Date: 2024-10-19 Page is: DBtxt003.php txt00026306
SUSTAINABILITY
VIA CAW SUSTAINABILITY JAN 2024
HBS ... Business and Society ... How Sustainability Efforts Fall Apart
VIA CAW SUSTAINABILITY JAN 2024
HBS ... Business and Society ... How Sustainability Efforts Fall Apart
Lucy Jones
Original article: https://hbr.org/2022/09/how-sustainability-efforts-fall-apart
Peter Burgess COMMENTARY
It is good that there is some discussion about sustainability by the accounting profession, but I am not sure about the aims of the discussion.
I think about accountancy as a tool to accomplish something rather than simply as a static method of reporting that is an end in itself.
With this in mind I am looking for a framing of the elements of accounting so that all the various dimensions of progress and performance become part of a single coherent system of metrics.
The financial profit and loss account has debits and credits that deduct or add to financial capitals, but the activities that resulted in the financial debits and credits also resulted in social good and perhaps also social bad that should be taken into account. Similarly, these activities also result in environmental impacts.
It could be said that it is time for double entry accounting to be upgraded to a triple double system where activities become associated with a six entry recording system.
I embraced the idea of a Triple Bottom Line (TBL) when it was described by John Elkington in the 1990s. What I just described above is essentially TBL ... or a system of accounting that embraces People, Planet and Profit (3P)
I cannot understand why the TBL did not become the norm for corporate accounting decades ago. It obviously is somewhat more resource intensive than conventional financial accounting but with the emergence of powerful electronic data process (EDP) this could have been overcome.
Peter Burgess
How Sustainability Efforts Fall Apart
by Elisa Farri, Paolo Cervini, and Gabriele Rosani
September 26, 2022
Summary.
Sustainability has become the new corporate imperative. Companies have begun doing their homework, diligently setting up a number of initiatives. This is a good starting point, but too often, firms are unable to systematically scale these efforts to achieve a more transformative outcome. This is because internal hidden enemies act as antibodies and resist the change. Unless a company tackles the enemies early on, it will never be able to achieve sustainability at scale. Defeating the enemies is possible, as shown by the success stories in different industries. It’s time for firms to put in practice concrete countermeasures to fight back against the hidden enemies and unleash the full potential of sustainability.close
The combination of accelerating climate change, rising income inequality, the Covid pandemic, and geopolitical conflicts have created a perfect storm of challenges to how businesses and economies are run. In response, pressed by investors, employees, activists, and consumers, companies are launching sustainability initiatives at an unprecedented pace. This is good news. After many years of skepticism and lack of commitment, companies have finally begun taking sustainability seriously, setting ambitious goals and targets. The bad news is that there is still a huge gap between ambition and action.
Over the last few years, in our work as consultants, we have witnessed the development and implementation of dozens of companies’ sustainability programs across different sectors. We have observed that after positive beginnings, most sustainability programs get stuck and are unable to scale. Without scale, long-term goals are simply not attainable — or are delayed for years, which reduces credibility and increases external pressure from customers and other stakeholders.
So, what makes sustainability at scale difficult to achieve? Talking with executives, a number of recurring patterns emerge. They show that the real blockers to sustainability are hidden inside companies and are often the result of what was considered sound management practice in the 20th century. These are the “hidden enemies” of sustainability: the prevailing organizational winds that tend to blow in the direction of routine and an incremental approach rather than sustaining a more radical and transformative journey.
Here are the four main categories of hidden enemies — and how to fight them to achieve sustainability at scale.
Hidden enemy #1: Structure and governance
Since its first appearance in the business lexicon, sustainability has tended to be cornered and corralled into ad hoc departments. The result is that it’s siloed away from other key corporate functions like strategy and innovation and distant from business lines and operations. This segregation, still in place in most companies, makes it difficult for sustainability to percolate throughout the whole organization. It’s also an internal political signal: The real power and relevance of sustainability is limited within the organization, with little traction or influence across other units. It’s not surprising that managers have often seen sustainability as a nice-to-have or a marketing lever, rather than a key driver for margins and sales. The same misperception is evident at the board level, where there is little familiarity with the strategic dimensions of sustainability. The situation has improved over the last couple of years, but there’s still a stark disconnect between what boards say and what they do.
Hidden enemy #2: Processes and metrics
In most cases, sustainability is not embedded into business processes by design. Procedures and criteria for decisions were designed in a pre-sustainability era where profit was all that mattered. People and planet were not even on the radar when evaluating choices and trade-offs. Price, costs, profits, market shares, and earning per shares were the most common criteria used to run a business. The main goal in this perspective is to outperform competitors, take the highest share of consumers’ wallets, increase bargaining power over suppliers, and squeeze the margins of other players on the chain.
