Summary Findings From The Sustainability Global Executive


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RESEARCH REPORT

In collaboration with

SUMMARY FINDINGS FROM THE SUSTAINABILITY GLOBAL EXECUTIVE STUDIES, 2009-2016
Corporate Sustainability at a Crossroads
Progress Toward Our Common Future in Uncertain Times
By David Kiron, Gregory Unruh, Nina Kruschwitz, Martin Reeves, Holger Rubel, Alexander Meyer Zum Felde

MAY 2017

#MITSMRreport REPRINT NUMBER 58480

RESEARCH REPORT CORPORATE SUSTAINABILITY AT A CROSSROADS

AUTHORS

DAVID KIRON is the executive editor of MIT Sloan Management Review. He can be reached at [email protected] mit.edu.
GREGORY UNRUH is the Arison Professor of Values Leadership at George Mason University and guest editor for MIT SMR’s Big Idea sustainability initiative. He can be reached at [email protected] gmail.com.

MARTIN REEVES is a senior partner and managing director in The Boston Consulting Group’s New York office and head of BCG’s Henderson Institute. He can be contacted at [email protected]
HOLGER RUBEL is a senior partner and managing director and global sustainability lead in The Boston Consulting Group’s Frankfurt office. He can be contacted at [email protected]

NINA KRUSCHWITZ is the former senior project manager of MIT Sloan Management Review.

ALEXANDER MEYER ZUM FELDE is an expert principal for sustainability in The Boston Consulting Group’s Hamburg office. He can be contacted at [email protected]

CONTRIBUTORS

MIT Sloan Management Review Cheryl Asselin, managing editor Carolyn Ann Geason, designer Elizabeth Hamblin, web production editor Max Harless, graphics Janet Parkinson, copy editor Lauren Rosano, associate director, digital media

The Boston Consulting Group Hanna Asmussen, associate Matthew Clark, global marketing director - strategy Elena Corrales, lead knowledge analyst Hans-Georg Höllerer, associate Sophie Zielcke, consultant

A special thank you to Knut Haanaes, who left BCG in 2016 to become a professor of strategy and international management at IMD in Lausanne, Switzerland. Knut played a key role in setting up the partnership between MIT SMR and BCG in 2008, when he was a senior partner and managing director for BCG. Knut made countless contributions to our research during the past eight years, even after he became the leader of BCG’s Global Strategy Practice.
To cite this report, please use: D. Kiron, G. Unruh, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Corporate Sustainability at a Crossroads: Progress Toward Our Common Future in Uncertain Times,” MIT Sloan Management Review, May 2017.
Copyright © MIT, 2017. All rights reserved.
Get more on data and analytics from MIT Sloan Management Review: Read the report online at http://sloanreview.mit.edu/sustainability2017 Visit our site at http://sloanreview.mit.edu/sustainability Get the free data and analytics newsletter at http://sloanreview.mit.edu/enews-sust Contact us to get permission to distribute or copy this report at [email protected] or 877-727-7170

CONTENTS

RESEARCH REPORT
MAY 2017

1 / Executive Summary
• Key Lessons
2 / Introduction
• The Crossroads
4 / Corporate Sustainability Hits the Mainstream
5 / Uneven Progress
• Uneven Progress Across Industries
• Progress Varies Between Geographies
• Progress Varies Relative to Size • Progress: A Work in Progress

9 / Making Material Progress
• Innovate the Business Model • The Implementation Challenge • Build a Business Case • Getting the Board on Board
16 / Engaging Shareholders
• Embrace Collaboration Within Your Ecosystem
19 / The Big Why
21 / Appendix
24 / Acknowledgments

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Corporate Sustainability at a Crossroads
Executive Summary
M IT Sloan Management Review and The Boston Consulting Group have been tracking corporate sustainability for the past eight years, surveying tens of thousands of managers and interviewing more than 150 executives and thought leaders, while producing eight annual reports and numerous blogs and articles. MIT SMR and BCG joined forces to increase knowledge about business adoption of sustainable practices and to support the integration of sustainability into business strategy. (See Appendix for summaries of the reports.)
Despite significant progress, corporate sustainability has arrived at a crossroads. In one direction, corporate leaders in sustainability remain a minority, and are unevenly distributed across geographies and industries. In the other direction, a handful of standout companies are demonstrating that sustainability can be a driver of innovation, efficiency, and lasting business value. Populist political movements around the world threaten to set back global diplomatic progress on issues like climate change and reverse recent regulatory trends. All of this complicates the calculus of corporate leaders and their sustainability strategies.
Fortunately, the path to sustainable value creation has become substantially clearer in the past eight years. Based on our multiyear research on corporate sustainability, we have identified eight evidencebased factors that drive sustainable business practices, regardless of industry or region:
1. Articulate a practical sustainability vision and ambition that lays the foundation for new business practices.
2. Identify and prioritize material issues to focus resources. 3. Embed sustainability organizationally through cross-functional teams, clear targets, and key
performance indicators (KPIs). 4. Innovate on multiple dimensions of your business model. 5. Develop a clear business case. 6. Get the board of directors on board. 7. Communicate a sustainability value-creation story to your shareholders. 8. Collaborate with a variety of stakeholders to drive strategic change.
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RESEARCH REPORT CORPORATE SUSTAINABILITY AT A CROSSROADS

