by Matt Haddon & Freddie Hospedales
There was a time when sustainability professionals felt like they were just talking to themselves.
Their roles were siloed within the organization - relegated at worst to little more than a tick box compliance function and at best to a way of generating cost savings through greater environmental efficiencies.
No more. In 2019 it feels, finally, that the world has awoken to the realities of climate crisis and the associated threats it brings - jolted into life by a combination of extreme and often catastrophic weather events, a massive shift in media coverage and a growing global activist movement fed up with what they see as climate inaction around the world.
Many companies are facing up to the realities of climate risk. Food producers battle the challenges poised by extreme weather and soil erosion from intensive agriculture. Consumer goods producers are under intense pressure to reduce plastic pollution. Apparel manufacturers face resource and raw material shortages. And carmakers face the biggest technological transition to electric vehicles since the birth of the auto industry.
In corporate boardrooms around the world the risks related to our changing climate and the call to being seen to be a net benefit to the environment and society are focusing minds and shaping future business strategy - reinforced by calls from leaders like former Unilever CEO Paul Polman for ‘heroic CEOs’ to drive a shift to a low-carbon economy.
This is good news for sustainability professionals, but also raises a serious question. As companies take active steps to mitigate climate risk and develop new areas of sustainable business, does the sustainability profession have the necessary business skills to play a leadership role or will it be siloed all over again?
It’s not about compliance anymore
To better understand how sustainability is reshaping the business landscape we recently conducted a survey, titled Navigating the Road Ahead, of 150 corporate executives from a range of sectors including chemical and pharmaceuticals, technology, media and telecoms, mining, oil & gas and energy & power.
The majority of those surveyed (56%) still see regulation and disclosure requirements as a significant influence on their company’s sustainability agenda - a testament, no doubt, to the progress made over the past decade in establishing sustainability as an accepted part of corporate accountability.
Compliance is no longer the dominant driver of sustainability however. Increasingly other forces – notably investor pressure, consumer expectations and a more existential need to be seen as a business that is doing right by society – are shaping the sustainability priorities and, importantly, putting it at the heart of business strategy.
The impact of investors
In our previous survey, titled Climate Change Risk: The New Investment Fundamental, 57% of executives surveyed said their organization was facing significant pressure from investors to report on climate-related risk and management. This year that percentage had grown to 66% as the investment community starts to get serious about environmental, social and governance (ESG) evaluation. This is being driven by a combination of risk factors. They include PG&E’s climate change bankruptcy filing and growing fears over fossil fuel “stranded assets” that may never be extracted due to regulation or shifts in technology – a harbinger being the UK government’s new stipulation that ESG reporting become mandatory for all pension funds. One London School of Economics report estimates that climate change could reduce the value of global financial assets by $2.5 trillion.
Then there is the mind-focusing realization that a new generation of young investors is entering the picture. Millennials in particular represent a growing influence in the investing community - it is estimated that they will receive more than $30 trillion of inheritable wealth in the US alone over the coming decades. In general, they hold very different positions than older generations when it comes to issues like fossil fuels and the consumption of goods and services.
Sustainability is good business
Other core business factors are reshaping how sustainability is viewed and prioritized. Seventy nine percent said that revenue and growth opportunities now have an influence on their organization’s sustainability agenda and 71% said consumer pressure influences the sustainability agenda – even for business to business (B2B) suppliers who are being challenged by consumer brands to demonstrate performance that matches consumer expectations. This would seem to be backed up by other research – one recent Cone Communications Brand survey found that eight out of 10 consumers were more loyal to brands that extolled a sense of purpose.
And then there is the growing sense belief that companies have to stand for more than simply maximizing shareholder returns. Nearly 90% say believe a key driver for sustainability is doing something good for society. That point of view might once have been interpreted as little more than philanthropy. Today though, a growing number of industry leaders consider it a core philosophy for future business success. A good example of this is BlackRock CEO Larry Fink’s 2018 and 2019 letters extolling portfolio targets to contribute to society or risk losing the investment bank’s support.
As companies wake up so must sustainability professionals
The shift towards sustainability to grow business, win over investors and mitigate climate risk is taking place across all industries.
In 2018, Norwegian energy Statoil rebranded as Equinor as it moves away from oil in favor of a broader renewable energy strategy. German chemical giant, BASF, is pioneering a new way of corporate reporting that will put a monetary figure on its total financial and non-financial value and impacts. And at this year’s Davos World Economic Forum the consumer goods giants Coca-Cola, Unilever, Procter&Gamble and Nestle announced their participation in the Loop Platform – a global initiative to reduce plastic consumption through a multi-use and recycling packaging program.
These examples are backed up by the finding of our survey where 79% of respondents said they currently integrate sustainability with mainstream planning and metrics or intend to do so over the next two years. Even more (81%) have plans to pursue integrated reporting, both to provide ‘C-suite grade’ data to the boardroom, and even ‘investor grade data’ to the stock market. To prepare, 72% say they will have an executive in place with responsibility for sustainability issues and 81.5% intend to invest in new technology to support the sustainability agenda.
All of which should make sustainability professionals rejoice, right? Perhaps not. As sustainability becomes part of the mainstream there is a very real danger that sustainability professionals could find themselves marginalized from key decision making exactly because ‘their’ topic is being embraced as a core business driver.
More than 60% of survey respondents believe the function needs to become more commercial. More challenging still for sustainability professionals is that 69% said finance, procurement and other functions already have the skills and experience to deal with the issues.
A new breed of sustainability professional
Sustainability professionals are needed more than ever if companies are going to build a business that delivers both for shareholders and greater society. To do that they have to reframe and solidify their relationship with other key parts of the organization – leaving the silo of non-financial compliance and fully integrating in core functions of the organisation including finance, operations, procurement, research and development and marketing.
CEOs and executive boards must lead that integration in terms of making sustainability a core business priority, shaping a corporate culture with sustainability at its center, upskilling incumbent sustainability professionals in other core business skills and recruiting a new generation of talent that already understand that sustainability is core to business success.
In doing so, the sustainability profession can add significant value by helping protect organizations from climate-related risk, identify new growth areas and develop products and services that will serve the needs of society, while minimizing their impact on the environment. In reality, this is what sustainability professionals have been discussing for more than two decades - now is the chance to put great ideas into practice.
Matt Haddon is Global Service Lead for Corporate Sustainability at ERM
Freddie Hospedales is Global Head of Marketing at ERM