How do we put rocket boosters under business efforts to become more socially and environmentally sustainable? More than a billion people currently lack access to basic needs such as safe drinking water, food, and electricity, and at this rate of resource intensity we will need another three planets worth of resources to support a population of over nine billion by 2050. The first step is to identify the obstacles.
For the last 10 years, we’ve been tracking the ebb and flow of executive opinion on what business can do to become more sustainable in social, environmental, and governance terms—making them more successful and valuable as a result. Our research has focused on a core group of 1,000 global CEOs, who we’ve interviewed triennially for the last decade.
In extending the scope of our research to encompass consumer and investor views of sustainability and value, we have begun to uncover a triangulated business case for sustainability: one that works for investors, consumers, and executives alike.
In 2010, CEO opinion was bullish: Business innovated. Government did not. Consumers and investors demanded an end to “greenwashing” and a move toward genuinely sustainable business models that delivered greater customer value, worth paying a price for. Business would deliver.
In 2015, the outlook has changed: CEOs tell us that business risks veering off-course when it comes to meeting global sustainability challenges. Leaders are frustrated. They feel like they’ve reached a plateau where there are lots of good case studies and examples of sustainable businesses that create real shareholder and customer value through enhanced sustainability, but they are rarely at scale or central to business models.
CEOs now see engagement with consumers as the most important factor motivating them to accelerate progress, and more than 700 told us that a lack of investor interest in sustainability is a major barrier to further progress.
The challenge is that businesses are often out of step with what motivates consumers to buy sustainable products in the first place. It’s not that investors aren’t interested in sustainability, but that they cannot quantify the link between many corporate sustainability initiatives and short or long-term competitiveness in the market.
On the consumer front, 81 percent of CEOs told us that their company’s reputation for sustainability is important to consumers, but our recent research with Havas Re:Purpose (a social business consultancy) shows that less than a quarter of consumers regularly seek information on the sustainability performance of the brands whose products they purchase. Rather than presenting consumers with metrics they don’t always find relevant, businesses need to explain the benefits their brand or product will have on the consumer’s local environment.
On the investment side, we have a specific problem. Investors’ inability to quantify monetary gains is the biggest barrier (except on product lines specifically tailored to an “eco-market”, in most cases marginal to mainstream markets). The difficulty seems to be that investors, as one CEO put it, “are still stuck within the green borders of Excel”. If they can’t put a (£/€/$) figure on how current sustainability initiatives will affect the long-term share price, you can tell them about emissions savings, strengthened supply chains, and women’s empowerment until you’re blue in the face—it won’t make a difference to the numbers. At the moment, 31 percent of CEOs think that their company's share price currently includes value directly attributable to sustainability initiatives. But this seems optimistic. When we spoke to investors (as part of our third study with the UN-supported Principles for Responsible Investment, or PRI, initiative), only 7 percent said they could quantify the business value of the sustainability initiatives undertaken by the companies in their portfolios. In fact, not one in 10 thought CEOs could even set out their sustainability strategy in business terms.
To move forward, CEOs must demonstrate how their products are delivering tangible improvements to consumers’ lives and society at large. They must also explain to investors exactly how their initiatives give them competitive advantage.
From an investment perspective, the overriding aim of any CEO is to encourage a culture of long-term, strategic investment to grow up around sustainability and reward the shift to a sustainable business model. We think the best way to do this is by ruthlessly targeting the opportunities that sustainability can bring. After all, who would want to invest in an unsustainable business? If resource prices are a large part of overall costs, how much could shifting to a circular economy business model (in which businesses treat waste resources, for example, as new inputs) improve competitiveness? To know how much such a shift could improve position against competitors, investors and companies will need new talent with specific skills and tools. There is work already being done on common metrics, but CEOs and CFOs, in conjunction with analysts, need to perfect these and roll them out across sectors and borders. Investors, and CEOs or CFOs also need to work constructively with governments to accomplish this.
So what can CEOs do about this?
- They can work much more closely with investors—through bodies such as PRI—to define and roll out common metrics that put sustainability in business terms. Or go a step further, and develop specific approaches they believe differentiate them from others’ analyses.
- They can engage with customers at a much more local level to understand their real wants, needs, and behaviors (not what the business thinks they should care about). Companies need to answer the question of how their brand is helping “around here.” That will include sustainability but not be exclusive to it.
- Both CEOs and investors can be clearer on the kinds of regulation that will help speed progress. This is something we heard again and again at the recent World Economic Forum in Davos.
If business leaders can do all these things, we will end up with better-informed investors, bolder CEOs, more engaged customers, and sustainable economic growth.