Sustainability has been seeping into corporate reality at a growing pace and from an increasing number of perspectives. We would like to share some thoughts on those perspectives: what characterises them, how companies are responding, how to seek advantage and what we see as the opportunities for a Supervisory Board in that context.
In our perception, the corporate sustainability journey has roughly four phases: Peripheral Irrelevance, Nuisance, Threat and Opportunity. Early focus on sustainability was almost exclusively in the Corporate and Social Responsibility (CSR) domain, or in our characterisation, “peripheral irrelevance.” This means companies were, and still are, seeking to build positive relations with their social environment by building schools, clinics or mobilising “impact days” for staff. While these initiatives have positive reputational and staff engagement benefits, they have little or no bearing on core business.
There is a growing recognition of the importance of creating social capital. This is very difficult to express as shareholder value, and we all have examples of companies that failed to take social capital seriously and suffered very expensive consequences. We all remember the Bhopal gas tragedy that is still deeply affecting citizens 30 year later, challenging DowDuPont’s ability to invest in India. At the same time those working on the International Integrated Reporting Coalition (IIRC) estimate that as much as 80% of corporate value is locked-up in intangibles, of which social capital plays a significant role. Equally there is a growth list of countries making investment in society a corporate obligation. All good reasons to make sure that the value of social capital is properly understood and that investments in it are aligned with core corporate goals, rather than must do window dressing.
Our first question to corporates is: have you thought about the value of social capital and what you can do in your role to build it?
In the “nuisance phase” we have seen increasing reporting obligations, growing regulation and more demands from consumers and investors to provide key sustainability information in the shape of supply chain standards. Corporates often feel that banks are asking for information they do not utilise and given the low cost of capital, feel it is unnecessary to jump through overwhelming reporting hoops.
In reality, we have seen that a strong corporate sustainability position can build brand value, positively transform relationships with suppliers and enhance investor risk appetite. In fact, many fund managers state that their green investments show a better return and are more reliable.
So our second question to you would be: what is reporting to you? Do you see integrated reporting as a nuisance, or as a tool to discover corporate value? Are you actively prompting the use of that tool?
The “threat phase” of corporate sustainability comes in many sinister shapes and sizes. For example, as a result of unsustainable business practices there are growing fears around material scarcity and security of supply. The clearest example is the consumer goods industry, which in turn has taken initiatives to turn these threats to their advantage. There is the threat of policy and investor interventions that result in business practices becoming uneconomical, capital stock having to be destroyed and assets becoming stranded.
The third question then arises: has your Supervisory Board mapped the threats relevant to you in terms of their probability, time scale and potential impact? Do you have a plan to mitigate risks and turn them to your advantage?
The fourth phase is the happy phase, when it is all about opportunity. The Business and Sustainable Development Commission estimates that meeting the 17 Sustainable Development Goals (SDGs) could create almost 380 million jobs as well as business opportunities worth $12 trillion USD. The Commission based these figures on assessments of four economic systems: food and agriculture, cities, energy and materials and health and well-being.
An example of a company taking the Opportunity phase to heart is Mars, which is spending $1 billion in sustainability to make greener practices it believes will increase profits several times over. The three areas Mars is examining are: more efficient usage of energy and water, with simplification of its supply chains.
We recognise that the SDGs are not reason enough to make new products for customers you may not want, in markets you would prefer to stay out of. However, it is important to recognise that by the end of the century half of the global population will be African with the vast majority of urban growth occurring in South East Asia and Africa. But are these the markets where you can do significant business in the foreseeable future?
Our experience is twofold. First, don’t waste your time on propositions that are completely alien to your business and secondly, if you can’t make the business case, stop talking.
If core business values relate to (a) growth, (b) efficiency and (c) brand value, we would encourage Supervisory Board members to ask three questions:
- How can we grow our business through innovative products and services that build on sustainability trends?
- How can we address our energy consumption, water consumption, waste generation and supply chain management to increase efficiency and reduce cost?
- Are we doing everything we can, not only to safeguard the value of our brand, but to enhance it and fully express it’s worth?
We firmly believe that by asking and answering these questions you will achieve two transformative outcomes. You will be using the sustainability agenda to build business value and you will be focussed on the business models of the future.
Don’t believe us? Let’s look at some real examples.
In terms of value creation, Unilever’s Sustainable Living brands grew 50% faster than the rest of the business in 2016. Colgate-Palmolive has made products more affordable with smaller sizes and developed innovative distribution models. Digital financial services are showing huge growth opening-up new markets. Phillips, Siemens, BMW and many others are seeing the strongest growth in the green part of their business. Driven by circular economy goals, entirely new business models are emerging.
In terms of cost reduction, by focussing on worker well-being programmes, Levi Strauss generated a 3 to 1 return on investment through reduced worker turnover, absenteeism and tardiness. Anheuser-Bush InBev’s energy reduction policies have resulted in a saving of $55 million since 2012. Pepsico’s electric delivery trucks saved $3 million in 2014. Microsoft found they could save 15-30% on energy cost through smart building solutions.
Lastly in terms of brand value, demonstrating the use of sustainable grown tomatoes helped Unilever push its ketchup into a market leadership position. Germ-fighting efficacy in soap helped push Unilever sales up by 15% in 2014. PWC has found that 78% of citizens are more likely to buy goods and services from companies signed-up to the SDGs. According to Global Knights, sustainable companies offer a 24% greater return to investors than other companies.
So what does all of this mean for you as Supervisory Board members or for your Board?
Certainly, you have formal supervisory and fiduciary responsibilities and these duties of course must be met. However, we believe your real added value lies in:
- Providing insight, advice and support to the CEO and management team,
- Stimulating discussion on key decisions facing the company, and,
- Seeking-out relevant expertise to add value to decisions.
As such, we would encourage you to explore how sustainability can bring growth, efficiency and brand value to your company, employees and investors.
Ultimately, we have seen three basic business responses to the sustainability challenge:
- Seek your future in the past and staunchly resist all change that threatens current practice.
- Go with the flow, do what you must, but never stick your neck out.
- See change as an opportunity.
We hope this short summary prompts you to be a type 3 person and add value where you can.
Yvo de Boer, Partner [SRI Executive Strategy] and Global Advisor for Sustainability
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