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    Leading in Turbulent Times

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    Integrating sustainability and strategy: 3 narratives for success 

    15 November 2023 • by Frédéric Dalsace, Goutam Challagalla in Leading in Turbulent Times

    The future lies in creating positive value equations for customers, showcasing how sustainability enhances traditional product benefits....

    Has Unilever “lost the plot”? 

    Terry Smith believes so. The influential fund manager contends that Unilever’s management has veered off course. In a scathing letter to investors last year, Smith criticized the consumer goods giant for prioritizing the showcase of its sustainability credentials over fundamental business operations. “A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot,” the veteran stock-picker wrote.   

    This critique goes beyond Unilever, raising critical questions about the intricate dance that companies must perform between profitability and social responsibility.  

    Traditionally, business success was measured solely by profitability and legal compliance. However, a paradigm shift has occurred with the emergence of sustainability as a pivotal player in corporate strategy. Companies, including Unilever, are now faced with the challenge of integrating sustainability into their overarching business strategies. This shift has given rise to three distinct narratives that reflect the coexistence of sustainability and strategy. 

    Narrative one: License to operate 

    In the first narrative, the concept of a “license to operate” asserts that sustainability is not just a choice but a necessity. The primary objective is to establish legitimacy through compliance with regulations. This defensive mindset aims to secure the right to play in a landscape where the hurdles are escalating both in height and proximity. 

    The race involves navigating through regulators, customers, investors, and top talent. The first hurdle, regulators, has become more challenging with the introduction of new rules, such as the mandatory disclosure and integrated regulation exemplified by the EU Green Deal post-2022.

    “Sustainability is not just a choice but a necessity.”

    The second hurdle involves meeting the escalating requirements of customers. CEOs, who are committing to reach net zero by 2030 or later, find themselves in uncharted territory. To fulfill these ambitious pledges, they turn to suppliers, demanding solutions for Scope 3 (full value chain) emissions or selectively working with suppliers who meet their standards. 

    The third hurdle emanates from the investor landscape. Larry Fink, the CEO of BlackRock, has been a vocal advocate for CEOs to prioritize sustainability as part of their fiduciary duty to clients. In 2023, he extended this call to investors, urging them to consider the broader implications of the energy transition on the economy, asset prices, and investment performance. 

    The fourth hurdle is posed by top talent emerging from prestigious universities, armed with tough questions that challenge the status quo and demand a commitment to sustainability from potential employers. These hurdles have led to the second narrative.   

    Narrative two: Selling sustainability 

    This approach views sustainability as a strategic differentiator, presenting both opportunities and risks. Companies leverage sustainability as a business opportunity. Despite some polarization, the trend persists, with a significant increase in new products featuring sustainability messages in fast-moving consumer goods — from 28% in 2017 to 48% in 2021, according to the NYU Stern Sustainable Market Share Index.

    McKinsey and NielsenIQ supports the strategy’s efficacy, linking explicit ESG claims about products to higher product growth. However, challenges in capturing market share persist. 

    Leaders in this field, such as Unilever and Danone, adopt a comprehensive approach. Former Unilever CEO Paul Polman’s principles embedded in the group’s strategy focus on ownership of impacts, long-term benefits for business and society, positive returns for all stakeholders, and partnerships to drive systemic change.   

    e-commerce
    “To successfully implement the strategic thrust, companies must engage with all segments of customers, aiming to maximize their incentives to make sustainable choices.”

    One of Unilever’s brands, for instance — Hellmann’s mayonnaise — exemplifies selling sustainability through recyclable packaging and a purpose-driven approach to food waste. But the question of developing a meaningful purpose tied to sustainability for its hundreds of other brands arises.  

    Narrative three: The strategic thrust 

    Acknowledging these challenges, a third approach emerges – the strategic thrust. Unlike other approaches, the strategic thrust focuses on viewing sustainability as a bonus and integrating it organically into the broader business strategy. 

    The objective is not to alter customer beliefs about sustainability but to concentrate on maximizing customer value through meticulous scrutiny of key products. A case in point is consumer goods company Reckitt’s #skiptherinse campaign, which encourages consumers to conserve water by skipping pre-rinsing dishes and opting for its Finish detergent brand. 

    To successfully implement the strategic thrust, companies must engage with all segments of customers, aiming to maximize their incentives to make sustainable choices. This involves considering three crucial elements: sustainability benefits, traditional benefits, and pricing dynamics. Balancing these factors is essential, as the addition of sustainability benefits can often result in increased product prices. 

    The effectiveness of this approach varies across industries. Companies in sustainability-native industries, such as Ørsted, the Danish offshore wind developer, seamlessly integrate sustainability into their strategies. Similarly, firms in sustainability-aligned industries, like the Australian logistic company Brambles, find it easier due to the synergy between traditional benefits (efficiency) and sustainability objectives. 

    By contrast, businesses in sustainability-orthogonal sectors, like Dutch telecoms group KPN, face unique challenges in aligning sustainability with their business strategies. One of the central challenges is appealing to every customer, as an exclusive focus on green credentials may only resonate with a small segment of the market. 

    The key lies in creating a positive value equation, emphasizing how sustainability enhances traditional benefits. This approach allows companies to drive change more effectively than attempting to force sustainability onto their customers. 

    Key takeaways:

    1.
    The relationship between sustainability and strategy is progressively changing, from ignorance to coexistence and now integration.
    2.
    First move to integration if they want to play the sustainability game seriously.
    3.
    Avoid getting trapped into using slogans that seem inspirational but can lead you down the wrong path.
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    Authors

    Frédéric Dalsace

    Frédéric Dalsace

    Professor of Marketing and Strategy at IMD

    Frédéric Dalsace focuses on B2B issues sustainability, inclusive business models, and alleviating poverty. Prior to IMD, he spent 16 years as a Professor at HEC Paris where he held the Social Business / Enterprise and Poverty Chair presided by Nobel Laureate Professor Muhammad Yunus. Prior to his academic life, Frédéric accumulated more than 10 years of experience in the business world, both with industrial companies (Michelin and CarnaudMetalbox) and as a strategy consultant with McKinsey & Company. At IMD, he is Director of the Integrating Sustainability into Strategy program.

    Goutam Challagalla

    Professor of Marketing and Strategy and dentsu Group Chair in Sustainable Strategy and Marketing at IMD

    Goutam Challagalla is Professor of Strategy and Marketing and dentsu Group Chair in Sustainable Strategy and Marketing at IMD. His teaching, consulting, and research focuses on strategy with a focus on digital transformation, business-to-business commercial management, value-based pricing, sales management, distribution channels, and customer and service excellence. At IMD, he is Director of the Advanced Management Program (AMP), Digital Marketing Strategies (DMS), and Strategy Governance for Boards, and co-Director of the Integrating Sustainability into Strategy.

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