Cresting the wave: businesses must navigate a course towards sustainability
As a business imperative, sustainability has moved from regulatory afterthought to strategic driver: according to a global survey of 1,800 companies conducted recently by Oxford Economics and Fujitsu, 97% report that sustainability is a top priority in 2023. Amid intensifying pressure from consumers, employees, regulators, and investors, businesses are steadily progressing from the early stages of sustainability target-setting to the complex and expensive work of implementation.
This journey will require major transformations spanning all aspects of the business from governance and reporting to culture and mentality, and the scale of this undertaking should not be underestimated. Companies have made commitments, but tangible progress is slow. Our research identified three substantial stumbling blocks:
- The availability and quality of data. Two-thirds of businesses focus their sustainability efforts where the data is most accessible and insights are easiest to action—their internal operations. Only half extend this focus to their supply chain, or the use of their products and services in the market. Few organisations are collecting essential Scope 3 emissions data from their partners, suppliers, and customers—an important piece of the emissions pie—and are unable to accurately record today’s emissions to set a baseline against which the success of sustainability initiatives can be measured.
- The scale of the task and resources required. In a separate study of 3,000 executives Oxford Economics conducted in partnership with Cognizant, roughly half said they find the complexity and enormity of sustainability transformation a key challenge. Meaningful change requires a strategy and execution plan, but many don’t know where to start.
- Leadership and accountability. Typically, CEOs develop sustainability strategies, control the funding, and provide sign-off. They then delegate execution to the Chief Sustainability Officer and other senior managers. However, few executives are empowered or incentivised to follow through on these initiatives, causing them to stall—our research shows that only 19% of businesses currently incentivise and reward their managers for meeting sustainability targets, yet those that do so recognise it as the most effective way of promoting the cultural shift to sustainable practices.
Disclosing sustainability-related impacts and dependencies
Emerging sustainability reporting and disclosure standards will help set the direction for action, leading to a broader and more reliable evidence base to help leaders set baselines and benchmark their progress.
Many emerging standards have been supported or led by the markets, reflecting the demand from shareholders and other stakeholders for more sustainable operations. In other cases, such rules are being mandated by regulators—disclosures aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are already being rolled out in the UK and are on the horizon for the US. In the EU, the Corporate Sustainability Reporting Directive (CSRD) will require around 50,000 companies to make disclosures in line with the European Sustainability Reporting Standards (ESRS), starting from 2024 for large businesses operating in the EU.
These standards call for companies to disclose how they impact the environment and society, and what risks and opportunities arise from those impacts. In this way, the scope of sustainability reporting is broader than just environmental considerations, and the environmental considerations are not limited to climate; nature and biodiversity are also important, as are social and governance factors.
Making these disclosures will not necessarily be easy. Ultimately, though, there is a significant pay-off to measuring and managing impacts and dependencies in the way these standards specify. While they might once have been regarded as being outside the financial realm, considerations around issues like equality, human rights, biodiversity, and the climate will have a material impact on businesses’ bottom lines. Acting sooner than later should bring those pay-offs forward. Over time, with better access to relevant information, investors will be able to make more informed decisions about the risks and rewards associated with investing in different companies. This should improve capital allocation and reward companies that have a credible plan to address their social and environmental impacts and exposure to risks.
Thinking beyond annual reporting
Increasingly, executives will be confronted by a range of sustainability-related questions, such as:
- Where would be the best place to focus resources on supporting suppliers to decarbonise their highest-emitting procurement categories?
- What environmental impact repercussions might there be from relocating production to domestic markets to avoid potential trade-war-associated risks?
- Would we have a greater social impact reducing water abstraction from water-scarce regions, focusing on reducing emissions at primary production hubs, or directing limited resources towards addressing both?
- What is the scale of financial risk associated with potential climate change impact in areas they are economically active in?
These are not easy questions to answer, but economic principles can be applied to them to illuminate and inform decisions, giving clearer insight into the repercussions of business activities and leading to better management. This aids companies in their transition to sustainability. It is also just good business. When strategic decisions are based on evidence, aligned to company aims, and demonstrated to the market via established reporting and disclosure standards, it signals a forward-looking, competently managed, sustainability-focused enterprise.
There is no question about it, sustainability is a disruptive force, with all the uncertainty, complexity, and opportunity that that implies, and navigating it requires a meaningful understanding of how today’s business actions may play out in an uncertain future. This will crystallise effort and resources to where they can have the greatest impact, harnessing the cresting wave of business momentum to achieve remarkable—and imperative—progress towards sustainability.
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