SUSTAINABILITY’S NEXT FRONTIER
Walking the Talk on the Sustainability Issues That Matter Most
In this 2013 report, new research by MIT Sloan Management Review and The Boston Consulting Group looks at companies that “walk the talk” in addressing significant sustainability concerns. So-called “Walkers” focus heavily on five fronts: sustainability strategy, business case, measurement, business model innovation and leadership commitment. For them, addressing significant sustainability issues has become a core strategic imperative and a way to mitigate threats and identify new opportunities.
For the past five years, MIT Sloan Management Review and The Boston Consulting Group have collaborated on an annual research project to assess how businesses address their sustainability challenges. In the past, we focused on sustainability broadly as a business agenda and how that agenda drives profits and business model innovation. This year, we turn our attention to sustainability’s next frontier: addressing the most significant sustainability issues. These are the key social, environmental and economic issues that, if not embraced or addressed, can thwart a company’s ability to thrive — or even survive.
What are the most significant social, environmental and economic sustainability issues confronting companies? (See What is Material Sustainability?)
How thoroughly are businesses addressing these issues?
What are companies that thoroughly address significant sustainability issues doing differently than other companies?
Our findings are both encouraging and disconcerting. Although some companies are addressing important issues, we found a disconnect between thought and action on the part of many others. For example, nearly two-thirds of respondents rate social and environmental issues, such as pollution or employee health, as “significant” or “very significant” among their sustainability concerns. Yet only about 40% report that their organizations are largely addressing them. Even worse, only 10% say their companies fully tackle these issues.
Companies that perceive sustainability issues as significant and thoroughly address them share distinct characteristics. For example:
More than 90% have developed a sustainability strategy, compared to 62% among all respondents.
70% have placed sustainability permanently on their top management agenda, compared to an average of 39%.
69% have developed a sustainability business case, compared to only 37% of all respondents.
These leading companies suggest a path forward. We call them “Walkers” — companies that “walk the talk” by identifying and addressing significant sustainability concerns. How they do so is a major finding of this research. Walkers focus heavily on five business fronts: sustainability strategy, business case, measurement, business model innovation and leadership commitment. “Talkers,” on the other hand, are equally concerned about the most significant sustainability issues, but address those issues to a far lesser degree. They also score much lower on the five fronts.
Although we found that some companies are making progress toward the next frontier of sustainability, data from the past five years shows that many organizations are struggling to move forward. For example, the percentage of companies that have established a sustainability business case has only grown from 30% to 37% during this period. The percentage of companies that have tried but failed to build a business case has increased from 8% to 20%. More than half of the respondents have either failed to establish a business case or haven’t even tried to create one (see Figure 1).
The percentage of companies that report their sustainability efforts are adding to profits has consistently come in at roughly 35% since 2010 (see Figure 2). Many companies have hit a crucial inflection point. They have reaped the immediate gains from sustainability but have yet to thoroughly embark on the next level: addressing the most significant sustainability issues.
However, some companies — Walkers — have moved past this inflection point. Addressing significant sustainability issues has become a core strategic imperative that these companies view as a way to mitigate threats and identify powerful new opportunities. In this report, we look at how businesses are defining their significant sustainability issues and tackling this new frontier.
We started by asking respondents how significant social, environmental and economic sustainability issues are to their organizations. Nearly 80% rate economic issues as significant or very significant. Seventy percent rate environmental issues similarly, and only 66% give the same ratings to social issues (see Figure 3).
Next, we asked respondents to rate the significance of specific social, environmental and economic concerns (see Figure 4). Across all industries, the top three social issues are the health and well-being of employees, the community and customers. The three most pressing environmental issues are energy efficiency, pollution and waste management. Competitiveness is the most significant economic concern, followed by market pressure and revenue growth.
