What’s holding business leaders back on sustainability?
In 2013, Accenture and the United Nations Global Compact produced the largest ever global study of CEO opinion on sustainability. We found that more than 90 per cent of CEOs don’t think the global economy is on track to meet the demands of a growing population. Furthermore, 83 per cent didn’t think business was doing enough to address global sustainability challenges.
What were the principal barriers? Economic conditions of course, but, just as importantly, a need for the government to send clearer regulatory signals was cited, as was a continued difficulty in quantifying the value of sustainability in business terms, leading to a perceived lack of investor interest in long term sustainability.
CEOs identify one specific barrier
For me, the overriding aim for anyone working in corporate sustainability is to help organisations scale up their efforts. That is why I want to focus on that specific barrier that CEOs identified: how to translate a sustainability strategy into a business strategy.
This year we took some of the same challenges CEOs had told us about and presented them to investor members of the UN Principles of Responsible Investment. And these investors corroborated the CEOs’ views. Except they were even more sceptical of CEOs’ abilities to turn sustainability challenges into business opportunities. While 31 per cent of CEOs thought that their company’s share price currently included value directly attributable to sustainability initiatives, only seven per cent of the investors agreed. In fact, not even a tenth of investors thought CEOs could even set out their sustainability strategy in business terms.
So where do we even begin to meet this challenge? The first step is to be clear about the specific ways in which becoming more sustainable can benefit a business. Then we need to develop tools at a sector level that can help to measure this value. The key question throughout is: what changes in the prevailing business model are needed to allow a business to drive societal and environmental value through the course of doing business?
Serious commercial advantages
The evidence that there are serious commercial gains to be made is mounting to a point where very few investment professionals (or CEOs) disagree. In 2013, Accenture, Business in the Community and Marks & Spencer aimed to paint a macro-picture, especially for British businesses, by quantifying the full economic potential to private enterprise of five recognised sustainability strategies. The final figure we arrived at surprised even us: over £100 billion annually.
But none of this is much good to a CEO if they cannot put a value on it and be rewarded for it by their key stakeholders: investors and customers. Which brings us onto the second question.
Very broadly, there are three ways a sustainability initiative can generate return to shareholders: it can contribute to revenue, it can contribute to profit and loss, through things like cost reductions or greater employee productivity, or it can have intangible impact like boosting brand value or reducing risk exposure.
Consider two examples. The first is Siemens. Its valuation approach was designed to target and measure the revenue generated by its Environmental Portfolio, those products that reduce the impact on the environment and emissions responsible for climate change. In their fiscal year 2013, this portfolio accounted for 43 percent of revenues from continuing operations.
A more challenging measurement was developed for the Danish pharmaceuticals company Novo Nordisk. It developed a ‘blueprint’ methodology that focused on quantifying the upsides to their business plan, in terms of business growth, for patients and for society. Through Novo’s Changing Diabetes programme in China, they educated 280,000 patients, trained 55,000 physicians and grew their market share in the insulin market by 23 per cent, whilst at the same time contributing to an improvement in patient life years by 80 per cent.
Recommendations for business
What recommendations would I make for the here and now?
The first is that universal, and sophisticated, metrics by which to measure a company’s value in sustainable terms need to be agreed. Only then will fund managers invest the time to benchmark their portfolios against it. The World Business Council on Sustainable Development has done a lot of work on this. Next, emphasis needs to shift to how to reconcile business goals with sustainability goals, sector by sector. New business models maybe necessary. My colleague Peter Lacy has written extensively about this, through the lens of circular economy thinking.
Two attributes are common to successful business models: they are designed specifically to generate new sources of revenue for a business and they are, more often than not, driven by charismatic leaders who make a virtue out of clearly reconciling their social goals to the business objectives of their investors, in a way the market can understand.
Shifting the mainstream corporate view
But what is it that unites these transformational leaders, and how can we encourage more of them? As our recent CEO study highlighted (on pages 51-54), an overwhelming proportion of them see investors as the primary incentive to greater ambition on sustainability, rather than CSR or brand as such (76 per cent as opposed to 35 per cent). Any policy that shifts mainstream corporate opinion onto that territory is a good thing. It could be a greater level of governmental involvement but it could equally be much smarter metrics and higher levels of supply chain transparency. However, I am clear that, until we can say for sure how sustainability ties into tangible business performance, we will struggle to get more CEOs and investors on board. The focus now should be on the methodology and the dialogue.