There is plenty of talk in the corporate sustainability space. Some companies embrace a green cause such as rhino poaching, tree planting, or wild dog conservation research. However worthy the cause, that embrace tells you little about those companies’ real approach to sustainability. To see which businesses are serious about sustainability, there are only two questions that matter:
1. Is your sustainability approach integrated into your real business strategy?
The sustainability strategies that matter are the ones that are part of a company’s real business strategy. Companies have a difficult enough time implementing one strategy. Implementing multiple parallel strategies seldom succeeds.
It’s easier to see this integration in the companies who have succeeded in driving significant revenue growth from it. Internationally, one of the best compilations of these companies, Freya Williams’ Green Giants, lists a number of the “usual suspects” whose business model was created from the integration of business and sustainability, such as Chipotle, Whole Foods and Tesla. She also identifies companies which have integrated sustainability into business segments like GE’s Ecomagination and Toyota’s Prius. In South Africa, Woolworths’ Good Business Journey programme was launched in April 2007 as a formalisation of Woolworths sustainability commitment. SABMiller in South Africa pioneered water footprinting and partnered with WWF to reduce water use in its beer production while Safaricom in Kenya is showing true leadership in sustainability. Yet others are struggling, as in NRG’s attempt to reinvent the energy business, leading to the CEO’s dismissal – yet his successor’s contention that the strategy remains fundamentally unchanged.
Where sustainability is real, it has been developed with the business strategy in mind, and/or has dramatically shaped the business strategy. It has deeply informed the understanding of future risks and opportunities for the business itself. It is achieved by understanding BOTH:
- What are the sustainability issues which have real potential for affecting the business of the business – markets, supply chain, competition; and
- What is the strategy process of the business, and how to inject sustainability content into that process rather than building artificial and burdensome parallel processes.
There are a number of different ways that this integration can happen, including:
- By using the strategy process itself – the real one that drives the company – to identify and address sustainability issues and aspirations along with other critical issues
- By using sustainability issues and insights to fundamentally shape the assumptions and hypotheses going into the business strategy process
- By building sustainability goals into the desired outputs, identifying the clear sustainability aspects of the business strategy and goals –nota separate set of sustainability goals
- Before the business strategy is locked in, by including a critical review stage, using a matrix of business issues and sustainability issues to see where the two sets of issues come together, where sustainability issues may create unanticipated opportunities and risks
Many companies have yet to achieve this integration of business and sustainability strategy. Some have tried and failed. Others have attempted to improve branding or appeal to stakeholders by highlighting sustainability activities without achieving meaningful integration. (There is still a raging debate over what aspects of the oil & gas industry’s efforts were sincere and failed versus which were public relations efforts, ranging from BP’s infamous “Beyond Petroleum” campaign to other majors’ largely-abandoned investments in wind and solar.) Many others have invested in a large number of sustainability initiatives, which however well-intentioned are still irrelevant to the strategy of the business. Even when those grow, it’s always useful to remember that the plural of initiatives is not strategy.
If sustainability has truly been integrated into the business strategy, that in turn means it is more likely to influence the real decisions the business makes for its future – where it puts its money. If sustainability is really integrated into the strategy of the business, then we should expect to see sustainability issues influencing the critical business investment decisions like research and development (R&D), mergers and acquisitions (M&A) and capital expenditures (Capex). Which takes us to the second question.
2. Is your sustainability approach really adopted and used by the business functions that matter most?
A second interesting question to ask a practitioner is: “Which departments/functions in your company have the greatest influence on your future, which ones have the greatest uptake of sustainability issues, and how does that match?”
If sustainability strategy is real in a company, then the people who understand and care about sustainability issues are the people who have their hands on the levers that really move the business. They do not need to recognize that the issuesare“sustainability” issues, but:
- The people who control M&A activity need to understand evolving water and carbon constraints and how those might affect the viability and value of an acquisition target. For example, the proposed carbon tax in South Africa, anticipated to be introduced in 2018, will undoubtedly have a financial impact on an energy intensive business. Similarly, an operation that is water intensive and located in a water-stressed catchment, will be subject to additional risk. For example, Anglo American Platinum’s Mogalakwena mine is located in the water-stressed Limpopo river basin. In addition, there are challenging socio-economic circumstances with high poverty levels and poor infrastructure. These conditions are exacerbated by the drought conditions experienced in Southern Africa as a result of the El Nino effect. This means that access to secure water is a risk that the company has to proactively manage.
- The people who control R&D need to understand a wide range of constraints and concerns, and how those might create both opportunities and risks. For example, key materials used in products, that may either be carbon intensive or contain materials harmful to the environment, may be destined for rejection by customers in the future, creating urgent needs for replacement materials – or drivers for innovation.
- The people who control Capital Expenditure need to understand the increasing concerns over social, environmental and economic impacts and how those may affect the ability – and time required — to win approval, begin and complete projects, and actually obtain the return for which the investment is going to be made. Traditionally project teams have focused their attention on “maximising Net Present Value (NPV)”. If the highest NPV option is technically feasible, this is typically the one selected. These project teams have sometimes ignored potential sustainability impacts, to the detriment of the project. For example, construction of a million-dollar wind power plant in Kenya was halted following a series of protests by surrounding communities. According to the proprietors, construction of the power plant has been prevented by protests from the community since May 2014, costing the shareholders $66 million to meet project costs and pursue other avenues to move forward with the project.
In successful companies, you do not necessarily see the leaders of these functions engaged in formal sustainability activities. What you do see is a deep understanding and uptake of the issues. The people leading M&A demand that, at a minimum, social due diligence and future-facing carbon and water assessments are part of the decision process before deals go too far. These are questions asked by the deal sponsors, not asked of them. They want to know. Similarly, the real Capex process includes rigorous analysis of the social and environmental issues that could arise from a project, and take those into account both in the project costing (“what will it take to do this right?”) and in looking at project timing which drives NPV (“when will we really get to the revenue stream if we deal with communities this way?”). When you are looking at investment, costing and timing this way, you are now bringing the real sustainability issues into the operation of the key business functions.
In some companies, though, the answer is clear – and inverse. Engagement has been shaped about who already cares about sustainability and wants to be involved – rather than who controls the fate of the company andneedsto be involved. In those companies, the more a function shapes the future of the company, the less likely it is to have understood, accepted and applied sustainability issues.
It’s not about how nice your sustainability strategy is, or how many initiatives you can show and boxes you can tick. It’s about how well sustainability is integrated into the strategy of the company, and how well sustainability issues have been understood and taken up by the critical business functions and leaders who are responsible for implementing any strategy. That’s what real sustainability is about.
Source: CNBC written by Scott Nadler