The Industry Lens
We also examined significant sustainability issues by industry (see Figures 5 and 6). Often, but not always, these concerns reflect the most important sustainability issues in a company’s specific industry. Respondents from commodities, for example, rank community health and well-being and the economic sustainability of local communities as more significant than do respondents from other industries. Mining companies often operate in remote locations in developing and emerging economies that place great stock in important socioeconomic issues.
Most companies are still not able to connect sustainability with profits.
Similarly, food security is high on the list in the chemical and consumer products industries, indicating the importance of chemical products in agriculture, fertilizers and nutrition businesses, and the importance of healthy and reliable products for consumer goods companies. IT and telecommunications companies consider energy efficiency more important than do respondents in other industries, reflecting the substantial energy needed to operate and cool large data centers as well as the energy needed to power IT and telecommunication devices. Healthcare respondents, not surprisingly, put consumer and community health at the top of the list.
However, we also found that some important social and environmental concerns aren’t receiving what is arguably their due.
Education, for example, falls toward the bottom of the list in healthcare, chemicals and consumer products — only 2 to 3% of respondents in these industries rate it as one of their top three significant issues versus 7% of all respondents. Companies in these industries may perceive that they already offer significant opportunities for the public to educate themselves on health and nutrition. However, given the complexities of these aspects and their potential risks, education should arguably be of greater concern.
What is Material Sustainability?
The focus of this report is, in large part, on the most significant sustainability issues: what they are, how they are addressed, and which companies are addressing them. This research examines a growing global expectation that companies assess and address the sustainability issues that are material to their existence over time. Material sustainability issues, in this sense, are those issues most relevant to the company’s continued ability to function. Thus, what counts as “material” may vary considerably depending, for example, on which industry you look at, or even on the business model of individual companies in the same industry.
The expectation that companies should be addressing these material sustainability issues is reflected in a variety of new standards and practices. In the United States, for example, the Sustainability Accounting and Standards Board, accredited by the American National Standards Institute, is developing disclosure standards for 88 industries to provide investors with transparency into the significant sustainability risks of the companies in which they invest.i
In May of 2013, the Global Reporting Initiative (GRI) — a leading institution in developing guidelines on sustainability disclosures — released its new G4 reporting standard.ii This standard emphasizes the importance of identifying and disclosing material sustainability issues to meet stakeholder expectations — even if the organization is not yet prepared to manage them. It targets specific processes, such as procurement or distribution, to pinpoint each material sustainability issue a company faces both within and outside the organization. Reporting on these issues is a prerequisite for advancing material sustainability on corporate agendas.
Even with these advances, we’ve found that the concept of materiality in corporate sustainability is still developing. Numerous definitions are emerging and competing for acceptance. While we were inspired by the concept of materiality, to alleviate confusion in our survey, we chose to use the word “significant” instead, asking respondents about the significant social, environmental or economic issues that could have a meaningful impact on the long-term viability of their companies. We deliberately included issues that influence the macro context in which companies operate, including climate change, water scarcity and political factors such as human rights.
Only 13% of respondents from IT and telecommunications say pollution is one of their top three significant sustainability issues, compared with 18% across all industries. The relative lack of concern suggests that many companies in these industries don’t see the full gamut of sustainability issues across their supply chain, including the second-order impact of their products. Rare-earth elements, for example, are important for LED screens. However, in some countries, including China (the dominant producer of these metals), unregulated mining has caused widespread environmental damage, including water pollution with toxic chemicals and low-level radioactive waste.1
Only 3% of healthcare respondents identify climate change as a significant sustainability issue. However, as Kathy Gerwig, vice president of employee safety, health and wellness and environmental stewardship at managed care organization Kaiser Permanente points out, climate change is expected to have a major impact on health. Severe weather will increase the number of injuries and deaths worldwide. The consequences of a warming planet include changes in rainfall patterns and agriculture that will affect food supplies, as well as changes in the geographical range of insect-borne diseases such as malaria and yellow fever.
As expected, economic issues are more significant than environmental or social issues.
