As society looks to business for sustainability leadership, the pressure to deliver grows
Global research indicates that citizens no longer believe they can count on government to lead the way on sustainability initiatives – so they are looking to businesses instead. Those that step up have the opportunity to reap great rewards.
Something big is happening in business. After nearly 50 years of Milton Friedman economics, in which generating profits was widely seen as the prime role of business, the tide appears to be shifting, and fast:
• The CEO of one of the world’s largest asset management firms has openly challenged the world’s CEOs to make sustainability a priority if they want their companies to thrive.
• Forbes magazine recently lauded Microsoft on its cover as one of the corporate leaders “taking the public interest into their own hands.”
• In a recent survey by Deloitte, millennial workers were asked what the primary purpose of business should be. “Improving society” beat “generating profit” by a margin of 63 percentage points.
The nonprofit organization Business for Social Responsibility (BSR) summed up the groundswell this way: “To meet both the needs and the context of the 21st century, it’s necessary to rethink every aspect of business … The stakes are profound: Businesses that fail to change will struggle, and those that do change will find immense opportunity.”
But what is giving rise to changing attitudes about the role of business? The trend appears to have three drivers.
First, the world’s citizens say they have lost faith in the ability of governments to act on the world’s most challenging issues, from climate change to fair wages and hiring practices to technology-driven employment disruptions. In the face of this leadership vacuum, 76% of those surveyed for the 2019 Edelman Trust Barometer said that they want CEOs to lead change rather than waiting for government to impose it.
“IF CORPORATIONS FOCUS ON SUSTAINABILITY FIRST AS A PART OF THEIR CORE BUSINESS STRATEGY, THEY’LL ATTRACT A BETTER WORKFORCE AND GENERATE LONGER-TERM GROWTH IN PROFITABILITY, WHICH IS THE END GOAL.”CEO, BASE 11
Second, consumers, employees and society at large increasingly expect businesses to lead on sustainability issues. For example, Edelman’s research found 67% of workers expect their employer to have a greater social purpose and for their jobs to have a positive impact on society. Among consumers, 67% say that unless they come to trust a company, they won’t continue to buy its products.
Most importantly, perhaps, a strong link is emerging between responsible business and profitability. The JUST 100, the 100 most responsible companies ranked according to the principles of JUST Capital, returned 7.5% in the first 50 weeks of 2018, more than double the 3.6% returned by the S&P 500. That performance gap has not gone unnoticed by investors.
“A recent study from Oxford University found that more than 80% of mainstream investors now consider ESG – environmental, social and governance – information when making investment decisions,” Tim Mohin, CEO of the Global Reporting Index, said in a recent interview for Forbes magazine’s blog. “And the numbers are compelling: globally there are now US$22.89 trillion of assets being professionally managed under responsible investment strategies, an increase of 25% since 2014. This number is so large it needs context – it exceeds the GDP of the entire US economy.”
But why is everyone – including business itself – suddenly looking to business for leadership?
“Businesses are seen as an effective force for change,” said Andrew Wilson, the London-based executive director of purpose at Edelman, which publishes the Trust Barometer. “Employees’ expectation that prospective employers will join them in taking action on societal issues (67%) is nearly as high as their expectations of personal empowerment (74%) and job opportunity (80%). What’s more, over three quarters (76%) say they want CEOs to take the lead on change instead of waiting for government to impose it – a significant, 11-point jump on last year.”
Those firms that are seizing the opportunities and leading change are benefiting society, the environment and the economy as a whole – the three major categories of sustainability, which are commonly referred to as “people, planet and profit.” They’re also finding that a more sustainable business leads to a more profitable one.
Scottish philosopher Adam Smith’s core maxim in his 1776 publication The Wealth of Nations was that, in the course of rationally pursuing their economic interests, business leaders will end up serving society’s interests as well. Attitudes shifted in the 1970s, however, when economist Milton Friedman famously declared that the only role of business was to generate profits for its shareholders.
Almost five decades later the pendulum has made a sharp lurch back, as unmet social, environmental and economic issues have proliferated and the link between sustainability and profitability has become clear. And, increasingly, a company's purpose is being recognized as a critical factor in achieving both goals.
“When a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability,” Larry Fink, CEO of New York-based asset management firm BlackRock, wrote in his 2019 open letter to the world’s CEOs. “Purpose unifies management, employees and communities. It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making and, ultimately, helps sustain long-term financial returns for the shareholders of your company.”
It is a view shared by Landon Taylor, CEO of STEM skills accelerator program Base 11. “If corporations focus on sustainability first as a part of their core business strategy, they’ll attract a better workforce and generate longer-term growth in profitability, which is the end goal,” he said.
