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Tuesday, August 12, 2014

Sustainability’s strategic worth: McKinsey Global Survey results 08-12

Sustainability’s strategic worth: McKinsey Global Survey results

Executives at all levels see an important business role for sustainability. But when it comes to mastering the reputation, execution, and accountability of their sustainability programs, many companies have far to go.

Company leaders are rallying behind sustainability, and executives overall believe the issue is increasingly important to their companies’ strategy. But as it continues to grow into a core business issue, challenges to capturing its full value lie ahead. These are among the key findings from our most recent McKinsey survey on the topic,1 which asked respondents about the actions their companies are taking to address environmental, social, or governance issues, the practices they use to manage sustainability, and the value at stake.

One such challenge is reputation management. Year over year, large shares of executives cite reputation as a top reason their companies address sustainability; of the 13 core activities we asked about, they say reputation has the most value potential for their industries. However, many of this year’s respondents say their companies are not pursuing the reputation-building activities that would maximize that financial value.
Comparing companies with the most effective sustainability programs (our sustainability “leaders”) with others in their industries highlights another obstacle: incorporating sustainability into key organizational processes, such as performance management, one area where the leaders report better results than others. Beyond strong performance on processes, the leaders share other characteristics that are keys to a successful sustainability program—among them, aggressive goals (both internal and external), a focused strategy, and broad leadership buy-in.

Sustainability rising

According to executives, sustainability is becoming a more strategic and integral part of their businesses. In past surveys, when asked about their companies’ reasons for pursuing sustainability, respondents most often cited cost cutting or reputation management. Now 43 percent (and the largest share) say their companies seek to align sustainability with their overall business goals, mission, or values2 —up from 30 percent who said so in 2012 (Exhibit 1).

Exhibit 1

More and more companies are addressing sustainability to align with their business goals.
One reason for the shift may be that company leaders themselves believe the issue is more important. CEOs are twice as likely as they were in 2012 to say sustainability is their top priority. Larger shares of all other executives also count sustainability as a top three item on their CEOs’ agendas (Exhibit 2).

Exhibit 2

Company leaders and all others increasingly see sustainability as a top CEO priority.
As sustainability rises in significance, capturing its full value grows more challenging—perhaps because the more that companies prioritize sustainability, the more it needs to be integrated into (and even change) the core business. At companies that are already taking action, respondents most often cite challenges related to execution: the absence of performance incentives and the presence of short-term earnings pressure that’s at odds with the longer-term nature of these issues. Accountability is an increasing concern: 34 percent of executives (compared with 23 percent in 2011) say too few people at their companies are accountable for sustainability. At companies that aren’t pursuing sustainability activities, respondents continue to cite a lack of leadership prioritization as the top challenge to taking action.

Reckoning with reputation

Of 13 core sustainability activities we asked about, executives most often say their companies are reducing energy use in operations (64 percent), reducing waste (63 percent), and managing their corporate reputations for sustainability (59 percent). These actions were cited most often in 2011 and 2012, and a growing share of executives now identifies reputation management as a core activity. They are also most likely to say that among these activities, reputation management has the highest value-creation potential for their industries over the next five years.
Yet there’s a lack of clarity around reputation management, compared with other, better-defined activities, such as reaching new markets with sustainable products. We asked executives what actions the companies they work for take to manage their reputations, and, on average, companies most frequently communicate their activities to consumers and maintain stakeholder relationships. Yet the results vary by industry, indicating that companies understand and value reputation in very different ways (Exhibit 3).

Exhibit 3

Companies’ current approaches to reputation management vary by industry.
Many of the differences depend on how much action companies are taking on reputation, and on the overall sustainability agenda. In extractive services, executives say their companies are pursuing seven core sustainability activities, with three-quarters saying reputation management is one of them (compared with 59 percent of all respondents). The reputation-building actions these companies focus on—local community investments, external reporting, and employee volunteering—differ, then, from those of their peers in high tech, where companies take an average of five actions and just half of respondents say reputation management is one of them. These results confirm that there’s no one-size-fits-all approach to reputation, possibly one reason why reputation, like sustainability more broadly, is hard for many companies to manage.
When asked which activities maximize financial value, respondents most often cite customer communications. Beyond that, there are disparities between current reputation-management activities and the ones that are most critical to value creation (Exhibit 4). These results also vary by industry and reflect the importance of understanding and communicating sustainability’s financial value, from the leadership down. In extractive services, where the board and C-suite are most engaged and respondents are the most likely to expect that sustainability will create value, respondents identify the same activity (community investment) as a current action and a source of value. In contrast, those in financial services—where respondents report the lowest level of leader engagement and perceived value—most often cite employee volunteering, the activity they rank lowest with respect to value creation.

