The new era of sustainability will see business leaders face significant integration challenges, but also key opportunities to develop solutions for a vastly different future.
A new report from Accenture and the United Nations Global Compact, which surveyed more than 750 CEOs worldwide, found the majority believe a tipping point is near, with sustainability issues likely to be fully integrated into all elements of business within the next decade.
To reach this point, however, CEOs agreed a number of external conditions need to be realised. These include increased consumer demand for solutions that address sustainability challenges, the development of skills required by future leaders, an engaged investment community, and a new concept of business value.
They also acknowledged the central role technology and innovation will play in advancing the sustainability agenda, in areas such as climate change (through the use of smart grids and meters) and by increasing transparency through social media. Over 90% of CEOs said they would employ new technologies such as renewable energy, energy efficiency and ICT to help meet sustainability goals over the next five years.
Steve Nicholls, southern Africa's sustainability lead at Accenture, notes that the impact of sustainability on the bottom line has really hit home for CEOs.
“In previous economic downturns, businesses treated sustainability as an area of discretionary spend, and would cut these programmes when times got tough. What we've seen with the recent recession is that sustainability has become a business imperative.”
Only 12% of the CEOs surveyed said the downturn had affected their investment in sustainability measures, with 74% saying it led to aligning sustainability more closely with core operations.
“There's been a mindset shift from seeing sustainability as a nice to have, to something that's central to business,” adds Nicholls.
According to the survey, 93% of CEOs see sustainability as important to their future success.
However, Nicholls explains that while business leaders now recognise the significance of sustainability, they're struggling with execution and implementation.
“Five to 10 years ago, sustainability was about compliance and mitigating risk. Now, it's also about opportunities - CEOs have to ask themselves, 'How does sustainable thinking enable me to access new markets and products?'
“There's a new understanding that sustainability is about more than just a silo of five people on the side of the business, “ says Nicholls. “Moving sustainability from that silo to the core of the company, however, comes with challenges in culture, infrastructure, and available skills.”
While leadership skills as such won't change, the concepts CEOs need to understand and consider will, says Nicholls. He adds that a trend identified by CEOs was that the relationship between business growth and country development is becoming quite close. Tackling national challenges such as climate change and lack of infrastructure now has a much greater impact on companies' ability to do business.
“If a company wants to expand into Africa, for example, their success in penetrating a market will be very closely tied to the development of that market. Business leaders have to solve problems that would never have fallen into their domain five to 10 years ago.”
Five to 10 years ago, sustainability was about compliance and mitigating risk. Now, it's also about opportunities.
Steve Nicholls, Accenture
Linked to this is a greater need for business to collaborate with partners outside its usual realm, to create a long-term sustainable environment.
“Business is an incredibly powerful force within a country's economy,” notes Nicholls. “National sustainability challenges are not going to be solved by a single entity, but by business partnering with NGOs, government agencies, suppliers, and the like. So as companies move into the new sustainability era, they're going to have to get better at collaborating, which will require a new skills mix.”
He notes that board members will have to align themselves with new pressures, and be able to connect social, environmental and developmental trends with the strategy of the business.
An overriding theme in the report is that organisations will have to grapple with a new concept of value. Companies will have to shift their focus beyond pure profit, and incorporate non-financial metrics that require them to measure and communicate progress.
“Previously, your stakeholders used to be mainly shareholders, and the ability to understand stakeholder views was minimised,” explains Nicholls. “Now, you have a broader set of stakeholders - consumers, employees and government - and board members are going to have to engage with stakeholders and communicate in a sincere way.”
In line with this, a major element driving sustainability among CEOs is re-establishing consumer trust, which was shaken by the recent financial crisis. Of the executives surveyed, 72% cited strengthening their brand and reputation as the strongest motivator for taking action on sustainability issues.
Money with morals
A critical enabling factor identified by CEOs was a supportive investment community, and Nicholls adds that pressure from investors is growing. He points to industry initiatives such as the Carbon Disclosure Project (CDP) and UN Principles for Responsible Investment, where asset managers sign up to principles that bar companies from access to capital unless they meet certain requirements.
“A local example is the Government Employee Pension Fund, one of the largest of its kind in the world with an asset base of around [R800 billion], and which at any one time owns between 10% and 15% of share capital on the JSE,” says Nicholls. The fund is a signatory of the Principles for Responsible Investment, a UN-backed investor initiative whose members have committed to integrating environmental, social and governance considerations into their decision-making.
