Seven forces driving a sustainable business revolution

Like the title character in Samuel Beckett’s play Waiting for Godot, true sustainability in business seems to be something much discussed but never quite arrives.

Why is that? Surely talk of sustainability is now everywhere.

True.  However, the transition from peripheral issue to the heart of the organization’s value creation model and strategy – a state in which firms strive inherently to produce goods and services that maximize positive societal value while operating within the natural limits of the planet – has remained elusive.

In concrete terms, sustainability is not yet a core preoccupation of most CEOs and Boards, and it still is framed as a trade off or a nice to have.

Without this fundamentally changing, society simply won’t make meaningful progress against our biggest and most urgent challenges: climate change of course, but also social equality and the SDGs.

To be fair to those of us who have spent the last 20 (or more) years working on this transition, this is a pretty big system change problem. System change is fiendishly hard and difficult, until, sometimes, it’s not. One of the properties of complex systems is they can shift from one state to another very quickly.

Predicting such a state change seems like a fairly foolhardy activity. However, there are actually a number of fairly monumental forces acting on business right now to make the shift towards real sustainability.

I am sure readers will be familiar with at least some of these, but we need to step right out to see this complete picture. Individually, each of these forces described below represents a major lever for change.  Collectively, their impact will eventually be irresistible.

1. Major investors are now recognizing sustainability as fundamental to the value of the businesses that they own

Major institutional investors and asset managers – the entities that own and control a large percentage of the world’s biggest businesses – have realized that sustainability is fundamental to the long term value of the assets they own.

This importance is driven by both the exposure to the systemic risks of a changing climate and failing ecosystems, but also the once-in-a-century opportunities as the world deliberately shifts towards a more sustainable future.

Larry Fink, CEO of the world’s largest asset manager Blackrock, in his now iconic 2020 Letter to CEOs, highlighted that climate change is now a “…defining factor in companies’ long-term prospects”. Perhaps the most thrilling statement in the letter is the prediction that this will lead to a significant reallocation capital “…sooner than most anticipate”.

Fink’s 2021 Letter, published this week, doubles down on this position. Blackrock will now ask companies to disclose a plan for how their business model will be compatible with “a net zero economy” and how this plan will be incorporated into their long-term strategy and reviewed by their board of directors.

Here in Canada, home to some of the world’s largest and most prudently-run pension funds, the eight largest funds recently made a joint announcement (in more measured, Canadian terms) that sustainability factors are now “…an integral part of our duty to contributors and beneficiaries…this will unlock opportunities and mitigate risks, supporting our mandates to deliver long-term risk adjusted returns”.

As these perspectives increasingly shift the actual investment choices and shareholder voting of these major institutions, the impact on how companies are managed will be profound.

2. Standardization of measurement and reporting sustainability risks and opportunities will be game-changing

Sustainability-related reporting has been around for a long time (my first job as a graduate was collecting corporate environmental reporting data at a mine in Indonesia in 1998). However, a diverse array of voluntary reporting mechanisms has made it difficult to truly compare and make decisions in the way investors currently evaluate traditional financial statements.

Driven by demand from institutional investors, this lack of comparability is likely to change quickly. In late 2020, the five leading sustainability reporting organizations — including the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) — announced they plan to work together to develop a comprehensive global corporate reporting system. In addition, the International Financial Reporting Standards Foundation, whose financial reporting standards are followed in over 140 jurisdictions, has just concluded a global consultation on establishing a new Sustainability Standards Board to facilitate global sustainability standards.

The potential impact of truly comparable data for markets cannot be underestimated, especially when the largest market players are now looking to make strategic choices based on this information. In essence, firms will be competing on their sustainability performance.

3. More ambitious policy making is coming

Business action on sustainability has, to a large extent, moved hand-in-hand with the policy and regulatory environment. And in general terms, policy-making on sustainability issues has evolved gradually with limited ambition, in part because politicians and policy-makers felt constrained by the actual or perceived resistance of business and citizens.

These dynamics are rapidly dissolving.

There is always going to be anti-change lobbying. But many of the biggest voices in business and finance now have a very different ask of policy-makers: ambitious, clearly-articulated policy that provides a stable and predictable framework for investment in a sustainable, low-carbon future (as per force no 1 above).

At the same time, there has been major shifts in the perceptions and engagement of citizens. The Pew Research Centre has tracked a major increase in the percentage of national populations seeing climate change as a major threat, with this group now being in the significant majority in most major economies (see Table 1). If you see something as a major threat to you country, chances are it will affect your voting choices.

Table 1 – Percentage of population seeing climate change as a ‘major threat to my country’

This is already translating into more ambitious policy making. Two-thirds of global greenhouse gas emissions are now covered by some form of governmental net-zero commitment (including Canada). The fact that the Biden/Harris presidential campaign was able to win the US presidential election with an ambitious climate plan as a key policy element is particularly emblematic of this change.

4. Recent social movements for equality and inclusion look like they may finally make businesses more representative of the societies in which they operate

 A fundamental reason that business often fails to deliver for society is that, as organizations, they still don’t reflect the communities in which they operate and aren’t welcoming places for all but a privileged minority.

