There is little doubt that we are living in the most crucial period in human history, and what we do or don’t do now will determine the conditions in which we will live. We must develop innovative techniques for sustainable actions because we are on the verge of disaster. Unfortunately, based on the polarized global political scenario in which we live, governments will not act quickly enough to prevent environmental disasters. Can companies, on the other hand, do it, in any case? Well, I honestly hope so.
Today, massive changes occur within a limited group of the world’s largest influential organizations because of the world’s utmost environmental issues. As a result, many well-known global corporations are changing their business models.
These new approaches incorporating sustainability have much promise for the future. For example, scientists are designing new products based on a better understanding of how nature works using a process known as biomimicry. Corporations are also gauging the entire environmental footprint of products from resource extraction through production, supply chain, distribution, usage, disposal, and recovery using a tool known as life cycle analysis.
A rising number of businesses worldwide have willingly adopted and implemented various sustainability policies in recent years. The rapid adoption of these approaches sparked a discussion over the definition of sustainability and its long-term implications for businesses. Is sustainable practice adoption a type of strategic differentiation that can lead to improved financial results? Is it a strategic need that will assure the company’s survival but not necessarily its success?
On one side, some suggest that sustainability can be a strategy for gaining a competitive advantage and achieving above-average performance. Organizations that incorporate advanced circular-economy-based practices, for instance, do so to differentiate themselves and thus take over an untapped market niche by developing a unique and difficult-to-copy strategy [1]. But, conversely, some argue that sustainability is spreading like a ‘must-have exercise‘; thus, many consider it an essential condition for market relevance, although it would not be a key driver for value-added competitiveness.
In this train of thought, some argue that a few organizations undertake environmental measures such as water and waste control to take advantage of value efficiencies and enhance their income. Although such structures are commonly part of the ecological, social, and governance (ESG) ratings as sustainability, questionably few, if any, organizations could anticipate setting up an aggressive gain solely by their adoption. Typically, competition can obtain these measures from third parties and implement them without restrictions. A study from HBR correlated this sustainability approach to philanthropy [2], once it is not at the center of the strategy but as a peripheral action and thus, would not contribute significantly to improving financial performance. Nevertheless, society recognizes corporations as legitimate based on incorporating these typical sustainability efforts.
Both perspectives showcase legitimate aspects. But…
Is sustainability thus a differentiating strategy or a practice bound to unfold through market replication with limited potential for competitive advantage?
Analyzing findings from MSCI ESG Ratings covering almost 4k companies, a conversion of sustainability initiatives across different industrial sectors has been observed over the past decade [3]. This data set reveals that most companies implemented similar sustainability practices regardless of the industry. There is an increasing trend to implement sustainable innovation practices as standard or must-have protocols and less as strategic differentiators. In industries undergoing higher social and environmental issues, there is a higher degree of sustainability practices, suggesting an embedded component of business survival.
The analysis of this data and the evolution of current sustainability trends show a correlation between different sustainability practices and performance indicators. For example, businesses often associate market valuation and good return on investment with adopting sustainability as part of the business strategy. On the other hand, when undertaking typical sustainable practices to tick the box of the new ‘green rules’ of today’s society, proper return on capital is not guaranteed despite the probable positive reputational impact.
In summary, a buoyant market valuation is almost always perceived, but a real impact on business results requires the strategic employment of sustainability as a business driver.
A sustainability strategy is not only a necessity, but it can certainly be a market differentiator. Therefore, there is a need to develop a broader understanding of corporate sustainability beyond the narrow focus on typical cross-sectional practices to leverage this duality and strengthen partnerships.
Overcoming common industrial and systemic boundaries is the step toward creating a more dynamic, complex, and multi-level view of the generation and implementation of the green transformation.
Thus, proper employment of the best industrial practices can meet the needs for a sustainable plan, and combining them with new strategic changes enables the creation of new business models and foster new value-added approaches.
Large-scale collaborative efforts between multinational companies, environmental nonprofits, and governments lead to new systemic approaches to our most complex global environmental problems. Some actions that could start as a survival strategy in a competitive marketplace can also become part of a new business strategy to develop a competitive advantage and create new opportunities. Yet, the paradox remains, and companies that best implement the learn-as-you-do approach will arise as front-runners in the new systemic sustainability movement.
References
[1] The Decade to Deliver: A Call to Business Action, The United Nations Global Compact — “Accenture Strategy CEO Study on Sustainability” (2019).
[2] Michael E. Porter and Mark R. Kramer “Creating Shared Value: How to reinvent capitalism—and unleash a wave of innovation and growth,” Harvard Business Review (2011).
[3] ESG Ratings: Measuring a company’s resilience to long-term, financially relevant ESG risks, webpage: www.msci.com/our-solutions/esg-investing/esg-ratings, accessed in August 2022.
