One of them is employee value proposition. A sustainable vision and mission can galvanize your workforce, boosting engagement at work by 1.4x and satisfaction at work by 1.7x. This directly boosts productivity, reduces costly employee churn and helps in attracting talents, in particular millennials and Generation Z.
Sustainable companies also benefit from a higher brand value. Beyond employees and customers, strong brands are also positively perceived by investors, creating intangible capital often translated into higher share prices.
Additionally, transparent, sustainable practices across all operations can shield companies from scandals. Companies with “social capital” gained through a track record of honest sustainability leadership are much more likely to be forgiven by customers. As recognized by leaders in the investor community (for example, think of the 2021 letter to CEOs from Larry Fink, CEO and Chairman of BlackRock), the line between sustainability risk and financial risk is gradually disappearing as companies become exposed to the scrutiny of civil society: if negative externalities are not directly paid through regulation, they will be paid in the form of increased risk of sustainability scandals.
Finally, using sustainability as a lens for innovation helps a company to remain relevant in the long term, by properly accounting for emerging risks and opportunities that will become financially material one day. Umicore, global leader in the circular economy space, transformed from traditional mining to urban mining: instead of extracting resources from the ground, the company today sources materials from used IT equipment. The interesting part of this transformation is its timing: launched in the early 2000s, 10 years before the circular economy megatrend began to materialize.
The challenge of indirect impacts is that they are, by nature, difficult to quantify and will thus tend to be overlooked or discounted. And this partly explains why companies struggle to identify and sell positive business cases for sustainability to their management and boards.
One thing is clear: the world is moving at a much quicker pace, and stakeholder expectations on sustainability are no exception. More than ever, firms must continuously adapt. The rules of the game are constantly evolving, with full transparency becoming the norm, often enforced by regulation (The European Union’s strengthening of the rules of Directive 2014/95/EU on non-financial reporting and the roll out of its EU Taxonomy Regulation 2020/852/EU are cases in point). Competitive peer pressure also plays a significant role, with companies being jostled towards sustainability.
The biggest shift, however, is in Environmental, Social and Governance (ESG) reporting. Five leading standard-setters together with the World Economic Forum (WEF) are working towards universal metrics and methodologies to report all material societal impacts under the umbrella concept of ESG (the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board).
Standardized metrics will mean companies will no longer be able to cherry-pick the impacts and externalities they wish to share. Invariably this shift will move sustainability from being a soft concept to one with clearly defined edges and very little wriggle room.
Already, financial analysts are equipped with tools that compare sustainability performance across industries, or over a timeframe, and immediately reward or sanction sustainability performance. Moreover, technologies offer sophisticated algorithms that track complex ESG data to report a company’s true performance. With such scrutiny on the near horizon, a business’s material risks could change considerably in a very short space of time.
But will this be enough? The ability of the economic system to self-regulate through ESG is questioned by heavyweights in the financial system. Tariq Fancy, former Chief Investment Officer for sustainability at BlackRock, has poked holes in the very concept of ESG and highlighted the critical role of regulation to reach societal objectives as poised by the Sustainable Development Goals (SDGs) or the Paris agreement.
And the 2020 progress report on the UN SDGs (recognized as the universal framework for sustainability) goes in the same direction, as it warned that the world is off track to achieve most of these goals.
Combine this with the election of US President Joe Biden and his prominent sustainability agenda, and we believe that today’s rules of the game are far from set in stone, and that regulation is poised to play an increasingly prominent role.
As a result, companies need to remain agile, ready to adjust continuously in the face of a complex, high-paced environment. And this has concrete, deep implications for business operations, as companies now must prevent rigidification of capabilities, keep internal movement from the outside-in, legitimize exploration, marshal energies, all while ensuring a long-term vision and consistency.
A clear business case accounting for direct and indirect impacts is a must-have for companies if they want to avoid becoming obsolete. But this is not enough: the sustainability megatrend, from its complexity, unpredictability, speed and far-reaching business implications, could be the ultimate test for corporate agility. Survivors, chin up, should take advantage of the scars left from the sustainability megatrend for future disruptions.