Three key business challenges to increasing sustainability
Green transition 24 August 2020 Jens Haubensak
Sustainability is a key topic of our time, catalysed through fundamental societal and technological change. Capitalising on sustainability requires businesses to reframe their strategic perspective and systematically operationalise it into clear metrics and concrete actions that – crucially – create value. This poses a great challenge for companies, but also offers new opportunities for organisational development. This article describes the three main aspects, with both challenges and opportunities for each.
Sustainability has recently experienced an evolutionary leap and has entered the heart of public discourse, across generations and societal groups. Even in the peak of the COVID-19 pandemic, the climate crisis is seen as equally important to deal with, and people expect the eventual economic upturn to not be at the expense of climate protection 1).
Sustainability also stands at the centre of massive financial stimulus programmes announced by governments to facilitate the rehabilitation of economies. For instance, the €750bn corona recovery package from the European Commission refers to the key topics of the European Green Deal and amplifies large parts of its strategies promoting carbon neutrality, circular economy and sustainable finance.
On a national level, sustainability and climate protection are at the heart of many stimulus packages. The German government recently released a corona recovery package allocating €50bn 2) for developing technologies such as digitalisation in combination with climate-friendly technologies such as hydrogen and e-mobility infrastructure and low-carbon buildings. The US economic stimulus package also shows that sustainable measures and economic recovery need not be mutually exclusive, with the American Recovery and Reinvestment Act containing sustainable investment expenditure of $90 billion. And in China, huge investments in sustainable infrastructure addressing electric mobility and renewable energy are being promoted under the “new infrastructure construction plan” 3) . These developments build significant momentum for sustainable transformation, requiring businesses to evaluate the impact on their current and future development.
While change might initially feel threatening, with appropriate strategies and effective management in place it can bring momentum to organisational transformation and, ultimately, new business opportunities. Companies that are responsive and start preparing now can build themselves an early competitive advantage. But they must first tackle the three main challenges:
1) Reframing sustainability strategy to shift emphasis from risks to opportunities
To take advantage of opportunities and effectively manage risks, companies must place sustainability at the heart of their business model and scrutinise its future viability. This appears to be largely understood in the business community, as reflected in Ramboll’s recent study Managing Sustainability, where 95% of the interviewed companies stated that sustainability is an important factor for long-term business success. However, the key challenge is to identify developments that will decisively influence current and future development and set a clear strategic direction.
The current global economic situation means that the dynamism and complexity of change are overwhelming. Companies need to reframe their strategic perspectives and build effective management structures and mechanisms to streamline and channel corporate sustainability commitment into clear metrics, concrete action and measurable performance. Concepts such as the Planetary Boundaries are useful as they capture a more holistic view of current and future drivers as well as their interactions and impacts on an individual business.
The Planetary Boundaries framework was initially developed in 2009 by Swedish scientists and is referred to by international policymakers as one reference model for guiding sustainable transformation 4). In the private sector, too, companies have started to apply the concept to assess their sustainability performance. However, the majority of businesses appear to focus primarily on individual sustainability aspects rather than addressing a wider range of potential drivers of change and their interrelations, as suggested in the Planetary Boundaries framework. This was confirmed in the Ramboll survey, where we matched the most mentioned sustainability issues with the categories of the Planetary Boundaries concept. 83% of companies refer to actions on climate change, which is entirely reasonable as climate change is one of the most pressing issues of our time and companies need to take action for climate mitigation and adaptation. However, dimensions such as biodiversity and nitrogen and phosphorus flows – which, according to the Planetary Boundaries, are already putting significant stress on the earth’s system capacity – appear to be significantly underrepresented in corporate sustainability action.
From an environmental point of view, isolated actions risk resulting in improvements in one dimension that are at the cost of others. From a business point of view, companies may be slow to anticipate – or miss altogether – the important developments, risks or opportunities deriving from areas that are not their current focus.
If we can assume that these other aspects will be coming under the spotlight of legislation and public interest (as evident in the current societal discourse on biodiversity or marine litter, for example), companies that are already addressing these issues will have a strategic advantage as they will be better prepared for the scrutiny and demands of stakeholders and customers.
Of course, it could be argued that the application of a more holistic framework would further complicate the identification of a clear point of reference for corporate sustainability action. This could be the case if done on strictly scientific and quantitative bases, and as practicable models are not yet widely established. However, if initially applied as a qualitative framework and strategic compass and iteratively elaborated over time to become a more sophisticated, quantitative model, the strategic benefits for an organisation far outweigh the effort involved.
2) Facilitating corporate transition towards sustainability
Once the risks and opportunities of sustainable change have been identified through strategic reframing, companies need to implement targeted action. This process can be categorised into four different stages 5):
Stage 1: doing known things in new ways to increase operational and eco-efficiency. Here, corporate sustainability improvement primarily builds on process enhancements and investment into efficient technologies such as waste avoidance, energy and resource efficiency.
