By Dr. Ram Nidumolu
As you go about developing or revising your strategies for making your business more sustainable, it is worth reviewing last year’s key developments in important areas of business strategy.
They will only grow in importance this year.
Rather than focus on particular stories ably summarized elsewhere, here are key strategic themes and the underlying research that you can use as practical guidance.
1. Business Value of Sustainability: The best work on the business value of sustainability in 2012 showed that sustainable businesses significantly outperform unsustainable businesses in both market value and book value (e.g., ROA, ROE) over the long term. Expect more outstanding work in this area.
2. Sustainable Innovation: Business model innovations that are driven by sustainability got attention: dematerialization, open loops, low-carbon energy, and restorative innovations. The industrial Internet got a lot of attention, while an annual assessment of sustainability practices showed that sustainable innovation was the common thread among successful sustainability programs.
3. Consumers: The environment continued to rate low in national importance for consumers globally. But the silver lining was that Americans are increasingly linking climate change and extreme weather. The rest of the world continues to lead the U.S. in seeing signs of climate change.
4. Emerging Markets: Executives in emerging markets say that sustainability is more critical to business than those in developed markets. But poor disclosure of environmental, social and governance (ESG) issues is the biggest challenge to making investments in emerging markets.
5. Megatrends: Sustainability megatrends got increasingly factored into strategic planning, with improved analysis of the differential exposure of industries. Zero-impact growth gathered momentum, as the top five factors driving sustainability initiatives were better understood.
6. Reporting: Sustainability reporting gained momentum, with most CFOs of global companies saying sustainability challenges will alter financial reporting and auditing. A framework for integrated reporting began to be put together, while voluntary accounting standards for sustainability reporting got started through the Sustainability Accounting Standards Board.
7. Risk Management: Corporate planners got better at modeling climate change risks. The short and long-term physical and economic impacts of climate change by business sectors got more attention. Eighty-three percent of the S&P 500 incorporated climate change into its business processes for managing enterprise-level risk. The concern with business resilience to climate change increased. 2012 is likely to break the 2011 record of natural disasters costing $380 billion globally, with Hurricane Sandy already clocking in at $50 billion.
8. Suppliers: Resilient supply chains became more critical to business strategy, whether through new models for dealing with transportation and supply risk, a more comprehensive view, better supplier self-assessment, or a more aggressive, risk-focused stance given the world is at risk of 6°C warming. Rising fuel costs led to a rethinking of existing transportation practices, as well as a rethinking of current approaches to sustainable packaging.
9. Business Management: The success of corporate sustainability champions was shown to depend more on their relationships with their internal business than subject matter knowledge. Becoming a sustainable company required leadership commitment, stakeholder and employee engagement, and disciplined mechanisms for execution.
10. Investors: Sustainable and responsible investing accounted for one out of every nine dollars under professional management in the U.S. In 2012, $3.74 trillion in U.S.-domiciled assets were engaged in sustainable and responsible investing practices. Corporate cost savings from sustainability and rising expectations of limited partners were the biggest reasons for their increased focus on ESG issues. Comparatively, while U.S.-based investors mainly focused on eco-efficiency initiatives, EU-based investors used a wider range of ESG issues.
11. Food and Water: There was a lot more attention to how feeding the world in the future is increasingly a daunting challenge, as extreme weather exacerbated the production of food and increases food prices, and put greater pressure on smallholder farmers who comprise 50 percent of the malnourished. Attention grew on reducing the 40 percent of food (worth roughly $165 billion) in the U.S. that currently gets wasted.
Interest in water escalated rapidly, with long-term projections that 45 percent of the expected worldwide GDP of $63 trillion in 2050 will be at risk because of business-as-usual practices for water management. Sustainable water strategies increasingly emphasize local solutions and working with stakeholders at the watershed level. Disclosures on water risks grew, but disclosure of water footprints continued to be slow. The value of water to U.S. industries saw a major shift. Despite these trends, water-related concerns have not hit boardrooms yet.
12. Energy: The EIA’s 2012 projections got attention, especially that U.S. reliance on imported oil will reduce as domestic production of natural gas and domestic crude oil (from tight oil and shale resources) will exceed consumption. Also, coal-fired plants are being retired at a faster rate, though not fast enough for many.
The global outlook for clean energy was both good and bad news in 2012. Mature clean energy sources such as hydro, biomass, solar PV and onshore wind made good progress. But less mature clean energy sources, such as CCS, offshore wind, and concentrated solar power, are not growing fast enough. Despite potential savings and job opportunities from energy efficiency, the worldwide lack of progress on it has been equally alarming.
13. Natural resources: 2012 was the year in which business began to recognize the vast scale of its impacts and dependencies on nature. Nature provides $72 trillion worth of free services to the global economy every year, but we lose about $6.6 trillion in natural assets every year due to business. Well-publicized corporate actions included PUMA’s Environment P&L Coalition (which focuses heavily on natural capital), Dow’s partnership with The Nature Conservancy to launch pilots on evaluating natural capital, etc. The TEEB for Business Coalition got established to drive corporate action on natural capital.
What is needed is a framework for corporate change that accelerates the adoption of natural capital in companies (Disclosure: I am leading a project in this area for TEEB for Business Coalition).
And that was the year for sustainable business strategies.
Dr. Ram Nidumolu is the founder and CEO of InnovaStrat, Inc., a US-based firm that provides sustainability advisory and research services to large corporations. He is a recognized thought leader and the lead author of the Harvard Business Review cover article, “Why Sustainability is Now the Key Driver of Innovation.” He is currently completing a book on business and being-centered leadership that will be published by Berrett-Koehler later this year.