The idea that sustainability contributes to profitability isn’t universally accepted, however. Charles Eisenstein, teacher, speaker, writer and the author of Sacred Economics, believes that putting all of society’s faith in business is not a wise strategy – at least in the short run.
“Businesses are operating in an economy that generally doesn’t reward sustainability,” he said. “For example, there is very little financial incentive to create durable, easy-to-repair products, because then how will you get repeat customers?”
Eisenstein argues that it is often cheaper – by design – to buy a new product than to fix an old one, assuming a repair is even possible. “Businesses that want to be sustainable must compete against those that don’t care, and those who don’t care will have lower costs,” he said. “Unless we can change these basic conditions then sustainability will often conflict with the bottom line. The rules of the game need to change. Sustainability must be built into basic economic incentives or, in many situations, mandated by law.”
Martin Edlund, CEO of Sweden-based sustainable marine energy technology developer Minesto, agrees that the government is a necessary force, but field-leveling regulations aren’t his primary focus. “We need governments and public sector organizations to invest in knowledge through universities and research grants, and we need to look to government to provide legislation and incentives,” he said. “The United Nations, for instance, does a great deal of good work – we can’t discount that.”
The UN Global Compact, for example, is the organization’s framework for businesses; it outlines 10 principles in the areas of human rights, labor, the environment and anti-corruption. At the time of the framework’s creation in 2000, 40 companies had signed up. Today, that compact claims more than 13,000 participants, of which more than 9,500 are businesses. These businesses have committed to work with UN agencies, labor groups and civil society to advance the Compact's principles.
“Good progress is happening on many fronts, such as alleviating poverty and bringing down child mortality,” Lise Kingo, CEO and executive director of the UN Global Compact, wrote in a January 2019 letter to all of the initiative’s participants. “But there are huge gaps, particularly on climate change and inequality — for women, young people and for workers in the global supply chain. This is where business can make a huge difference.”
Those firms that are embracing and seizing sustainability's opportunities come in two types – established companies that are weaving these new priorities into their activities, and those founded with social responsibility as their raison d’être.
Canadian apparel firm Tentree, for example, plants 10 trees for every item a customer purchases. Its corporate purpose? To become the most environmentally progressive brand in the world.
“Tentree was founded to build a sustainable business that could have a long-term impact on our planet,” CEO Derrick Emsley said. “We’re tree planters first, product second.”
“THERE’S A REAL OPPORTUNITY HERE TO MOVE FROM A LOW-COST, LOW-RISK, BUSINESS-AS-USUAL OPERATING MODEL AND INSTEAD TAKE A CHANCE THAT MIGHT JUST CHANGE THE WORLD.”EXECUTIVE DIRECTOR OF PURPOSE, EDELMAN
The planting of trees in communities around the globe has an incredible impact on the livelihoods of different communities, from job creation to food security to education, Emsley said.
“For example, we’ve employed individuals in a fishing village that lost their ability to support their families because the fish populations dwindled due to deforestation. Now, with the trees we’ve planted, the fish have returned and the community is beginning to return to fishing with a new appreciation for protecting their mangrove forests.”
Minesto, which makes underwater kites used to generate electricity from ocean currents, is placing its products squarely in the environmental pillar of sustainability. But the company also is focused on the people pillar, with its emphasis on education to prepare the workers of tomorrow for jobs that haven’t even been invented yet.
“Part of our corporate social responsibility is education,” Edlund said. “We participate in training in schools and have a visitor center in Holyhead, Wales, where people can learn about the importance of what we do. We were also recently invited to the West Indies by the United Nations to coach young entrepreneurs. It’s great to be able to use our work as an inspiration.”
Education also is at the heart of Workshops for Warriors, an organization that works hand-in-hand with businesses across the advanced manufacturing sector to match eager, willing veterans with careers that need them.
“I got tired of seeing ex-services members dying of drugs or suicide because they struggle to transition back to civilian life,” Founder and CEO Hernán Luis y Prado said. “Meanwhile, there’s a huge shortage of manufacturing workers. Workshops for Warriors is directly addressing both of these challenges. We provide veterans and transitioning services members with advanced manufacturing training and industry-recognized certification for careers in welding, machining and fabrication at no cost to the veteran. So far we’ve placed 94% of our students in jobs where they are earning, on average, US$60,000 a year.”