A Cloudy Horizon
The discussion above reveals that most companies focus on demonstrable, measurable sustainability challenges such as energy efficiency, waste management or employee health and safety. Concerns that are less tangible or less industry-specific — that are perceived as being on the distant horizon — are barely a blip on the corporate radar. Issues such as human rights, for example, fall to the bottom of the list of social sustainability concerns. Biodiversity loss and soil erosion or desertification fare no better.
Given its potential impact on society and business, we specifically asked managers how their companies are approaching one “distant” issue that affects social, environmental and economic concerns: climate change. The scientific community worldwide has been warning that it is one of the most pressing long-term issues. In its 2013 report, the U.N.-sanctioned Intergovernmental Panel on Climate Change concluded that human influence is causing global warming, and that if consumption patterns continue at current rates, dire effects on global living conditions, habitats and economies are likely. The report — the Panel’s fifth since it was formed in 1990 — points out that many of the observed changes since the 1950s are unprecedented. In the Northern Hemisphere, for example, 1983 to 2012 was possibly the warmest 30-year period in more than 1,400 years. Ocean and air temperatures have increased, and the amount of snow and ice has declined. In addition, both sea levels and the concentration of greenhouse gases have risen.2
Despite the scientific attention, however, climate change is low on respondents’ lists of significant sustainability issues. Although 67% of respondents agree that it is real, only 11% rank climate change as a very significant environmental issue. Not surprisingly, the level of preparedness is quite low. Only 9% of respondents strongly agree that their companies are prepared for climate change risks (see Figure 7).
Notably, employee health and well-being and energy efficiency are the most significant sustainability issues.
Still, there are a few industries that buck the trend of lackluster interest in climate change’s effects — for instance, reinsurance and banking. Companies in these two sectors depend on mitigating financial risk and are factoring in longer-term, less-tangible issues, including climate change. “There’s a price tag on them,” says David Bresch, head of sustainability at Swiss Re, the world’s second-largest reinsurer. “Insurance is often an incentive to prevention and preparedness.”
For example, Swiss Re creates scenarios to help regional and national decision makers understand the impact on insurability of inaction on climate change. The city of Hull in the U.K. is a case in point. Swiss Re examined historical disaster data, including wind, inland flooding and storm surge. The company then applied probabilistic modeling to estimate the expected economic impact of natural disasters through 2030. In the worst-case scenario, Swiss Re calculated that climate change would eventually cause annual losses of U.S. $90 million. Swiss Re developed a portfolio of steps Hull could take to limit its exposure, including education, reinforcing sea defenses, retrofitting buildings and changing building codes. These measures could reduce the potential losses by some 65%.
The significance of environmental issues varies by industry.
Crédit Agricole, France’s largest retail bank and Europe’s third largest wholesaler of banking services to large institutions, is also factoring in long-term sustainability risks. “People are now aware that any kind of project or banking relationship has environmental and social components,” says Jérôme Courcier, the company’s chief social responsibility (CSR) officer.
Through its Ceres committee, named after the ancient Roman goddess of agriculture, the bank assesses the inherent social and environmental risks in any new major investment or relationship. Certain investments are automatically out of bounds. For example, the bank eschews any deals involving surface oil sands, offshore drilling in the Arctic region, or any hydroelectric plant where the size of the reservoir is disproportionate to the energy generated. All other opportunities are subject to five stages of evaluation and up to 20 criteria.
But the bank is also factoring climate change into its retail business. “When we lend to people to buy their homes, we factor in the impact of climate change on energy prices,” says Courcier. “We need to make sure that if heating and transportation costs go up, customers can still repay their loans.” Along similar lines, the bank launched a sustainability lending program that guides consumers through the issues of energy-efficient remodeling: energy audits, project estimates and financing.
For long-term issues such as climate change, our research shows that many companies aren’t taking the same heed as these financial institutions. The gap indicates a broader disconnect between thought and action on a range of sustainability issues across industries: Companies are far more likely to perceive significant sustainability issues than they are to act on them.
Read the complete article at the link below.