Stage 2: doing new things in new ways to promote effectiveness and achieve absolute improvements and targets such as carbon neutrality. This can be increasingly witnessed in the private sector, for instance, in connection with carbon target setting. In this phase sustainability measures typically aim at the decoupling of operations from environmental impacts or product and service redesign.
Stage 3: seeking to trigger sustainable innovation, transforming their core business and generating new sources for revenues and growth in parallel to the known business.
Stage 4: actively striving for a capitalisation on sustainability as a driver for market differentiation and competitive advantage through the creation of entirely new business models.
To unlock the inherent potential of sustainability for value creation, companies need to continually progress while maintaining key elements from the previous stages. For instance, efficiency actions are likely to be relevant still when new business models have emerged. Hence, this process is a constantly evolving circle in which companies steadily develop further sustainable transition.
In the Ramboll survey, we observed that many companies are already in transition as their sustainability actions relate to all described stages. However, it also appears that there is a clear focus on stage 1 activities and the potential of achieving market differentiation, and that value creation through new, more sustainable business models (stage 4) is addressed by only 10% of the companies.
It is clear that the potential for driving sustainable transition varies for each company and depends on its specific organisational possibilities and constraints. The question is: how can companies progress their transition?
As explained above, strategic reframing is necessary to cope with change and to strategically guide corporate sustainability action. But companies also need to foster foresight and proactive decision-making regarding sustainability issues. Insights from our survey indicate that information on sustainability performance is typically used for monitoring and reporting, and therefore is largely retrospective. To drive transition to the next level and define appropriate actions, it should also be used for decision-making that determines the future of the business, such as strategic risk and opportunity screening (such as for climate change adaptation), product design (including eco-design principles) or material selection or research and development (such as sustainable materials, engineering for circularity).
It is vital that companies include the up- and downstream components of their value chain in their sustainability decisions. The shift from an isolated view on an individual stage to an integrated perspective is essential. In doing this, value for both the company and its socio-ecological environment can be created and captured.
3) Effective operationalisation and management of corporate sustainability
Even when a company follows a clearly defined strategy, it often meets challenges and barriers when implementing it into their daily operations, from both company-specific and external perspectives. One frequently observed barrier is a lack of capacity and resources, which is typically dependent on the level of top-management commitment. Without management support, sustainability action will never become an integrated part of a company’s general value creation process.
An increasing number of companies combine financial and non-financial reporting 6), which is a first step. A precondition for this is that decision-makers need to develop an understanding of the business case for sustainability, which then can be leveraged when progressing on the transition path towards stage 4.
Catalysed through the current momentum for sustainability, the opportunities for sustainable value creation will come faster, and equally the downsides of not taking action will become clearer, too. However, we still observe that companies face difficulties when measuring the value and benefits of sustainability action going beyond quantifying resource savings or efficiency gains, or that investments in sustainability are perceived as too high. Find out more about how companies can better link sustainability and value creation in these articles: Capturing value in the circular economy and Circular economy assessment – How can enterprises get started?
On an operational level, companies can use various tools to systematically breakdown strategy into concrete action. However, numerous tools have emerged in the last few years in areas such as circular economy, sustainable supply chains and sustainability performance monitoring. In addition, the progress of digitalising management processes has brought new tools and applications, particularly in the area of sustainability data gathering and management. Choosing the right tool is not always easy.
While these new approaches can be very useful, well-established and proven concepts such as environmental and other management systems (i.e. ISO 14001, ISO 50001, ISO 45001) and impact assessment methods (such as lifecycle assessments and carbon foot printing) remain key drivers of sustainability action. Management systems particularly serve as effective platforms to coordinate the application of more specific tools, such as material flow analysis, circularity assessments, performance monitoring systems or digital dashboards. The importance of management systems and impact assessment methods is recognised by the companies interviewed in our survey: a total of 84% stated that they rely on management systems and impact assessment methods.
Businesses need to take sustainability seriously as a key driver of fundamental societal and industrial transformation. However, in doing so, a shift is necessary – from seeing it mainly as a business risk towards early identification of opportunities for innovation and development – to ensure survival and growth in an increasingly competitive and accountable operating environment. Sustainability is already a management task in many companies, and with effective platforms for change and experience readily available, companies are well-prepared to tackle these challenges.
Enabling a green economy where economic development does not compromise the future
Despite several promising initiatives, the global transition to a circular economy has not picked up pace. This is partly due to the fact that enterprises (companies, business, public authorities etc.) are struggling to understand where to start. What is the “baseline”? How far must they travel to truly capture value from a circular transition? Understanding an enterprise’s point of reference and distance to target is key to taking the first tentative steps in the circular transition.
The transition to a circular economy is perceived by many to be inevitable, due to the anticipated economic, environmental and social benefits. Yet, if so beneficial to society, why is the transition happening so slowly?
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