Global security and aerospace company Lockheed Martin, meanwhile, has focused its sustainability efforts on business resiliency, creating a strategic framework designed to help the corporation last long into the future. Lockheed Martin Energy, for example, focuses on offsetting the greenhouse gases generated by the Lockheed Martin's airplanes. The company now operates a waste material (biomass) boiler system at a 1.8 million square-foot facility in New York that provides steam for heating and process needs. Lockheed Martin estimates that the biomass system will decrease the facility’s carbon footprint by 9,000 metric tons a year. The company also generates power with an onsite solar plant in California.
“In 2017 we saved our customers 1.7 billion kilowatt hours of electricity and 7 million therms of natural gas,” Frank Armijo, vice president of Lockheed Martin Energy, said in a YouTube video. “That’s the equivalent of taking 140,000 homes off the grid for an entire year.”
Then there is XYT, a new-generation automotive manufacturer that focuses on developing efficient, durable modular electric vehicles that can be quickly reconfigured to serve multiple functions. All components of the vehicles fit together like Lego blocks, including the body, interior components, accessories and propulsion system.
XYT’s solutions address economist Eisenstein’s point about our throwaway culture.
“We recognized that cars are becoming more complex, making them more difficult to maintain,” Simon Mencarelli, XYT’s CEO and co-founder, said. “More parts are being thrown away because they were not made to be repaired. By creating a solution with more durable products, we consume fewer materials. We have created parts which are made of recyclable materials or that we can re-employ.”
While each of these firms has taken a different approach to tackling sustainability challenges, they are achieving their visions through a single strategy: using technology to gain a comprehensive overview of their business, which enables them to optimize processes, improve visibility, anticipate emerging challenges and improve decision-making.
Specifically, many of these companies have adopted a business experience platform to empower their employees with rapid access to knowledge and know-how, plus the ability to collaborate with colleagues, value network partners and customers, to achieve more sustainable outcomes.
“Our business experience platform is the most important tool that we use daily to shape innovation into competitive products,” Minesto’s Edlund said. “We are a knowledge-creating company. Everything we do is about gathering and analyzing data, learning from it and then putting that knowledge into new products. Data is integral to our design and simulation systems to make our products as energy efficient and cost effective as possible.”
Tentree’s Emsley agrees.
“Digitalization is key to our success,” he said. “It gives us the opportunity to make the impact more real by connecting someone on one side of the world with the trees they planted on the other side. It helps us be more personal – we can break down the impact into something that means something to each unique person based on their profile – and also allows us to create more meaningful audit and transparency procedures.”
Business experience platforms also enable firms to genuinely connect with customers, helping them to deliver products that better match demands.
“Connecting with our consumers is not only essential to our business success, it’s also vital to deliver our sustainability ambitions,” Unilever states on its sustainable living website. “Our product design teams turn unique insights into the products that consumers want and need.”
With improved end-to-end visibility into all internal functions, as well as the activities of their suppliers, brands are increasing profitability in ways that improve the future for people and the planet. For example, Unilever now offers 26 “Sustainable Living“ brands, including Dove, Lipton, Hellmann’s, Knorr and Ben & Jerry’s. In 2017, these brands grew 46% faster than the rest of the business and delivered 70% of Unilever’s turnover growth.
With sustainability emerging as a business imperative in today's experience economy, more and more businesses are adopting business experience platforms to “connect the dots,” gaining insights into the full value chain.
“They are better positioned to make a difference in a way they have never been able to do before and deliver on citizens’ expectations in new and exciting ways,” Edelman’s Wilson said. “There’s a real opportunity here to move from a low-cost, low-risk, business-as-usual operating model and instead take a chance that might just change the world.”
Sustainability is often defined as meeting the needs of the world’s population today without compromising the quality of life for future generations, a concept first articulated in the Brundtland Report, published in 1987 by the World Commission on Environment and Development. Those needs fall into three broad categories, or pillars, of sustainability: social, environmental and economic, commonly referred to as “people, planet and profit.”
PEOPLE PILLAR: requires businesses to be good employers, neighbors and members of the community. Businesses that support the People pillar pay fair wages, treat employees well, and offer benefits such as parental leave, flexible scheduling, and learning and development opportunities. Companies also are expected to monitor their supply chains to ensure that their suppliers support these principles as well.
PLANET PILLAR: involves minimizing the negative effects of business on the environment. Activities in the Planet pillar include reducing or eliminating the carbon emitted by processes, reducing the raw materials needed to produce goods and services, and offsetting those negative impacts that cannot be avoided with resource replenishment, such as reforestation.
PROFIT PILLAR: balances the other two, recognizing that businesses must be profitable to survive, attract investors and create jobs. Corporate governance and risk management are important elements of the Profit pillar.