Why sustainability has become a corporate imperative (2024)

Transforming the core

The first pillar: sustainable products and value chains

Think of the entire value chain, building sustainability into each step and into the structure of the chain itself.²⁰

You may consider these three product strategies. The easiest and most common is to rebrand an existing product in your portfolio that already meets internal and external standards of sustainability criteria. Be sure to do due diligence to avoid the negative accusations of greenwashing.

The second strategy is to address a partially unsustainable supply chain to make an existing product truly sustainable. The risk is that rushing this process to capture market share or avoid a heavy investment can backfire.

The most disruptive option is to create entirely new sustainable products and solutions. Here, startups may be more successful than incumbents — with new business models, sales strategies and powerful branding. One example of this strategy is Tesla’s disruption of the automotive market.

The second pillar: sustainability culture

The culture of an organization may be defined as the collective mindsets, behaviors and decisions that ultimately shape the direction of a firm. So, what does a sustainable culture look like? It should be more than encouraging employees to print less, and cycle or carpool more. It should be about nurturing a long-term mindset and connecting to a collective purpose beyond profit, also driving long-term consumer, human and societal value. A sustainability-oriented culture usually comes in two stages of maturity:

• Leaders as role models who can clearly articulate the organization’s purpose in line with its sustainability goals. This purpose then fuels individual and organizational transformations — igniting long-lasting, positive change that results in sustained improvement and innovation.

  The Kantar Purpose 2020 study, a survey of more than 20,000 global consumers and 100 global leading brand interviews, highlighted that brands with a highly perceived positive impact, or more purposeful companies, experienced growth of 175% over 12 years compared with 70% to 86% for brands perceived as having low or medium purpose.²¹

• Empowering the organization to make sure everyone buys into a new vision. With a thoughtful approach to balancing long-term metrics and short-term targets, provide space for people to own the vision. When individuals and corporate purposes are aligned, employees are usually willing to go above and beyond what is required to express their values.^{22, 23}

The third pillar: integration into the corporate operating model

How well managers understand and manage the required changes to run their businesses sustainably is an important factor in delivering on sustainability commitments.

Take, for example, a hypothetical business that announces a sweeping strategy to sustainably source all of its products, eliminate poor labor practices in its supply chain and make long-term investments in the communities in which it operates. As the next step, the steering infrastructure of the operating model must be altered to effectively deliver on this vision. Considerations include:

• Defining responsibilities or roles. Who will be responsible for driving toward and maintaining the new commitment to source sustainable raw materials?
• Defining new skills, tools and processes to evaluate sustainability according to a new, uniform set of criteria.
• Creating new data assets, frameworks and metrics to evaluate the performance of managers and business units. Corporate sustainability results from strategic alignment of the whole company. Hence, sustainability performance can be measured by the objectives of business units to become integrated with the company’s core.
• Measure ESG KPIs as digitally and automatically as possible to reduce the friction a massive manual effort can have on an organization’s efficiency and accuracy and, thus, the adoption of new ways of working.

Driving external value

The fourth pillar: positive reputation

Sustainable business practices can drive brand value growth. Companies should not attempt this until they are able to demonstrate the intention and results around true sustainability targets.

It isn’t only about marketing sustainability targets — since consumers and investors look for real impact. There is no way around building sustainability into the organization’s core strategy or skipping past the first three pillars.

Organizations that commit to a purpose embracing sustainability can expect exceptional growth fueled by positive reputation.

• A University of Cologne study showed sustainably engaged companies have a 50% higher brand value than average companies.²⁴
• Nielsen reported in 2014 that half of young consumers were willing to pay more for sustainable products. In 2018, that number had risen to about 85%.²⁵

Mere greenwashing may be counterproductive in extracting brand value. Greenwashing has been defined by Greenpeace as misleading consumers with regards to a company’s environmental measures or the environmental performance of individual products.²⁶In the future global economy, only companies that have transformed to be truly sustainable may be rewarded.

The fifth pillar: capital market access

Investors are placing value on sustainability and withdrawing capital where unsustainable business practices are identified.²⁷

Companies should consider establishing a formal strategy around investor engagement to maximize the amount of capital access gained and make certain that sustainable transformation efforts do not go unnoticed. It is crucial to note, however, that capital may only be secured if the first three pillars of the sustainability strategy are already truly addressed.

To effectively engage with investors, consider these strategies:

• Establish formal channels for communicating the long-term purpose to institutional investors.
• Incorporate more long-term rhetoric into earnings calls. While companies regularly report down quarters, showing positive outlooks can result in boosts in the share price.
• Collaborate with investors to learn from their views about sustainability.

Leveraging the Long-Term Value Framework to define your new sustainability strategy

Many corporations struggle to define sustainability strategies that fundamentally transform the core of the firm toward long-term value for the company’s key stakeholders. The EY Long-Term Value Framework provides a very powerful method for solving the complexity of multi-stakeholder strategy development by using a structured approach.

There are five clearly defined steps.

Figure 1: The EY Long-Term Value Framework