change resolutions are gaining traction among investors, and “how companies respond to these vote levels is increasingly viewed as a matter of corporate governance.”
With each new proxy season, Boards are seeing more and more sustainability-related shareholder proposals. Likewise, nearly three-quarters (73 percent) of marketing and communications executives surveyed by the American Marketing Association and Fleishman-Hillard in April 2009 said that corporate reputation is a key driver that will encourage sustainability initiatives.
Knowing Where You Are Going
Corporate reputation is critical to long-term viability, never mind profitability. Two broad mindset shifts have made sustainability a critical issue for corporate reputation and trust across stakeholder groups. First, sustainability has become part of the public consciousness for the foreseeable future. Second, the global economic downturn has brought broad concerns about risk management to the fore.
Recent research from the Canadian-based Network for Business Sustainability found that customers are “typically willing to pay 10 per cent [premium] for sustainable products.” Clearly, this is an issue that matters to customers—and it can matter even more depending on changing global economic conditions. For example, would America’s auto industry have fared better in the face of an economic downturn and $4 per gallon gasoline had they better developed a portfolio of fuel efficient vehicles?
If you are an executive at a company that depends on Wal-Mart to deliver a significant portion of your products to customers, you will not soon forget July 16, 2009, the day that Wal-Mart formally launched its Sustainability Product Index. The Index, which GreenBiz called a “world-changing project,” is a guide for rating the sustainability of products with the intention to “reward those suppliers who have measured impacts and shown progress toward meeting aggressive sustainability goals.” The world’s largest retailer has made sustainability a critical issue for companies up and down its sizable supply chain.
We see similar interests among the students entering the Darden School and other business schools, with increasing appetite about working for, purchasing from, and interacting with companies whose longer-term strategy incorporates sustainability issues and initiatives.
Perhaps too often, companies continue to describe the thousands of pounds of waste recycled, or the reduction in water consumption at a headquarters building. While such efforts are noble and even necessary, they may not connect with the core of a company’s strategy and may signal to others concerned with this issue that they remain stuck in a previous paradigm that has since shifted. Apple’s sustainability report, for example, acknowledges “switching off lights and recycling office waste aren’t enough.”
The landscape with respect to sustainability issues is very dynamic and promises to remain so for years. There are a number of questions that executives should be asking. When the ground shifts, does our company have an agile strategy in place that will enable us to adapt? What are our biggest suppliers and customers planning and how will this impact us? How are we positioned in the various markets where we operate, and how does this align with proposed regulations in each region?
The bottom line is that sizable opportunities are growing for companies that engage sustainability at the strategic level and, conversely, the risks are also growing for those who do not.
Dean Krehmeyer is Executive Director, and Brian Moriarty is Associate Director, of the Business Roundtable Institute for Corporate Ethics (www.corporate-ethics.org). They can be reached at KrehmeyerD@darden.virginia.edu or MoriartyB@darden.virginia.edu.
Michael Lenox is the Samuel L. Slover Professor of Business at the University of Virginia’s Darden School of Business. He is Associate Dean and Executive Director of Darden’s Batten Institute for Entrepreneurship and Innovation.