Recent social movements (#MeToo and Black Lives Matter) have shown that business – like  many other institutions – still has a long way to go to address systemic discrimination, harassment and exclusion.  The pressure for change is now overwhelming and in the social media age, the old tokenistic responses get called out very quickly.

Thankfully, it looks like many businesses are now taking meaningful action to change. If you are cynical about this (and you certainly have the right to be) this is not just an ethical shift – the business case is actually compelling.  Diverse and inclusive organizations are more creative, more productive and more attractive places to work. They also make better decisions – my favourite evidence here is this clever piece of research in the Venture Capital industry.

5. Leading companies are setting sustainability goals that will invariably shift how they create value

While the four forces above predominantly describe external forces acting on firms,  let’s now look at how leading firms are responding. Note that these leaders set the future expectations for the rest of business over time.

Not surprisingly, given the trajectory of capital markets and policy, firms have significantly ramped up their ambition levels. As a bellwether, look at the new membership criteria of the World Business Council for Sustainable Development (WBCSD), just approved by its Executive Committee (box below).

The WBCSD is a CEO-led leadership group of 200 large multinationals including 3M, BP, Du Pont, Google, Philips, Toyota and Walmart. Historically, the WBCSD has been a club for gradual change (and full disclosure: I worked there for a number of years). However, under current President Peter Bakker, the WBSCD has focused on driving ambition and ‘raising the bar’. The WBCSD membership setting these criteria as their minimum standards – for companies representing a combined revenue of more than USD $8.5 trillion and 19 million employees – is absolutely noteworthy.

You can argue that these are still long term aspirations and not actions. However, these commitments – especially when ‘science informed’ – are passing the threshold where they will necessitate shifts in most firm’s strategy and value creation model. At net zero emissions, most organizations will need to operate quite differently. Also note that the easy way out for net zero – carbon offsetting – will increasingly become less and less acceptable (think: farting at a dinner party).

6. Business are extending their boundaries to become agents of systemic change

These types of commitments are made even more exciting because the playing field on which they will be delivered is expanding too.

Let me explain. Historically, most businesses were keen to draw sharp boundaries around their societal impact. Companies, hesitant of risk and liability, only generally took responsibility for those things they could directly control. Witness how long it took many sectors to take responsibility for what happened in their supply chains.

However, there is actually no such thing as a ‘stand-alone’ sustainable business. Sustainability comes from the relationships and impact on the wider systems in which businesses operate.

It is not surprising then that leading companies are starting to consider their opportunities and impacts within these much wider production and consumption systems. While this requires greater ambition and sophistication, it also substantially increases the scope for real positive impact through system-wide change.

A notable example: Ikea’s ambitious commitment to become fully circular by 2030. This will change not just Ikea’s business but also shift a whole ecosystem of suppliers as well as their relationships with their millions of customers.

Another example are the actions of major players in the agri-food sector (such as Unilever and General Mills) to shift agricultural production systems towards ‘regenerative agriculture’ – a much more environmentally-friendly system of production that has positive impacts on soils, ecosystems and the climate (and which also makes long-term financial sense for farmers too).

Learning how to act in systems is a relatively new skillset for business. However, as firms build their capabilities to be systems players (and in some case leaders) the ability for business to be a force for positive impact will expand rapidly.  

A key point to note here: a systems approach works both ways; Embracing being part of a system makes you more likely to be receptive and open to the perspectives of others, which itself becomes a positive force for change in how companies operate.

7. We are about to see an explosion of sustainable innovation and entrepreneurship

A massive wave of sustainable innovation and entrepreneurship is about to break that will accelerate the pace of change of sustainability in business– creating new blockbuster businesses and disrupting old ones. While this may seem relatively predictable, there are several reasons to be really excited about the upside of the scale and impact of potential innovation.

Firstly, a whole range of foundational technologies are advancing at an incredible pace: renewable energy production and storage, information technology, cloud computing, artificial intelligence, remote sensing, blockchain and other fintech. We haven’t scratched the surface of how these technologies can be integrated and deployed for sustainability, nor the opportunities to link them directly to the market power of motivated consumers.

Secondly,  the venture capital industry – a key component in the modern innovation ecosystem – has learned from past disappointments to take the more patient approach needed to bring clean tech innovation to market (see this recent PwC report).

Finally, the major forces we have already described are creating a general environment of flux and disruption that is ripe for new products, services and business models. This is opening a period in which the potential opportunities and rewards for game-changing sustainability innovation and entrepreneurship become even greater. There is everything to play for.

What does this all mean?

It hard not to be excited about the possibilities of these forces acting simultaneously on business. There are compelling reasons to think that the rapid reallocation of capital described by Larry Fink could come sooner rather than later. As this happens, CEOs across the board will not be able to avoid fundamental re-evaluation of how they run their organizations. The sustainability leaders will not just be lauded but systematically rewarded.

This is when we know that Godot may have finally arrived.