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45 (140) 2020
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The Responsible Rebound

How to embed sustainability into your core business strategy

By Rafał Rudzki, partner associate, and Katarzyna Średzińska, manager, Sustainability Consulting, Deloitte
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‘Sustainability’ systematically tops the list of priorities of corporate boards and executives around the world. Entrepreneurs used to take environmental action or carry out social projects as part of their marketing or branding activities. Over the past decade, however, we have seen more and more companies contribute to the creation of commercial and social value by integrating sustainability into its business strategy and core business. 

Examples of companies that are re-building their image of a better, healthier and more sustainable organisation are numerous, not only in the context of the Covid-19 pandemic.  There are meat tycoons who are transforming themselves into leaders of the vegetable protein market, drug-store chains that close cigarette retail channels to focus their attention on health products, there are clothing and retail companies that invest in organic products, making them a part of mainstream retail sales, and thus contribute to their popularisation.

Despite many examples of bold moves and commercial successes, in the collective corporate imagination, sustainability is still equated with spending and constraints. However, in the face of increasing demands from investors and shareholders who are calling for sustainability initiatives (taking the risks involved and reaping the benefits of such initiatives), faced with pressure from customers demanding more sustainable product options, today's entrepreneurs feel they need to be proactive.

It is time to start seeing sustainability not in terms of compromises or concessions, but as an indicator of competitive advantage and lower risk. Companies more proactively incorporating sustainability concepts into their business strategy and core business benefit because their supply chains are more resilient, business practices – more efficient, interactions with stakeholders – transparent and trustful, management – more effective. And ultimately, it is easier for them to create added value and record better financial results.

To illustrate this, at the time of the Covid-19 crisis, the performance of sustainability-based investment funds is higher than similar traditional funds.  A study by the University of Oxford, drawing on more than 190 different sources, confirmed the correlation between sustainable development, good ESG practices and lower operating costs, better profitability and higher share prices.

The reasons why sustainability should be integrated into a company's strategy come down to four points:

1. Environmental and social issues are intensifying.

The number of sustainability problems continues to grow and the scale of challenges is increasing. Current global warming trajectory will exceed two degrees by 2050. Researchers predict that this will result in large-scale population migrations, increased risk of infectious diseases, critical water scarcity and significant biodiversity loss, and all these new difficulties will pile up, exacerbated by  existing social problems such as unequal treatment and injustice, and an ageing population.

2. Consumer, investor and broad stakeholder expectations are increasing.

As the time horizons for solving these issues narrow, the pressure from stakeholders increases. Governments, regulators, investors, consumers, business employees, the media and civil society are increasingly expecting business to take on the role of a reform force to help bring about the necessary changes. They demand greater transparency and expect company bosses to take action to help solve environmental and social problems.

Consumers are increasingly voting with their wallets – reward for good and punish bad sustainability practices with this powerful weapon, using numerous news channels, platforms and social media. Numerous studies indicate that consumers are no longer just saying that they want to buy organic products, but are putting their words into deeds. They get involved in public protests and boycotts; they write petitions and mobilise local communities, which increasingly leads to the abandonment of controversial projects and withdrawal of certain products from the market.

3. Combined, these two issues mean that companies have to re-define the organisations’ core purpose, which can no longer be one of profit maximisation alone.

From responsible business to shared values and conscious capitalism, the last decade has given rise to alternative constructs of the capitalist corporation. In recent months, more emphasis has been placed on the company's business objectives, and we are seeing a clear shift from shareholder to stakeholder value return. Companies are no longer just profit-generating enterprises for their shareholders; they must also become active participants in a system which meet social needs and achieves results for a much broader group of stakeholders. Such an increase in the importance of the company's objective confirms that the focus on maximising short-term profits is not the right strategy. The need to find a more sustainable path for business and society has arisen.

4. That is why instilling the idea of sustainability into a company's strategy today becomes a prerequisite for the company to both grow and protect its business performance.

Sustainability gives businesses the opportunity to stimulate economic growth and achieves a long-term competitive advantage by:  

•    providing new sources of development and innovation: An international car company describes the challenge of sustainable growth in terms of the best possible support for innovation and identity, which is reflected in the portfolio of 33 models of globally available hybrid vehicles and 10 million units of total sales of hybrid vehicles worldwide.

•    brand differentiation and customer loyalty: The ‘sustainable living’ brands of a leading global FMCG group last year saw sales rise 69% faster than other brands, which resulted in a 75% increase in the group's profits.

•    cost-effectiveness by reducing waste and resource consumption: The global food and beverage manufacturer reported more than $375m in cost savings from sustainability initiatives between 2010 and 2015.

•    attracting and retaining talent: Companies strongly committed to sustainability benefit from a 25% reduction in staff turnover, as well as an overall productivity increase of up to 13%.

Sustainable development measures already being undertaken today save companies costs and reduce risks for the future, in particular by safeguarding financial performance against:  

•    reputational damage and public acceptance: A Norwegian energy company has had to withdraw from its $200m oil exploration venture in the Great Gulf of Australia under pressure from environmentalists.

•    operational risks associated with a degraded and distorted macroeconomic, social and environmental environment; Deloitte Access Economics estimates that from an Australian economy perspective, the total economic cost of natural disasters will be AUD 39 billion per year by 2050, while building a more inclusive society could bring Australia an additional AUD 13 billion in profits per year. 

The pandemic has shown that, both as individuals and as a community, we are able to take radical action if faced with an imminent threat. In the shadow of the unfolding tragedy, we could see the manifestations of new, more sustainable ways of working and consuming.  We are also seeing numerous examples of partnership and cross-sectoral cooperation, independently of divisions, which will certainly continue after the crisis.

The key to achieving sustainability potential in a business strategy and operational performance is certainly to integrate sustainability objectives into the company's overall business objectives, also taking them into account in the processes for setting and implementing financial indicators. It is a complicated process.  Along the way, there will be problems to be resolved, from translating environmental and social considerations into the language of relevant business objectives and performance indicators, to alleviating tensions between sustainability requirements and current business models and practices, to the question of obtaining relevant data to assess whether the strategies used have the desired effect. Acknowledging and embracing these inherent, inevitable tensions, and working through them, will drive great outcomes.

More in The Responsible Rebound:

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