By Geert-Jan (GJ) van der Zanden, Sasin School of Management, as appeared originally in AMCHAM Thailand T-AB Magazine October 2022.
Even the most progressive companies in the world are on a continuous learning curve of how to become more sustainable, and run a profitable business while restoring, maintaining, or growing natural and social capital.
Political, economic, social, environmental, or regulatory trends may vary by region, but all transformations have pioneers and followers, leaders, and laggards. Companies that anticipate and equip themselves to capture opportunities emerging from the world’s sustainability transition are positioned to benefit tremendously. From my experience accompanying companies across multiple sectors in their sustainability journey, a pattern emerges of how corporate sustainability tends to evolve in most companies. Understanding this evolution will help companies recognize where in the evolution they are, where they want to go, and how to get there quicker.
Five phases of evolution can be identified, each with specific characteristics with respect to the scope and motivation of the organization, the way it communicates, and the way it interacts with stakeholders:
In the times before the social and environmental costs caused by business were recognized as a wider societal concern, undermining longer term ability to create corporate and societal value, the predominant focus of most businesses was phrased by Milton Friedman in the 1970s as “the social responsibility of business is to increase its profits”. Companies focused on maximizing shareholder value, often short term as capital markets evolved towards expecting trimestral financial reporting. Relationships with stakeholders like suppliers, employees, or local communities were largely transactional and companies would organize in industry associations to lobby for their interests. Profits permitting, some owners of companies would spend on philanthropic or charitable causes to polish their image and maintain social license to operate. Some companies still behave according to these basic principles.
More stringent health, safety, and environmental regulations reflect an increasing societal awareness of the need to protect workers and wider communities. As fines, sometimes retro-active, can be very significant, companies have become concerned about not breaking any rules and ‘doing no harm’. In this compliance-orientated phase, CSR might move from the Health, Safety, Quality, and Environment (HSQE) office, where it often originated, into the public affairs or communications domain, as companies expand their legal and communications departments. CSR activities and partnerships with non-governmental organizations (NGOs) in this phase are often oriented towards showing the company as a ‘decent’ participant in society and disclosure about environmental or social impact is limited to what is legally required.
Environmental and social factors now constitute risk to business, in the form of supply chain/operational disruptions, or legal or reputational risks that could have serious material impacts. Companies manage this by taking a more structured approach towards assessing the material risks in their operations, not seldom under the supervision of the head of finance. This is the phase in the evolution where we start seeing CSR reports appear, identifying the risks and impacts through materiality analysis and sometimes describing mitigation measures. Stakeholder engagement is mainly used to monitor and manage potential conflicts.
As companies realize that addressing sustainability challenges in fact leads to better resource management, increases resilience, lowers cost of capital, drives innovation, and opens new market opportunities, sustainability starts taking a more strategic role. This is where the Chief Sustainability Officer (one of the fastest growing new roles in recent years) comes on the scene, often entering the boardroom. To fully benefit from this competitive potential, companies in this phase try to articulate a vision around sustainability as a new growth opportunity and engage themselves in programs to integrate sustainability across all relevant functional areas and levels of the company. This is often accompanied by setting and reporting progress on concrete and incremental Sustainable Development Goal (SDG) targets. As typically 70% of life-cycle impact lies in the up- and downstream supply chain (scope 3), companies engage their supply chain partners to explore opportunities to collaboratively find solutions with positive impact and commercial promise.
More enlightened leaders champion sustainability because it is the right thing to do to build a better, more sustainable society. They understand that business cannot thrive in the medium to long run if it is at the expense of natural or social/human capital. These leaders show vision and purpose and feel not only responsible for their organizations, but for the bigger system of which they are part. Rather than lobbying for industry interests, they mobilize stakeholders across the supply chain and across industries into joining forces to address complex societal challenges like plastic waste, water scarcity, or inequality and migration, through the sustainable reinvention and transformation of the system that they are a part of, be it the food system, energy system, health system, and more. Companies that show true sustainability leadership deliberately pursue creation of shared value, exploring regenerative and inclusive models of growth. A key role of the Chief Sustainability Officer is that of a driver of cultural change, building and anchoring a sustainable mindset and behavior across all levels of the company.
The world needs to transform towards more sustainable forms of growth and value creation. This is the biggest challenge, but also the biggest commercial opportunity of our times.
Where on this evolution journey is your company? Where would you like it to be or where does society need it to be? What is stopping it from evolving further? What capabilities should your organization and your leaders strengthen to position yourself for success in the sustainable future?
Sasin School of Management is coordinating global sustainability transition research into this topic with business schools and communities around the world.
We would be very grateful for your response to this Sustainability Transition Survey, which aims to identify differences in motivations, priorities, barriers and enablers with respect to the sustainability transition of companies across geographies, industries and organisation sizes. It would only take a few minutes and insights from the survey will be shared back in December!
About the Author
Geert-Jan (GJ) van der Zanden is Visiting Professor and Senior Advisor, Sustainability Leadership, at Sasin School of Management, and Managing Director at European sustainability strategy consultancy, Xynteo, where he has spent the last decade working closely with C-level and senior leaders of some of the world’s most progressive multinationals accelerating their sustainability transformation.