Sustainability Will Continue to Shape Business Thinking and Strategy

19th Nov , 2021

One overarching emphasis for organisations is now ESG (Environment, Social and Governance) focus on sustainability.

ESG comes with a recognition that businesses need to generally be more sustainable with regards to the wider environment and social context, as well as implement strong corporate governance to make it happen. This emphasis translates into ESG and sustainability being core to strategy and the development of a supporting corporate culture, acting with some urgency and focus to make it happen.

An ESG and sustainability approach typically takes a long-term view of the business, which may prove difficult for boards and senior leaders who typically face urgent pressures such as supply or pandemic crises. Our business mentors understand that when short-term decisions are needed to secure survival and required financial performance, it’s easy for sustainability to take a back seat.

As a result of such short-term pressure in the difficult business environments that board members and senior management find themselves, they may feel that they are spending too much time on the sustainability components of ESG, at least until survival is established! To counter that shorter time frame thinking focus, they may need to look at a refocus of the strategy, purpose and mission as well as getting greater diversity in their ranks to counter or to at least challenge the thinking approach.

Diversity

The thinking of boards and senior management towards ESG and sustainability does depend on their general outlook, experience and training. If these key people are too similar in these respects, then it would be a good idea to consider becoming more diverse. This can be done by introducing at board and senior management levels great people with new outlooks, experience and backgrounds. Just keep in mind that more diversity still requires the individuals to be the best at their positions.

Clarify the Organisation’s Purpose & Mission

To get ESG and sustainability into an organisation requires the organisation’s purpose to allow this. The organisation must refine, if required, its purpose to motivate and enable the board and senior management to consider the wider aspects of ESG and the time frames of sustainability. Otherwise, they may be diverted from a focus on ESG and sustainability.

Long term and sustainable strategy needs a clear purpose to underpin it. Therefore, a clear purpose and mission is needed to galvanise the whole organisation into appropriate actions. These should promote positive improvements in a sustainability-orientated culture to deliver on ESG improvements.

Other stakeholders will also value a longer-term sustainable corporate view:

• Shareholders need a long-term set of goals to encourage them to remain and invest in the future. Unsustainability equals low returns long-term and reduced current values.
• Customers want organisations to continue to supply and grow with them for the continued supply of goods and services
• Suppliers want to supply sustainably into the future, reducing their risk and making longer term investment easier to make and fund.
• Employees want to feel they have a long-term future, with growth and opportunities in an organisation with values they can relate to and support.
• Local governments would like to have strong sustainable businesses based in their neighbourhoods to enhance the communities they serve.
• Communities would like to have long term sustainable businesses to employ their next generations and support their local and global environments.
• The general public and governments highly appreciate good corporate citizens to sustain the economy and provide stability in society.
• Regulators want to work with ESG focused organisations who will help improve compliance and better deliver on the political imperatives on environment, social and governance issues as well as taxation.

A major framework enabling boards and senior management to deliver on purpose was developed by Rupert Younger, the director of the Oxford University Centre for Corporate Reputation and the chair of the Enacting Purpose Initiative. His approach is SCORE, which outlines the five actions—simplify, connect, own, reward and exemplify—to help boards and senior management to articulate and foster a durable value proposition and its drivers.

Simplify

Enacting purpose needs to be simple and clear and understood by the entire organisation’s workforce, its wider supply chain, and other stakeholders. This must be communicated well and starts with a statement of purpose from the board.

The statement of purpose should:

• Outline a vision for long-term value creation in line with its purpose
• Define how the company aims to create value by fulfilling unmet needs in society
• Acknowledge negative impacts that must be mitigated to retain public support and its license to operate
• Present a distinctive message, not just the same as others
• Be relevant to increasing social and environmental pressures
• Comply with environmental goals

Connect

After communicating the purpose, the purpose must connect to the strategy and funding allocations. Short-term decisions might mean profits sacrificed for a longer-term objective e.g., abandoning a profitable product that is socially harmful or making IP available to help during a pandemic.

This needs a framework for prioritising long-term and short-term goals, even in the face of short-term pressures such as investors or shareholders.

Own

Owning the purpose starts at the top, with personal responsibility by each member of the board and senior management who must implement the structures, controls and processes to enact the corporate purpose.

Senior management must ensure that the purpose and mission is entrenched in the organisation through their own great:

• Example
• Communication
• Active management of all their people to support the purpose and mission

The board and senior management must make (and be seen to make) their decisions with the purpose and mission in mind within an effective communication strategy.

In family-controlled businesses, the family members on the board and in senior management can be highly effective in ensuring that the purpose and mission steer the organisation’s decisions and culture.

Reward

Primarily through its remuneration committee, the board establishes the basis for determining remuneration and promotion throughout the organisation. Delivering on the longer-term purpose and not just shorter-term profit targets needs to the objective. A broader set of strategic and financial and nonfinancial metrics should be used to evaluate performance over longer time frames. This has implications for the structuring of compensation for senior executives. For example, after British taxpayers bailed out Royal Bank of Scotland during the financial crisis of 2008, the bank’s board of directors linked 25% of executives’ variable pay to key performance indicators in the areas of “customer and stakeholder” and “people and culture.”

Therefore, targets and objectives that result in rewards to senior executives for performance should be evaluated in terms of both the company’s Environment, Sustainability and Governance activities and the external impact of its products and services. The board and senior management must be aligned with the priority of the ESG issues, as these impact the company’s financial performance and should therefore be embedded into executive compensation. For example, carbon emissions are less material for an insurance company, but for a coal-fired utility company they certainly are a high priority.

Exemplify

The purpose and how to achieve it must be set in both quantitative and qualitative terms.

• Quantitatively – Businesses can integrate reporting on financial performance with reporting on sustainability performance, showing how results in the two areas are interrelated.
• Qualitatively – It is important to have a consistent narrative, including how the company and its people are fulfilling its purpose.

Delivering on Sustainability

Since sustainability is now a major global issue, businesses now incorporate policies addressing their capacity to meet the economic, environmental and social aspects within all facets of their business. This must reflect the organisation’s purpose, mission and values, strategy, and culture.  Further, proactiveness in sustainability is now being demanded by major stakeholders and the general community of businesses and other organisations. For example, the carbon zero targeting at the world environmental summits is a major goal and requires embedding decarbonising into corporate strategies.

Our business mentors and coaches at International Business Mentors consider environmental sustainability as part of strategy development as appropriate for the directors, owners or senior management that they confidentially support. Many initiatives are being addressed by businesses in the sustainability aspects of their strategy, many of which bring long-term economic benefits to their organisations.

Examples of sustainability projects in business currently include:

• Carbon Capture
• Energy and climate reduction with greenhouse gas emissions mitigation and adaptation
• Increasing wateravailability and efficiency
• Minimising food waste
• Modern slavery reporting and minimisation
• Plastic reductions and improved recycling
• Reducing energy use and greener alternative sources
• Social and ethical sourcing with traceability and transparency of products and materials
• Sustainable agriculture and reduction in fertiliser use
• Sustainable packaging design
• Waste reduction and resource efficiency

The Push is On for Sustainability

Government, business and other agencies through innovation, legislation, regulation and policy are already driving towards many of the environmental, social and economic outcomes enshrined in Sustainability. There’s no doubt that this and general social pressures will continue to increase the focus and priority that organisations will bring to bear on sustainability.

Call International Business Mentors to discuss how business mentoring and coaching can assist you in addressing your strategic requirements and facilitate your thinking and development around sustainability.

David Cartney, November 2021