The climate crisis and the Covid-19 pandemic are two factors that have thrown the need for sustainability into stark focus in recent months. Companies not only have to satisfy shareholders in terms of financial performance, but they also have to show that they are working towards a sustainable future. They now have to communicate their performance in regards to environmental, social and corporate governance (ESG) elements. This is where sustainability and strategic management intersect.
Half of the pressure comes from investors who want to know that their portfolios are ‘doing good’. But the other half comes from governing bodies that are increasingly fine-tuning legislation to require both big and small businesses to improve their sustainability:
- In the European Union, the Sustainable Finance Disclosure Regulation (SFDR) provides a set of ESG reporting requirements for financial market participants in the EU. In addition, the EU Taxonomy Climate Delegated Act clarifies the economic activities that the union feels will best contribute to meeting its environmental targets. There are also proposals for a Corporate Sustainability Reporting Directive (CSRD) that will require reporting on sustainability against a set of EU standards.
- In the United Kingdom, the Financial Conduct Authority (FCA) released consultations in June 2021 on implementing mandatory disclosures for issuers on sustainable topics. The UK is also developing its own green taxonomy, which will be similar in effect to the EU version.
Benefits of integrating sustainability into your business strategy?
Although sustainability legislation brings a number of compliance challenges, there are also plenty of benefits for businesses embracing these measures.
How it works
Protect your brand name
Businesses are increasingly looking to improve their performance in the triple bottom line of the three Ps – profit, people and planet. The latter two Ps can have a considerable impact on your brand name and image, which, in turn, can affect your profit.
Becoming embroiled in a scandal over poor working conditions on inequitable treatment of your people, or being shown as responsible for polluting the planet, diverts attention and finances away from your business, as you attempt to manage the negative publicity. The reputational damage can dissuade customers from using your company and shareholders from investing.
Whether it is the environmental impact of your use of natural resources or the effect of your business activity on your suppliers, you are always under scrutiny when it comes to sustainable strategy implementation.
Attract ESG investors
ESG investing is gathering considerable momentum every year. Morningstar found that funds that apply ESG principles received US$21 in investment in 2019, but that jumped to an extraordinary $51.1 billion of net new money in 2020.
With each of the last five years seeing record ESG investment totals, sustainability is a trend that you must be a part of if you want to attract more shareholders to your offering.
Gain competitive advantage
Committing to sustainability gives a business a sense of purpose and a culture that can connect employees at all levels of the staff structure. Having that shared purpose has been shown to improve employee morale and satisfaction. In turn, that leads to your staff advocating for your company and that is incredibly persuasive when searching for the best talent on the market to join your team.
It is telling that 40% of millennials say they have taken a job based on the company’s sustainability focus.
Respond to customer demand
Consumers are increasingly interested in buying from sustainable companies, both in the developed and developing worlds.
The World Wide Fund for Nature (WWF) found that the popularity of Google searches relating to sustainable goods has increased by 71% globally since 2016. This was driven by high-income countries, but there have also been significant increases from emerging nations.
Customers want to know that their purchases are from businesses with sustainable practices, meaning that there is a real, financial reason for adopting these ideas into your management systems and supply chains.
The financial benefits do not just come from income. Sustainability can also reduce expenses for an organisation. Using resources such as water and carbon more efficiently can improve operating profits by up to 60%, according to McKinsey.
Minimising hazards can reduce payments required to offset the pollution caused by accidents, for example. Investing in diversity and inclusion policies can avoid potentially costly employment tribunals.
With a host of laws and regulations already enacted and the potential for more legislation that will increase the number of sustainability requirements on companies, adopting sustainable working practices now makes compliance both in the present and the future easier to achieve.
What is the relationship between sustainability and strategic management?
The role of strategic management is to set goals and put in place procedures that make the business more competitive and deliver value for all stakeholders. It is vital that sustainability is at the heart of this in order to remain an attractive proposition for consumers, employees and investors alike.
Sustainability is no longer an optional extra for your strategic management, it is a ‘must have’ to allow your business to compete in today’s market. Creating a strategy for sustainability means that you can make the very real changes that need to happen to show that you are compliant and taking affirmative action. It creates buy-in from all stakeholders and delivers the goals you set or which are set by regulators.
