The case for sustainability as a strategy
There are many definitions of sustainability. However, understanding the journey an organisation may undertake to arrive at sustainability provides the necessary context to the expected mindset.
Against an increasingly volatile, uncertain, complex and ambiguous (VUCA) backdrop, intensified by regulatory and investor demands, leading companies have identified alternative business strategies and have transitioned their businesses. This is done in tandem with making the leap towards greater accountability and transparency in their overall business operations and ethics.
Many have progressed from corporate governance (CG), corporate responsibility (CR), corporate social responsibility (CSR) to Sustainability, and beyond that, to contribute to the wider societal goal of sustainable development, otherwise known as the Sustainable Development Goals (SDGs) or the Global Goals.
However, too many have not grasped the underlying intent of the sustainability-mindset, which, in essence, is a proactive approach to holistic risk management to ensure business success and longevity.
As a result, many continue to focus on superficial reporting measures and short-term financial performance, without genuine integration of the principles of sustainability in the business. No doubt, the process can be challenging and may sometimes require rethinking current decisions, which impacts future considerations of the business, community and planet.
A realistic and meaningful long-term strategy
The impact of sustainability-related risks to business operations and the bottom line is evident from news headlines on corporate corruption to environmental pollution, to name a few. Numerous reports published over the last few years present a recurring theme – the reports reinforce the strong correlation between Sustainability and corporate value.
According to the Business and Sustainable Development Commission, alignment with the Sustainable Development Goals (SDGs) will require a step-change in both public and private investments. It also calls for business and world leaders to ‘strike out in new directions’ and ‘embrace more sustainable and inclusive economic models’.
By doing so, businesses stand to open-up some USD 12 trillion of market opportunities in the four (4) economic systems and create 380 million new jobs by 2030 . These are food and agriculture, cities, energy and materials, health and well-being – all of which, represent about 60% of the real economy today. Very clearly, the world needs to act urgently, and this is not a new thinking.
As early as 2011, 94% of respondents from leading companies say that they have integrated Sustainability into strategic planning. Fast forward to 2019, it is interesting to note that, globally, more CEOs have turned their focus inward, to centre around strengthening their companies from within, as they adapt to the changing dynamics of world politics and economics, especially the newly erected barriers between markets – both trade and labour.
According to PwC’s 22nd Global Annual CEO Survey, CEOs are ‘less bothered by the broad existential threats’, such as terrorism and climate change that rose in rankings last year and are more ‘extremely concerned’ about the ease of doing business in the markets where they operate.
The revenue and expansion opportunities CEOs identify are also more internally oriented and closer to home. 35% cited over-regulation and policy uncertainty as the top threats in 2019, followed by availability of key skills at 34%, trade conflicts at 31%, cyber threats, geopolitical uncertainty and protectionism at 30%, populism and speed of technological change making up 28%, with exchange rate volatility at 26%.
These are all risks and threats that would immediately be identified and become the emphasis of an organisation, if the impact-based principles of the Sustainability approach had been the key strategy.
It is proven time and time again, that companies and boards that take a long-term view of the business and perform well in sustainability issues tend to outperform their peers on a variety of financial indicators, such as share price, cost of capital, etc.
The principles and the best practices of sustainability will be key drivers for long-term value. This is evidenced in the large regional and global brands such as Unilever, Nestle, Shell, Hewlett Packard, and on a more local level, IOI Corp, Petronas Chemicals Group, Sime Darby Plantations and Sime Darby Berhad, Kuala Lumpur Kepong, British American Tabacco .
There needs to be a mindset shift about sustainability from an inconvenient cost to a business opportunity and long-term view, that leads to a competitive advantage.
Sustainability: A board-level concern
Sustainability encompasses Environmental, Economic and Social (EES) governance performance of a company with the intent to determine the impact caused by its everyday activities. The performance report brings together areas that have been viewed separate and disparate, and hence, not discussed in the same forum, resulting in siloed mentality or strategies. The external benefit is that stakeholders will be able to understand and connect the financial and non-financial initiatives to determine an organisation’s real value.
In a highly dynamic and globalised business environment, companies are becoming more susceptible to Sustainability-related risks. Proactively addressing these risks are becoming central to corporate competitiveness and long-term goals.
In the past, sustainability was centred primarily on environmental or social issues, with no clear correlation to the businesses, its financial and non-financial operations. This has since developed into a broader and holistic view, a vital component in creating long-term value, especially in driving growth, return on capital and managing risks.
These risks are apparent, as they have an impact on corporate reputation, competitiveness and profitability. What used to be considered non-financial risks, EES concerns are now defined as material financial risks.
When these issues become material to a company’s performance, the responsibility lies on boards to act.
The expectation on boards – the global sustainability agenda
Investor activism is on the rise. Technology and the internet have paved the way for investors to gain greater access to information, in compressed time frames, forcing companies to either be proactive with their strategies or extremely nimble in their response.
Perpetual connectivity and a pervasive network have allowed for a more informed and educated audience.
Investors are increasingly raising material issues and sustainability strategies in their conversations not only with management, but also with corporate boards. They are intensifying the pressure on boards to provide transparency through full disclosure of the company’s sustainability risks.
Indeed, the spotlight is falling on boards to demonstrate clear understanding and oversight of real business risks and opportunities that affect their corporate value while regulators closely monitor corporate governance, culture and conduct.
The challenge lies in its uncertainty, unpredictability and external forces when dealing with EES concerns.
With so many challenges that are beyond the control of the boards and company, it will require an aligned and united board to signal the cohesive organisational shift to sustainability.
Therefore, it is indeed time for corporate boards and directors to take Sustainability seriously and to drive it from the top. Making a clear commitment top down and effecting a well-defined plan that is kept focused by clear goals and outcomes, will be key.