National sustainability challenges are not going to be solved by a single entity.
Steve Nicholls, Accenture
Nicholls says clients are also increasingly asking questions around investment, with failure to meet principles in some cases leading to disinvestment. He adds that companies need to realise committing to sustainable practices and principles is more than just a box-ticking exercise.
“There's a fundamental misunderstanding of the CDP in SA. Many businesses think of it as another reporting requirement, and miss the link to investor influence.”
Ernst & Young recently reported that social and environmental issues have become a serious strategic consideration for corporate boards and their members. It found that resolutions focusing on these areas made up the largest portion of all shareholder proposals in 2010, with the trend expected to continue.
The firm adds that there aren't only more of these proposals, but that the degree of support for these kinds of resolutions is growing among mutual funds and other important investors.
Making links
Beyond adopting sustainability measures for today's environment, leaders are also looking ahead to future benefits. Nicholls says many companies are still grappling with ways to leverage sustainability for new opportunities, but adds there is great potential for solutions. For example, the communications sector offers significant openings for innovative products and services.
This not a dynamic unique to the sustainability trend; this is how business develops.
Nicola Robins, Incite
Carbon Connections, a study by Accenture and Vodafone, showed growth in wireless machine-to-machine connections (smart grids, smart logistics, smart manufacturing), as well as virtual communications, would require one billion new connections, and save millions of tons of carbon per year in the European Union alone - a major area of opportunity for ICT companies.
Nicola Robins, partner at Incite Sustainability, notes that as social and environmental pressures impact more strongly on the competitive playing field, companies will move deeper into what Incite calls 'the transition zone' - “the contested space between our present unsustainable and future sustainable society”.
“Successful CEOs will be those able to navigate this transition zone more effectively,” she adds, which will require certain skills, systems and abilities on the part of management teams as well as the organisation itself.
“The CEO will need the visionary leadership to see the future, together with the courage to manage a process of organisational change.”
In the new era of sustainability, competitive success will increasingly require a level of redesign, innovation and partnership, says Robins. “This not a dynamic unique to the sustainability trend; this is how business develops.
“The businesses that succeed are those that are able to reinvent themselves, their products, their business models and their vision successfully over time. As sustainability drivers hit home, this process will simply happen faster, the pressures will be more pervasive and the innovations will be that much more intelligent.”
Cost agenda
Robins adds that the cost and availability of energy is impacting the way company leaders view the environment. “As fuel prices increase, environmental issues are increasingly being linked to opportunities for cost reductions, whether in manufacturing operations, facilities, supply chains or logistics networks.”
Other drivers include increasing compliance requirements from environmental legislation and the possibility of future taxes linked to carbon emissions, she adds.
The Accenture/UNGC study revealed that recent economic hardships forced businesses to examine how their sustainability activities deliver core business value, in terms of cost savings and revenue growth.
“Those CEOs able to look beyond the obvious are making the links between commodity price fluctuations and environmental pressures more broadly - they are starting to see the extent to which environmental pressures will impact the competitive playing field in the coming decades,” says Robins.
A critical requirement for this to happen, she adds, is for the management team to develop an informed perspective on what sustainability really means for the organisation.
“Sustainability strategies are too frequently based on a lack of analysis. They are simply reactions to a green fad, or new listing requirements (such as King III) or a sense of social obligation.”
Robins stresses that sustainability is about far more than simply being “good and green". “Unless a sustainability strategy helps the company to compete better in increasingly turbulent times, it is largely a lost opportunity.”
In Incite's latest publication, it notes that a sustainability 2.0 strategy, like any business strategy, must allocate resources to enhance competitiveness. “The key difference between business-as-usual and sustainability is the extent to which the latter is informed by an analysis of the transition we are entering.”
According to Robins, a smart analysis will lead to sustainability interventions that provide a robust account of how the company creates value for society; enable it to compete more effectively in a radically changing world; and seize business opportunities that reverse unsustainable trends.
The new era of sustainability, says Nicholls, will require business leaders to challenge conventional notions and adapt their approach to new realities.
“CEOs are traditionally quite reactive to the needs that drive sustainability in the business, but the top CEOs are turning that around.
“A lot of CEOs look at their situation and say, 'We're not under too much pressure from consumers because they're not asking about sustainability'. But the forward-thinking CEO would see that and say, 'That's because I haven't empowered them to ask right questions'.”
The words of one CEO quoted in the report sum up the overriding message to executives in a world heading for drastic change: "The risk of inaction is the greatest risk facing business."
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