How to incorporate sustainability into strategic planning
1. Understand the law
The first element in incorporating sustainability into strategic planning is to look at your legal requirements to ensure you meet the standards set by the authorities. Depending on the jurisdictions in which you work, you might have to report on certain variables by law.
For example, by June 2023, SFDR in the EU will require businesses to report on detailed indicators for Principal Adverse Impacts (PAIs) — the factors that provide risks to sustainability.
2. Set your targets
The targets you set for those factors that are required by law will already exist, but to extend your sustainability strategy, you should look at setting targets for other, voluntary factors as well.
You might decide to improve the gender balance of the board, increase the amount of recycling your company undertakes or set any other goal.
It’s also a good idea to make your commitment public. Austrian engineering firm Andritz publishes its ESG targets online, including its targets for environmental issues, reducing its lost time accident frequency rate by 30% every year and enforcing and constantly checking the observance of the highest corporate compliance standards across the company, with the target of eliminating misconduct incidents.
3. Prioritise your goals
Different businesses will find different ESG targets more relevant, depending on their industry, their company history and the nature of their stakeholders. Oil companies will likely prioritise their environmental management policies, especially if they have been responsible for numerous spills in recent years, for example.
You already identify the major risks for your business. That process aligns with the procedures for identifying and prioritising sustainability goals. You need to work out which ESG goals are most appropriate to your organisation and hone in on meeting them as a priority, setting the appropriate key performance indicators (KPIs). You can use an ESG reporting framework to guide you in this process.
4. Involve the board of directors
The CEO and the board need to buy into the sustainability strategy, oversee the progress and help guide the business towards meeting its goals. With strategic decision-making at their core, the board and its committees can scrutinise and challenge the strategy to ensure it is fit for the purposes of the company. By spelling out the financial benefits to the business, you show directors why this is the correct course of action.
5. Engage stakeholders
The benefits of a sustainability strategy are different for all stakeholders. This is why it is important to engage them all and communicate the reasons why they should support the process from their perspective.
Whether they are employees, customers, investors, directors or any other interested party, having a sustainable strategy is in their interests because it helps to futureproof the business and make it thrive.
6. Measure your progress
Sustainable strategic management is about more than good intentions. It is about delivering on those intentions and being able to show demonstrable growth using agreed metrics.
If you want to be able to turn your environmental performance into as big a story as your economic performance and have a sustainable competitive advantage, you have to be able to quantify your progress.
To measure your progress against your peers, you can use a benchmark such as Boardclic’s ESG Index. It is based on questions and topics that include stakeholder management, corporate health, diversity, culture, and climate impact among many others. It provides a reference point for your performance and shows the progress that you are making.
7. Maintain transparency
Although many companies will restrict their sustainability reporting to those factors that are required under regulations, transparency with your ESG metrics in a wider sense shows a commitment to the cause. This breeds trust with consumers and investors.
Comprehensive ESG reporting sends a message to stakeholders that you are taking sustainability challenges seriously and are continuously working to improve your performance.
The challenges of truly strategic sustainability
Truly strategic sustainability means that businesses have to use these risk factors and goals at the heart of their decision-making and overall company strategy. This is in contrast with the typical corporate social responsibility (CSR) initiatives where decisions about sustainability are often held separately from the main corporate strategy decisions. Blending sustainable development and strategic management is a new way of working for many companies and some boards might need persuading that sustainability really deserves that amount of influence over decision-making. So, you need to make a solid business case for your sustainability initiatives.
Lifting sustainability from an operational concern to a strategic one requires vision and authority. It requires long-term thinking and planning, rather than a reactive approach. The long-term nature of the benefits of sustainability requires patience. You can’t expect it to appear on the balance sheet this year. The business is unlikely to see a quick win from the integration of sustainable efforts in the short term. This may put some stakeholders in opposition even if the medium to long-term effects will be positive. To align sustainability with strategic management, you need to have a strong advocate for the importance of sustainability in the long run.
Governance, social and environmental sustainability factors are here to stay as a major concern for all businesses. Not only for regulatory purposes, although that is hugely important, but also for brand image, competitive edge and even long-term profits. This is why sustainability can no longer be seen simply as a public relations exercise and why sustainability and strategic management must go hand in hand in the future.
If you want to measure the progress you are making towards your sustainability goals, Boardclic’s ESG Index can give you concrete benchmarks to compare your results against. You can request a demo here.
References and Further Reading
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