As long as procedures, rules, and metrics remain anchored to traditional thinking, sustainability initiatives will be neutralized by corporate bureaucracy, despite the good intentions of senior leaders. Moreover, while the metrics related to profit are standard and ubiquitous within organizations (as well as external communications), the same cannot be said of sustainability. Even when there are metrics, they’re fragmented, inconsistent, and lack a common standard. For example, ESG reports are often made up of inaccurate, unverifiable, and contradictory data, without the accounting rigor of conventional financial metrics.
Hidden enemy #3: Culture and leadership
Established firms, founded in the 20th century, were simply not designed for sustainability, and consequently they have not developed a culture of sustainability. There are very few exceptions to this (e.g., Patagonia, the outdoor clothing company founded in 1973). This means that for the vast majority of older organizations, putting sustainability at the heart of their purpose requires a deep cultural transformation. It’s not simply a recalibration of the mission statement or a new manifesto of values. Changing people’s hearts and minds is the biggest challenge — and it must start with an organization’s leaders.
Most of today’s senior executives were educated at business schools in the 1990s and gained experience (and built their careers) within a profit-only paradigm: externally, fighting against competitors; internally, ruling with strict command and control. Sustainability at scale requires a different approach based on empathy, openness, collaboration, and trust. However, unlearning the traditional paradigm, so deeply entrenched in the leaders’ mindsets, is not easy and takes time. Changing the narrative is a first step, but it will backfire if not coupled with an observable change in leaders’ actual actions, behaviors, and decisions about their employees, customers, suppliers, and communities.
Hidden enemy #4: Methods and skills
The conventional manager’s toolkit is made of frameworks designed by academics and consultants over the last four to five decades and now universally adopted as standard. Think of Porter’s five forces or financial tools like the net present value (NPV). Too often, these methods continue to be the only compass when formulating strategies or evaluating new projects. Managers are trained to master reading that particular compass and acquire the related analytical skills. This perpetuates the bias. While new methods and tools designed specifically for sustainability do exist, they’re relatively new, and their penetration and adoption are limited. If the methods are not part of day-to-day routines and practices, it will be difficult to reach judgements and make decisions based on sustainability. In addition, most employees do not have sufficient familiarity with sustainability terminology and frameworks. This is largely because this domain has always been the remit solely of environmental experts.
Fighting the hidden enemies
The internal enemies of sustainability are strong because they are deeply and widely ingrained in organizations. They inhibit the progress of transformational initiatives, making it difficult for companies to live up to their ambitions and pledges. The question is how to defeat these internal enemies and unleash the full potential of becoming a truly sustainable company.
To answer this question, we looked for analogies and common patterns with other waves of business transformations in recent decades. Indeed, the issue of “hidden enemies” is not new in the history of management. For example, when the theory of disruptive innovation went mainstream, the blockers were similar. This recurred more recently with the wave of digital transformations: The firms that were most successful in such journeys were the ones that seized the opportunity to transform their entire way of operating at scale, fighting the internal enemies of digitalization and reinventing their culture, structure, processes, and capabilities. Look, for example, at DBS Bank in Singapore, which shifted from being a rather conventional bank to become a champion of digital ecosystem by launching the largest API developer platform, looking not only at the financial sector but also beyond. In contrast, the firms that took a more incremental approach fell into the traps of internal enemies. Most banks now offer digital services, but very few have transformed into digital ecosystems as DBS did so successfully.
We need to learn from management history if we are to seize the potential of sustainability transformation. Drawing on the similarities of transformative journeys of the past, we identified four solutions to help companies embed sustainability into their DNA and defeat the internal enemies. Let’s examine each one and how leaders can eliminate the enemies — or at least confine them so they can’t do any more harm.
Establish an organizational mesh to percolate sustainability through all units.
How can a company overcome the typical disconnect between the sustainability department and other business units? One effective solution is to build a community of practice: a core team of experts (often called black belts) orchestrating a group of sustainability catalysts (or ambassadors) within the units. For example, at Clariant, a specialty chemical company, a small, cross-functional team of black belts supports projects with all business units.
