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How to square the circle on sustainability

Magazine

How to square the circle on sustainability

Published 17 November 2022 in Magazine • 6 min read

Companies that integrate sustainability into their core strategy at the highest level will be better placed to reap long-term value for the benefit of shareholders and society alike. 

Sustainability has become a fundamental prerequisite for doing business. Companies’ operations and business models depend on environmental and social inputs such as capital, natural resources, production equipment, and relations with the outside world. This includes a range of stakeholders, from legislators and investors to customers and employees.  

This means that sustainability is no longer just about compliance and ethics but rather should be a core part of business strategy. Placing it there will demand new competencies and skills from a company’s top leadership, and the board of directors in particular.  

Unfortunately, however, for most companies sustainability is still not fully integrated in this way. Consultancy PwC’s 2021 CEO survey showed that 60% of those interviewed had not yet made climate change part of strategic risk management. Instead, companies more generally seem to have sustainability or ESG processes that are designed to handle compliance, ethics and reporting. 

Part of the problem is that too many businesses are relying on the usual three- to five-year time horizons, which are too short to fully integrate the impact of climate change risk into business thinking. Therefore, boards and leadership must have the competences and willingness to operate with much longer time-horizons in their strategy processes. 

At the same time, many stakeholders, not least employees, now expect to see chief executives being publicly vocal about how their companies are contributing with solutions to sustainability challenges relevant to the company. Not all CEOs will be comfortable with this role, treading a fine line between business and politics. But it is a leadership role that is becoming increasingly crucial to succeed. From a strategic perspective, taking a public stance is likely to benefit the company’s growth if it supports society moving towards more sustainability – and therefore increasing the demands for the solutions the company can provide.  

Dealing with complexities 

When it comes to managing sustainability, it can certainly be complicated: the individual elements of sustainability almost always involve trade-offs and tensions. For example, while manufacturers have a positive impact in supporting job creation, they often contribute at the same time to increased resource consumption. Addressing overproduction and consumption by investing in digital automation creates environmental and health benefits but may inadvertently eliminate people’s livelihoods.  

Therefore, it requires competent leadership to be up to these new management challenges. The ability to handle such complexities becomes important. This entails an ability to view situations from multiple perspectives at the same time, and an acceptance that most questions don’t have a single solution but are rather a both/and.  

The board’s responsibility 

It’s also essential for boards to be able to think in a way that accommodates and helps navigate this duality, while seriously addressing the strategic importance of sustainability. Just as with ethics, responsibility, and compliance, the role of the board will be to ensure that the company’s processes are set up to deliver on both the hard and soft demands and expectations from stakeholders without being dragged around by fast-shifting views. 

Squaring the Sustainability Circle Font Page

 

Board and management therefore need to have a basic level of understanding of the sustainability issues relevant to the company, the stakeholder dynamics and a view to where things may be going. This includes an understanding that what today is considered enough, or an appropriate response to an issue, may not be so tomorrow.  

Equally, it is important that when corporate strategy is discussed, the board must ensure that mid- to long-term societal trends are analyzed and included, such as how changed climate patterns will impact the company’s supply chains and markets, or in which scenarios it is most likely that new legislation will kick in, presenting risks or opportunities.  

A basic understanding of the stakeholder dynamics will also be beneficial. What does the NGO landscape look like on strategically important topics, and how are these influencing consumers and legislators?  

So, where does sustainability sit in a board in terms of responsibility? Boards are sometimes described as having four main areas of responsibility:  

  • Stewardship: the duty to act in the best interest of the company with a long-term view on value creation for shareholders, stakeholders and society. 
  • Strategy: the ability to define the relevant purpose for the company and to set a course leading to sustainable competitive advantage and value creation. 
  • Succession: the obligation to evaluate and plan for succession of the CEO, executive management team, and the board. 
  • Supervision: the duty to set objectives and monitor financial and non-financial performance, and to evaluate risk scenarios and establish risk resilience. 

In our view, the S of sustainability must be baked into each of these so that it informs the process and is viewed as central to success rather than an after-thought. It should not become a fifth, standalone S. 

The board as a challenger and protector 

We believe and hope that the model that we have presented in our book can help leadership to view sustainability topics from a responsibility, business opportunity, brand value, and risk perspective. This can be done through tackling questions such as: 

  • What drivers and assumptions lie behind the conclusion reached by analyses presented to the board?
  • Do we live up to our values, commitments and our stakeholders’ expectations if we act on the basis of conclusions in this analysis? And if not, do we understand why and how?
  • Have the risks that will come with the sustainability crises in five to 10 years been considered, and what does the company’s access to resources look like in that landscape? 
  • How can our company benefit from being on the cutting edge of one or more sustainability topics?

Rely on your own analysis  

A final call in our book is a reiteration of the need for solid, systematic analysis when looking at sustainability issues, so that the company has its own documented platform to rely on when it encounters stakeholders and their expectations. 

Stakeholders’ and societal expectations are steadily increasing, and without the company’s internal analysis and clarification, it’s easy to end up in a situation where you are not in control of defining which elements of the sustainability agenda are most relevant to the company. 

Sustainability therefore needs to be taken out of its silo and fully integrated into the company’s strategy and underlying processes, in order to ensure short-term value creation is maximized, trade-offs are identified and addressed, and that the company’s strategy can become sustainable in the long term. This is how the circle gets squared. 

 

This is an edited extract from the book Squaring the Sustainability Circle by Annette Stube, Lene Bjørn Serpa, John Kornerup Bang and Nigel Salter (Magna, 2022). 

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