Exhibit 4

The reputation-management activities viewed as most important are not necessarily the most pursued.

What leadership looks like

Regardless of a company’s industry, its value-creation efforts require certain organizational traits. From our experience and previous work,3 we identified a few as the building blocks of a successful sustainability program. Indeed, when we identified our sustainability leaders—companies where executives report the strongest performance on core sustainability activities, relative to industry peers—we found that they share these characteristics.
It’s not surprising that leaders are much likelier than other companies to possess all 12 of these characteristics, though the results suggest which traits differentiate leaders from the rest (Exhibit 5). Executives at these companies are almost five times more likely than others to say they use aggressive external goals for sustainability, more than three times likelier to report a focused strategy, and nearly three times likelier to report an organization-wide understanding of sustainability’s financial benefits. In addition, leaders more often have in place the key components of performance management, such as aggressive internal goals and broad leadership coalitions to develop their programs.4

Exhibit 5

Sustainability ‘leaders’ set themselves apart through target setting and a clear strategy.
What’s more, much larger shares of executives at the leader organizations say their top leaders prioritize sustainability and report higher employee engagement on sustainability at every level, including CEOs, board members, and sustainability advisory committees. They report that their companies are taking more action to manage the life cycles of their products, and are four times more likely than others to say they have already implemented a life-cycle strategy. And they say their companies face fewer barriers to realizing value from sustainability, because they report better overall performance on the practices that underpin a healthy sustainability organization.

Organizing for sustainability

To better understand the defining traits of well-performing sustainability programs, we examined the organizational practices that underlie these characteristics. Of these, executives say their companies are better at fostering an organizational culture around sustainability and setting the direction for their programs. They struggle most with components of program execution, including employee motivation, capability building, and coordination of their sustainability work, which is reflected in the responses on specific practices (Exhibit 6). These results make sense, given the current levels of alignment between sustainability and various elements of the organization. Fifty-eight percent of executives say sustainability is fully or mostly integrated into their companies’ culture, compared with 38 percent who say so for performance management.

Exhibit 6

Organizations excel at creating a culture and direction for their sustainability programs, but they struggle with elements of execution.
Looking more closely at individual practices, some interesting patterns emerge. We identified four distinct approaches to the sustainability organization: leader supported, execution focused, externally oriented, and deeply integrated (see sidebar, “Four approaches to the sustainability organization”). The first approach is characterized by actively engaged leaders across the company, employee encouragement, and clear strategy; the second by clear structure, accountability, and middle-manager engagement; the third by the use of external ideas, networks, and relationships, as well as top-leader and middle-manager engagement; and the fourth by employee incentives for sustainability work, a focus on talent, and even engagement on sustainability at all levels of tenure. Our sustainability leaders are represented in each of these four approaches, confirming that there’s no single formula for sustainability success.

Looking ahead

  • Extend the product life cycle. Today, resource constraints are creating unprecedented prices and volatility in natural-resource markets. Yet the results indicate that most companies have not even begun to implement strategies that extend the life of their products and thereby reduce their resource dependence in a significant way. According to our other research,5there is huge value potential in better design and in the optimization of products for multiple cycles of disassembly and reuse. Forward-looking companies should begin investing in the “circularity” of their products, for the benefit of society and for their bottom line. On materials alone, companies could potentially save more than $1 trillion per year.
  • Look to technology. Similarly, technological advances are creating opportunities to drive sustainability solutions.6 Yet only 36 percent of respondents say their companies are mostly or fully integrating sustainability into their data and analytics work. Companies that want to capture increasing value in a resource-constrained world should spend more time thinking about how to integrate their technological capabilities into their overall sustainability agenda.
  • Focus your strategy. As sustainability becomes more central to the business, companies should align internally on what they stand for and what actions they want to take on these issues, whether it’s economic development or changing business practices. Whatever approach companies take, they should develop a strategy with no more than five clear, well-defined priorities—one of the key factors for successful sustainability programs.

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