Some companies go even further by reshaping the organizational design, both at the corporate level and business unit level. For instance, Enel, a world leader in renewable energy and a company we consulted for, created a corporate unit called “innovability.” In the words of Enel’s chief innovability officer Ernesto Ciorra “we no longer work separately on innovation and sustainability, but on innovability, a term that combines the two concepts.” The unit has representatives in each business line with three main goals: to make sure that sustainability is embedded by design in the development of new products and business solutions; to coach and support the experimentation of new initiatives and portfolio management; and to share and disseminate best practices and technical expertise (for example, about the circular economy). Such novel organizational positioning is consistent with the evolving role of innovation units: to enable all functions and business units to innovate sustainably, rather than being the owner of innovation.
Embed sustainability by design into every process and trade off decision making.
To rethink business processes to ensure sustainability-driven decisions, let’s consider the following real examples of different business processes.
The R&D unit of a large life sciences firm we consulted with revisited the product development process to include an ESG perspective starting from the very early stage of the funnel. Usually, at the start of the process, there is a step called “problem space definition.” At this point, key customer issues and problems to solve are selected based on a set of criteria. Without the right emphasis on sustainability scores at this stage, new products and businesses will most likely continue to focus only on profit maximization.
A European utility company rethought its travel policy and gave employees more freedom to judge when travel is necessary, making CO2 emissions one of the explicit decision-making criteria, based on a calculator. The same logic applies to commuting between office and home. Unilever, following its purpose of “making sustainable living commonplace,” revisited its M&A process, favoring divestiture from sectors and companies that, while lucrative, did not fit with the company’s long-term sustainability goals.
Agree on a new social contract: Walk the talk with employees and stakeholders.
Making sustainable thinking and behaviors a habit is perhaps the most important and difficult part of the process. Leaders need to be more open and collaborative with their broader ecosystem of customers, partners, and stakeholders, co-creating solutions to complex problems. Empathy and trust are foundational to connecting authentically with all stakeholders, starting with employees.
Of course, changing minds is not easy. Defining a new manifesto of values and cascading it down from the top in hopes that change will happen rarely works. Instead, managers should agree on a set of concrete behaviors to bring into their day-to-day activities, and those should be periodically reviewed and discussed in retrospective sessions. For example, rather than using abstract values like “trust,” “purpose,” “empathy,” “collaboration,” or “openness,” it’s better to articulate concrete organizational behaviors. For example:
- “Include external stakeholders in strategic conversations about the broader industry ecosystem.”
- “Care about people by dedicating time with collaborators to providing and receiving feedback.”
- “Set co-creation workshops with partners to jointly define the problem space and solutions.”
- “Drop projects or activities that — although profitable — are problematic on ESG dimensions.”
Foster ecosystem thinking and co-create with partners.
To adapt traditional business frameworks and tools to the sustainability age, make strategic thinking more systemic. One concept that is worth exploring is the link between strategy, sustainability, and business ecosystems. A case in point is xarvio’s sustainable farming ecosystem: a win-win coalition of more than 25 partners (like Bosch, John Deere, and Claas) orchestrated by BASF Agricultural division to provide holistic solutions to farmers, going well beyond the traditional BASF business model of selling crop protection products. In fact, by using data and receiving advice for making decisions, farmers can better manage frequency and dosing of crop protection products (when to spray, how often, and where exactly) for a more precise resource utilization with less pollution and higher yield. This case illustrates a fundamental shift from a firm’s product-centric business model to a more systemic one.
To help strategists think in this direction, the traditional businesses canvases and tools need to be updated with more emphasis on ecosystem design (see, for example, our Ecosystem Canvas) and other co-creation tools. Co-creation with partners will be key and should become a widespread capability in the organization. Think of circular business models, where co-creation with other firms and institutions is central.
Sustainability has become the new corporate imperative. Companies have begun doing their homework, diligently setting up a number of initiatives. This is a good starting point, but too often, firms are unable to systematically scale these efforts to achieve a more transformative outcome. This is because internal hidden enemies act as antibodies and resist the change. Unless a company tackles the enemies early on, it will never be able to achieve sustainability at scale. Defeating the enemies is possible, as shown by the success stories in different industries. It’s time for firms to put in practice concrete countermeasures to fight back against the hidden enemies and unleash the full potential of sustainability.
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- Elisa Farri is vice president, co-lead of Capgemini Invent’s Management Lab, Thinkers50 Radar Class of 2023. Previously, Elisa was a researcher at the HBS Europe Research Center in France.
- Paolo Cervini is vice president, co-lead of Capgemini Invent’s Management Lab, Thinkers50 Radar Class of 2023. Previously, Paolo was content coordinator at HBR Italia.