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As sustainability infiltrates the top echelons of companies it is acquiring a new hard-headed language of business risk
We have come a long way from the days when CEOs could quote the economist Milton Friedman’s maxim that “the business of business is business” to explain why sustainability was not an issue for their companies.
Even when companies did profess to be taking sustainability seriously they often separated it from their main operations, under the heading of corporate social responsibility, and it had little impact on day-to-day operations. But that has changed and sustainability has become more central to the consideration of operational risks and strategies.
There are a number of reasons for this shift, including greater awareness of sustainability issues, increased regulation in areas ranging from climate change to conflict minerals, changing attitudes among investors, customers and employees, greater transparency as a result of the rise of social media and an increasing institutionalisation of sustainability factors into business operations.
“It’s not just that sustainability professionals are moving towards the language of business risk – which is definitely happening – but businesses are embracing sustainability and integrating it more firmly within their organisations,” says Murray Sayce, UK head of sustainability at global environment and health consultancy Ramboll Environ. He adds: “A consequence of integrating sustainability more closely with core business is language and terminology. The less ‘right-on’ it sounds and the more it feels like discussion of mainstream business, the easier it is to change mindsets and increase acceptance of sustainability as business-as-usual.”
Leonie Schreve, head of sustainable lending at Dutch bank ING, agrees. She says: “We started looking at sustainability in the 1990s with a corporate responsibility approach that ensured our own organisation became more sustainable, but after a while we realised that sustainability is about much more than that, especially for a financial institution.” In the early 2000s, the bank started developing environmental and social risk policies for all transactions and clients based on international standards, but its ambitions were initially limited to not doing harm."
“Then in 2012, we started to focus more on the opportunity side,” Schreve says. “We believe that sustainable business is better business. New markets are opening up and we are forging growth in areas that we believe will make up the economy of tomorrow, such as the circular economy, as well as helping our clients to be ready for this new sustainable economy.”
Not everyone is convinced the change is real. “There has been an uptick in companies at least trying to be transparent and reporting on what they are doing,” says Mike Rosenberg, assistant professor of strategic management at the IESE business school in Barcelona. Rosenberg says most business people are not worrying about sustainability – they think it’s the job of civil society, not them, to fix the world’s ills.
“But it’s the board’s job to protect a company’s reputation and maintain its licence to operate,” he says. “Social norms can change very quickly and many companies could do more to hedge against that.”
This shift is more common for consumer-facing brands – which need to bring a certainty to their language for stakeholders and shareholders – than for business-to-business companies. Sayce says: “We see patterns in language emerging in western economies, which have historically been at the forefront of evolving sustainability trends, and this is likely to spread.”
Rosenberg adds that for companies such as Apple and Google, adopting the language of sustainability is important because their customers are deeply passionate about these issues.
Joe Franses, director of corporate responsibility and sustainability at Coca-Cola Enterprises, agrees, saying: “Sustainability is certainly finding its place in mainstream business strategy more and more.”
Each company will differ in how it makes sustainability part of its core strategy, but the first step is to identify the issues that are material to your company and prioritise those that pose the greatest risk or opportunity.
“For many businesses, when they start to look at their most material and profile risks, they inevitably include sustainability issues,” Franses says. “We have looked at our top business risks and they include a number of sustainability risks, including the availability and quality of water, climate change and its knock-on impacts on agricultural productivity.”
The amount of regulation related to sustainability is increasing all over the world, says Rosenberg. “As the cumulative effects of, for example, climate change become more and more obvious, people will clamour for action and politicians will give them that action. The further ahead of that you can get, the better for your business.”
International initiatives such as the Paris Climate Accord and the sustainable development goals, both agreed towards the end of 2015, create their own bureaucracies, Rosenberg argues – and once they are up and running, there is no stopping them, or avoiding their impacts. There are also new laws to contend with, such as the UK’s Modern Slavery Act and the US’s Dodd Frank rules on conflict minerals.
Another key driver for the increased focus on sustainability is demographics. Millennials are not only becoming a more important part of the market place, but they are also becoming a more important part of the workplace. And they speak the language of sustainability in a way that previous generations have not. “Millennials are becoming more senior in companies and they have more buying power,” says Michael Siegrist, associate director of governance, risk and compliance solutions at MetricStream. “Both consumers and employees are more engaged with sustainability and more tech-savvy, so companies are having to react to that.”
At a more technical level, business frameworks and practices are becoming increasingly risk-based (as opposed to product-based) in areas such as international standards. All standards from the ISO are now based on the same foundation document, known as Annex SL, explains Nikki Samme, a director at risk management company Alcumus. “This platform document requires organisations to look at their business context before applying any standards – and that context includes sustainability, which is becoming increasingly entwined with compliance, reputation and financial risk,” she says.
The increasing importance of sustainability is about more than just a shift in how companies think about the issue, says Schreve. It is also leading to a change in the way businesses operate. “With issues such as climate change and resource scarcity to deal with, it is important for us to support new business models such as the circular economy. And finding ways to do that makes us think in innovative ways about how we do business.”sustainability CSR Conflict minerals transparency social media Environment economy climate change governance compliance