Companies are increasingly rallying behind sustainability, but as it becomes part of the company’s core business, many still find it a challenge to capture its full financial, social and environmental benefits.
This is one of the main findings of a recent survey by United States-based management consulting firm McKinsey involving 3,000 business executives from companies worldwide, on actions they take to address environmental, social and governance issues, the practices they employ to manage sustainability and the value they give to such initiatives.
McKinsey’s findings showed that trends are changing. While firms still value reputation as important, many of them do not necessarily pursue reputation-building activities that give them the maximum financial returns.
The firm compared the results to surveys conducted since 2010, and in many years, reputation management was a top reason why companies address sustainability. This year, however, aligning sustainability with the company’s business goals, missions and values was cited the most important reason to address sustainability.
The survey, titled ’Sustainability’s strategic worth‘, also identified six key trends in how companies address sustainability issues and maximise value as they carry out their sustainability plans.
1. Aligning sustainability with business goals
Companies increasingly view sustainability as an integral part of their business operations. From 30 per cent of the companies surveyed in 2012, nearly half (43 per cent) are now looking to align sustainability to their overall business goals, missions and values. Moreover, the survey found those companies which incorporated sustainability in their organisational processes such as performance management fared better than their industry peers.
2. CEOs viewing sustainability as a top priority
As sustainability becomes increasingly central to the business agenda, it is also climbing higher on the priority lists of CEOs. Almost half of the 281 CEOs polled by McKinsey said sustainability was a “top three” priority on their agenda.
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Accountability was also an increasing concern as more executives - up to 34 per cent from 23 per cent in 2011 - noted that too few people at their companies were accountable for sustainability, while those companies that were not pursuing sustainability activities said their leaders did not prioritise taking action
Prioritising sustainability meant that companies were pushed to integrate it in their core business. Respondents whose companies had sustainability programmes pointed to weak execution, citing the lack of performance incentives to back implementation. Short-term earnings also continue to put pressure on the longer-term return on investments in sustainability.
Accountability was also an increasing concern as more executives (up to 34 per cent from 23 per cent in 2011) noted that too few people at their companies were accountable for sustainability, while those companies that were not pursuing sustainability activities said their leaders did not prioritise taking action.
3. Approaches to reputation management differ by industry
McKinsey found that there was no clearly defined or common view of how sustainable practices factored into a company’s reputation management efforts, although it was considered to have the highest value-creation potential for many industries.
For example, manufacturing and technology industries put high value on implementing policies on ethical issues and business practices, while financial and extractive industries gave less value to it. But extractive industries were found to give high value to economic investments in communities where their companies operate as compared to the manufacturing sector. But on average, many companies said they frequently communicated their activities to consumers in order to maintain stakeholder relationships.
4. The most important reputation-management activities are not necessarily the most pursued
The survey showed that there was no one-size-fits-all approach to reputation management, and that industries varied widely in terms of what they did and how much action was being taken when it came to reputation. But respondents mostly cited customer communications as an activity that maximised financial value and was also being pursued the most.
Companies were also putting more efforts on pursuing activities that were not necessarily the most important to maximising financial value. For example, changing core business practices to improve their reputation was pursued by only 41 per cent of the respondents, only second most important after communicating sustainability activities to customers.
On the other hand, sponsoring events and joining sustainability-focused organisations was ranked 8 out of 11 options, but pursued by 52 per cent of respondents. This reflected a disparity between current reputation management activities and those that were the most critical to value creation, said McKinsey.
5. Companies benefit from setting clear targets
Out of 12 characteristics, McKinsey identified five common characteristics of companies that have successful sustainability programmes compared to their industry peers:
- Sustainability leaders were almost five times more likey to set aggressive external targets or goals than all other respondents
- They were about four times more likely to have a unified sustainability strategy with clearly articulated strategic priorities
- They were three times more likely than other responsdents to set aggressive internal goals for their sustainability initiatives
- They were three times more likely than other respondents to achieve higher employee engagement
- The financial benefits of sustainability were clearly understood across the company
The survey also reported that these companies took more action to manage the life cycles of their products, which made it easier for them to realise value from sustainability.
6. Organisations are good at setting directions, but they struggle with implementation
The survey looked at how organisational practices reflected successful sustainability programmes. Fifty-eight per cent said sustainability was fully or mostly integrated into their companies’ culture, but only 38 per cent included it in performance management.
Companies performed well when it came to fostering an open and honest dialogue around sustainability, as well as supporting innovation and creativity through their programmes. However, they struggled with executing and delivering results due to weak implementation strategies - such as promoting employee motivation, capability building, giving financial incentives, incorporating sustainability in employee’s performance assessments and offering career growth opportunities to top sustainability performers.
Overall, there’s no single formula for sustainability success, but McKinsey suggested that companies can gain more value from their sustainability efforts by looking into these approaches:
- Extend the product life cycle. Companies should begin investing in ensuring the “circularity” of their products, either through repurposing the end of life of products, upcycling or ensuring the biodegradation of the products. On raw materials alone, companies could potentially save more than US$1 trillion per year.
- Look to technology. The survey found that only 36 per cent of respondents incorporate sustainability in data and analytics work. The firm suggests companies should spend more time on how to integrate their technological capabilities into their overall sustainability agenda.
- Focus your strategy. Whether it’s economic development or changing business practices, companies should develop a strategy that made up of not more than five clear, well-defined priorities.
