Invest in sustainability to roar out of the coming recovery, Part 2
Part 2 of a 2 part series
In part 1 of our investigation of how companies can invest in sustainability to rise up from the COVID-19 pandemic stronger, we looked at the 2010 paper “Roaring Out of Recession” by Harvard professors Ranjay Gulati and Nitin Nohria, with then Kellogg student Franz Wohlgezogen. The paper’s authors detail the business actions that lead to post-recession leadership in sales and EBITDA (Earnings before interest, taxes, depreciation, and amortization), actions that we note are, today, predominantly aligned with increasing companies use of sustainable business practices.
Now we are looking beyond a focus on tangible assets and operational actions to more fundamental changes in the mindset and behaviors of leaders and stakeholders, and a comprehensive strategy that can enable a company to spread sustainability across the organization. Concentrate on helping your teams and accelerating your sustainability transformation, and your company will be ready to roar too.
In the foreword to our book “Leading Sustainably”, Dr. Mark Milstein, Director of Cornell’s Center for Sustainable Global Enterprise and Clinical Professor of Management says that “As we accumulate more knowledge about how companies impact and are impacted by grand challenges like climate change, poverty, and ecosystem degradation, sustainability becomes more salient to all aspects of business operations, from sourcing to marketing, from operations to investment.”
This new awareness of environmental and social threats that Dr. Milstein describes is forcing companies to reconsider activities across their business from a sustainability perspective. Such an internal assessment is much like what happens within businesses that successfully position themselves to “roar out of recession”. Gulati, Nohria, and Wohlgezogen write that “Companies that respond to a slowdown by reexamining every aspect of their business models — from how they have configured supply chains to how they are organized and structured — reduce their operating costs on a permanent basis.” And they see a real benefit from doing so, as “When demand returns, costs will stay low, allowing their profits to grow faster than those of competitors.”
We see five steps that businesses can take to perform that examination from a sustainability perspective. Based on the recognition of the business case for sustainability, these practical, organization-wide actions will make it possible for companies to harness sustainable concepts in their strategic decision-making about operational efficiency, market development and asset investment, as well as regards human resources, leadership and development, and long-term strategy.
Stepping up
In “Leading Sustainably”, we introduce the “Five Steps to a Sustainable Business Model”, the common evolution of businesses pursuing this transformation.
As a business ascends our Five Steps, it progresses through distinct milestones that we believe companies on this journey must achieve before they can proceed to the next. Starting from the fundamental and imperative requirement of establishing a base-level understanding of sustainability, companies then leverage that requisite knowledge of the subject to build A Teams, set high-level objectives, and make initial choices around sustainability.
Once things start moving with a few first wins, executives should continue to engage in capability building and disseminate sustainability thinking to all functional roles across the organization via leadership development and training. This prepares the field for setting cross-organization priorities and achieving buy-in. When a business has done this, then it can create total alignment with sustainable practices across the company functions and integrate sustainability throughout its processes — “To put sustainability at its core”, as we say. (You can find a full list of the milestones here on the Read the Air website.)
‘Leaders … need to create an internal environment that enables individuals to connect sustainability to their daily work, develop the necessary skills, and execute innovative practices’
To do so and thus prepare for future climate-related threats, companies need to take the crucial first step and vastly increase their understanding of what sustainability means in a business context.
A gap in knowledge and leadership
Becoming fluent in sustainability and climate concepts has become a priority. Not only is it necessary for the survival of the business— the market demands it. Today investors are putting more pressure on businesses to understand the impact of climate change on their activities and future viability. They are prescribing the use of “scenario analysis” based on guidance from the Taskforce for Climate-related Financial Disclosure (TCFD) to come to grips with the physical and business environment risks, which they call “transition risks”. TCFD guidelines expect both board members as well as executives to understand and be able to implement effective sustainability programs to prove their ability to perform proper governance of companies under their watch.
We’re far from being there today.
According to a recent survey from KPMG and Eversheds Sutherland, corporate leaders need to significantly ramp up their climate skills. A majority of executives — 74 percent — self reported that they need to improve their skills to deal with the risks of climate change. The pressure is on and growing, with 78 percent saying that “managing climate-related risks will be an important factor in keeping their job over the next five years”, and 25 percent of the respondents’ companies “implementing remunerative incentives for directors to achieve decarbonization targets”. Yet the third most challenging barrier to decarbonization, true for 47 percent of respondents, was that “We don’t have the right skills within the organization”.
When it comes to acquiring those climate skills, it’s critical to know where to start and what to focus on.
Empowering leaders to respond
Businesses would be wise to prioritize their intangible assets as much as their tangible. The authors of “Roaring Out of Recession” note that when assessing what moves to make, “focusing purely on [tangible] assets … keeps companies from looking for more imaginative ways to build new businesses that will drive growth when the recession is over.”
Gavin Dixon, Director at the Leadership and Development firm Global Perspectives, says that the secret to igniting such innovative thinking comes from empowering a company’s teams.
“Too often there is an over-reliance on processes and metrics to drive sustainability transformation in an organization,” says Dixon. “An equally important but often overlooked factor is the transformation of the mindset and behaviors of stakeholders that is required to embed sustainable actions at every level of the organization.
“Leaders at the strategic, tactical, and operational level need to create an internal environment that enables individuals to connect sustainability to their daily work, develop the necessary skills, and execute innovative practices and processes in order to achieve broader organizational sustainability goals. Processes should serve the people, not vice versa.”
Simple solutions
Now is a great time to start creating such an environment if you haven’t already. (This is true, if, for no other reason, that the costs for many services that can advance your company’s sustainability journey and prepare you for the recovery have been driven lower by the uncertain state of the economy.)
As outlined in the Five Steps (and discussed in our previous “Nine takeaways for sustainability in 2020”, the simple solution to start is for boards and executives to empower employees to make sustainability-driven decisions by spreading the required knowledge across their organizations. This requires focusing on development and educating employees on the sustainability concepts that are relevant to their organization.
Who will be the post-Covid-19 winners? Like Gulati, Nohria, and Wohlgezogen, we believe that “companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession.” In today’s environment, that means the businesses that are deploying their budgets to actively ascend the Five Steps to a Sustainable Business Model will be the powerhouses that emerge strongest from our current, troubled times.
And, even more importantly, those companies that make the most of this crisis will be the ones that are resilient enough to withstand any future storms.
Read more about the Five Steps to a Sustainable Business Model milestones here