KEY LESSONS
Key Lesson #1: Set your sustainability vision and ambition: 90% of executives see sustainability as important, but only 60% of companies have a sustainability strategy.
Key Lesson #2: Focus on material issues: Companies that focus on material issues report up to 50% added profit from sustainability. Those that don’t focus on their material issues struggle to add value from their sustainability activities.
Key Lesson #3: Set up the right organization to achieve your ambition: Building sustainability into business units doubles an organization’s chance of profiting from its sustainability activities.
Key Lesson #4: Explore business model innovation opportunities: Nearly 50% of companies have changed their business models as a result of sustainability opportunities.
Key Lesson #5: Develop a clear business case for sustainability: While 60% of companies have a sustainability strategy, only 25% have developed a clear business case for their sustainability efforts.
Key Lesson #6: Get the board of directors on board: 86% of respondents agreed that boards should play a strong role in their company’s sustainability efforts, but only 48% say their CEOs are engaged, and fewer (30%) agreed that their sustainability efforts had strong board-level oversight.
Key Lesson #7: Develop a compelling sustainability valuecreation story for investors: 75% of executives in investment companies think sustainability performance should be considered in investment decisions, but only 60% of corporate executives think investors care about sustainability performance.
Key Lesson #8: Collaborate with a variety of stakeholders to drive strategic change: 90% of executives believe collaboration is essential to sustainability success, but only 47% say their companies collaborate strategically.
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In this report, we draw upon our database of more than 60,000 survey respondents from companies around the world to assess the emergence of corporate sustainability across industries and elaborate the above eight critical insights that can help executives accelerate their company’s contribution to our common future.
Introduction
This year marks the 30th anniversary of the publication of “Our Common Future,”1 the report from the United Nations World Commission on Environment and Development (also known as the Bruntland report) that launched the idea of “sustainable development.” The report envisioned a future where current economic prosperity did not come at the expense of future generations. But its definition of sustainability as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” was diplomatic sleight-of-hand, cleverly satisfying both economic and environmental ministers but offering no guidance on how such a vision might be implemented.
Three decades in, we have yet to implement this vision. However, today we know much more about what it will take to make it real. We know, for example, that relying only on government fiat to address sustainability issues such as climate change, water scarcity, depletion of natural resources, and workers’ rights is insufficient. Many solutions lie with business and the commercial sector’s ability to innovate. Sustainable corporate performance is essential, and executive leadership vital. Proactive action from the private sector is now recognized as fundamental to realizing a sustainable future.
Today’s business leaders demonstrate a much higher level of commitment to corporate sustainability than existed when the Brundtland report was published back in 1987. Nine thousand companies have joined the UN Global Compact since it was established in 2000.2 Its members commit to 10 sustainability principles. Seventy-four percent of the world’s largest companies now use the Global Re-

porting Initiative’s process for tracking and reporting their sustainability performance.3
In practice, a majority of executives today agree that having a sustainability strategy is necessary to be competitive.4 More and more companies are reporting on their sustainability performance.5 The roster of businesses with multibillion-dollar sustainable business practices is expanding year by year.6 Corporate sustainability is no longer a marginal or money-losing set of activities.7
A vast network of tool makers, including investors, consumer groups, organizations, coalitions, certifiers, and platforms, now exists to spur and aid sustainable business practices. Two significant trends have emerged in relation to this burgeoning network: One is that companies, as well as partners in their value chain, have become much more transparent about their own sustainability-related activities. Corporations are doing more to track and communicate sustainable practices, just as more tools have become available to consumers and noncorporate actors to measure and monitor (un) sustainable business activities. Notably, social media and other technology platforms have become effective mechanisms for heightening awareness of crises and corporate misbehavior, exerting increased pressure on companies to respond.

ABOUT THE RESEARCH
This report represents the conclusion of sustainability research carried out between 2009 and 2017 by MIT Sloan Management Review (MIT SMR), in partnership with The Boston Consulting Group (BCG). Over the course of eight years, we conducted an annual global survey on the topic of sustainability and business. Executive and management respondents came from a broad mix of industries, 118 countries, and totaled over 60,000 respondents (18,733 responses were from managers in commercial enterprises). The survey pool included MIT SMR subscribers and readers, MIT alumni, BCG clients and alumni, UN Global Compact participants, and other interested parties.
In addition to survey results, each year we interviewed practitioners, academics, and subject-matter experts from a number of industries and disciplines to further our understanding of the sustainability issues facing organizations and to refine hypotheses we were testing in the survey itself. A list of the 176 people who participated in our research through interviews (some more than once) can be found in Acknowledgments. We appreciate the generosity they demonstrated in sharing their time and insights, which contributed to the richness of our reports, including dozens of examples of sustainable business practices, many of which made their way into the final reports. Content from several reports are integrated into this report, which synthesizes and extends the findings from this eight-year research effort.

