Sustainability was set to be one of the defining global issues of 2020, headlining events such as the World Economic Forum last January. As we all know, healthcare has firmly taken the top spot, but the momentum behind sustainability remains strong, with individuals, businesses and governments making it a strategic priority. John Goddard, Clare Chatfield and Rebecca Scottorn share their views on how attitudes towards sustainability are changing, the effect of the pandemic and how business leaders are integrating sustainability into their core business strategies.
Sustainability isn’t a new topic. What’s different this time?
Sustainability has rapidly risen up the corporate agenda and is now an area of critical importance for executives, investors and boards. It’s not a new topic, but increasingly it is being considered a commercial priority and a potential source of strategic advantage. Some companies recognise the opportunity to move beyond a compliance-based approach, making sustainability a core part of their strategy. This can bring financial outperformance, e.g. through new products and services, reputational advantages, and cost efficiencies.
Sustainability issues are complex and multifaceted, requiring stakeholders to work together, so we see a lot more cross-sector collaboration. There is an understanding that companies cannot resolve these issues on their own.
What impact is the economic downturn having?
This economic downturn has not had the braking effect that the global financial crisis had on low-carbon solutions. There seems to be a realisation that companies can no longer afford to delay tackling these issues. There are, of course, challenges around the level of capital available to invest, and many companies are struggling to survive. The reality is that companies performing strongly against ESG criteria are also likely to be financially healthier. As companies look to rebuild, we envisage sustainability becoming increasingly important.
How are companies defining sustainability today? How are priorities changing?
The definition of sustainability has broadened beyond climate change and energy transition. Those factors are still critical and, for a lot of sectors, are the most material issues, but there are other elements now that are important across sectors, including workforce practices and customer engagement. The social aspects of sustainability are increasing in prominence. However, companies shouldn’t feel that they need to address everything concurrently. A pragmatic approach is required that prioritises the elements most material to a business, and the ones where there can be clear improvement and value creation benefits.
How are companies responding to sustainability pressures?
Addressing sustainability pressures can require fundamental changes to existing business models. Stakeholders are making demands from all sides; business models need to be fit for purpose and long-term success. ESG ratings have become an important metric, and there are increasing reporting requirements. It can be challenging to trade off short-term priorities and financial goals with longer-term, strategic sustainability issues.
How is L.E.K. Consulting working with its clients to facilitate more sustainable strategies?
At L.E.K., we see sustainability as being at the heart of strategy. We work with clients to consider the commercial and sustainability issues together, not independently of each other.
There are both internal and external considerations. Internally, getting buy-in from the leadership team is critical, as is a robust diagnosis of what the company is doing today. Externally, it’s important to understand how stakeholder pressures are evolving, what competitors and ‘best in class’ peers are doing (and plan to do) and the market context for each client.
Then it’s about collaboratively working to define the elements of the strategy and building a coherent narrative, before working out the flow of implications from the strategy for business model choices and potential changes.
What are the top three to five questions boards should be asking of their five-year strategic plan?
- Where do you really stand today when it comes to sustainability?
- What is your level of ambition?
- How are your stakeholders evolving in their demands?
- Which elements of the strategic plan should be on the table, and which ones should be prioritised?
- How can we build a coherent narrative and engage stakeholders?
These issues are not going away, and in time every company will have to adapt and change; it will not be optional. There is currently an opportunity to think about sustainability proactively and to identify value creation levers for your business. It can be daunting and may seem complex, but if sustainability is treated like any other major strategic decision, with a robust approach and framework, then real progress can be achieved.