A second trend relates to groups of companies or nations working together to forge new standards and goals for sustainable business practices. The Sustainability Consortium, for example, founded nearly a decade ago with funding from Wal-Mart Stores Inc., has a significant network of members committed to science-based sustainability guidelines for products and supply chains. Just last year, representatives of 195 countries ratified a landmark climate agreement in Paris to set nation-by-nation limits on greenhouse gas emissions beginning in 2020. Signatories to the agreement represent a large portion of the world’s population. The Paris Agreement will likely have a significant impact on the global economy and focus sustainability practices in industries around the world. Even with a climate skeptic at the helm of the executive branch of the U.S. government and un-

Details about the research and analysis for each annual report can be found within individual reports, at sloanreview.mit.edu/reports.
certainty about whether the United States will withdraw from the treaty, large polluting nations like China and India have begun introducing stricter regulations in accord with the Paris Agreement.
The Crossroads
Despite this progress, corporate sustainability has arrived at a crossroads. In one direction, corporate leaders in sustainability remain a minority and are unevenly distributed across geographies and industries.

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Stand-out corporate leaders, like Unilever’s Paul Polman or Patagonia Inc.’s Yvon Chouinard, are still the exceptions. In another direction, the natural environment continues to change as a result of human activity. Catastrophic loss events from naturally occurring events like floods, earthquakes, and droughts are becoming more frequent and intense,8 threatening regional economies and compounding resource-scarcity issues that afflict many areas. In still another direction, global economic inequality presents a growing risk to globalization and international market stability.
Public attitudes toward government regulation and efficacy also intersect with corporate sustainability. With populist and anti-regulatory leaders on the rise, trust in government institutions reaching a low point, and some political leaders denying the reality of climate change, the potential for corporate sustainability to lose momentum or backslide is all too real. In the United States, the coal industry is undergoing a wave of deregulation, prompting concerns that the U.S. will displace China and reclaim its title as the world’s largest emitter of greenhouse gases. Elsewhere, deforestation rates in the Amazon rainforest are on the rise after a decade of declines, pointing to the potential for broad reversals in recent trends.9
If backsliding is to be avoided, corporate leaders have an urgent need to accelerate their sustainability efforts and resist the siren song of new anti-regulatory incentives that tempt leaders to scale them back.
What can corporations do to hasten their sustainability efforts? A first step is to better understand the progress corporate sustainability has already made, and then build on those lessons. MIT Sloan Management Review and The Boston Consulting Group have been tracking developments in corporate sustainability for the past eight years, surveying tens of thousands of managers and interviewing hundreds of executives and thought leaders, while producing eight annual reports and numerous blogs and articles. (See Appendix for summaries of the reports, in addition to links.) For this report, we assess the emergence of corporate sustainability across industries, and elaborate eight critical insights about what

executives can do to accelerate their company’s contributions to our common future.
Corporate Sustainability Hits the Mainstream
To see how far corporate sustainability has come, one need look no further than the financial sector. Think of the financial sector as a group of organizations that includes not only retail and commercial banks but also central banks, insurance companies, re-insurance companies, asset management companies, investment funds, venture capitalists, private equity companies, institutional investors, and stock exchanges.
In 2010, a UN-financed report revealed that only 22% of 766 CEOs believed that the investment community would be major stakeholders in their company’s sustainability efforts.10
No more.
Our 2016 report, “Investing for a Sustainable Future,” demonstrated that a clear majority (60%) of executives in publicly traded companies believe that good sustainability performance is important to investors. But even this majority understates how much investors really care about corporate sustainability. Our survey results show that an overwhelming threequarters (75%) of senior executives in mainstream investment firms believe sustainability performance is materially important to their investment decisions. Seventy-four percent of surveyed investors agreed that sustainability performance matters more than it did three years ago. Investors care more about sustainability than many managers believe.
A 2016 report from the Morgan Stanley Institute for Sustainable Investing and Bloomberg LLC shows that among 402 asset managers, 89% were familiar with sustainable investing and 65% practiced sustainable investing in some form.11 Bob Eccles, retired Harvard Business School professor and chairman of Arabesque, a London-based invest-

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ment company, observed, “The vice chairman of one of the top 10 banks by market cap told me he interviewed all 50 of their largest institutional investors last year, and that was the first time every single one asked about sustainability or ESG. Companies have been complaining for years that nobody cares about sustainability, but investors care, and companies need to up their game.”

Many new analytics tools and platforms are making ESG performance information easier to access — and make sense of.17 This trend toward better access to better data is expanding the group of stakeholders using information about corporate performance on ESG factors, including millennials looking for employment opportunities with companies that have strong sustainability performance.

Many efforts are underway to guide companies on how to report environment, social, and governance (ESG) metrics. Below are three examples of organizations that address this:12
• The United Nations-supported Principles for Responsible Investment (UN PRI) state that an “economically efficient, sustainable global financial system is a necessity for long-term value creation” and will reward long-term responsible investment. More than 1,600 investment organizations have committed to the UN PRI’s six principles of responsible investment, which include incorporating ESG issues “into investment analysis and decision-making.”13
• In the U.S., the Sustainability Accounting Standards Board (SASB) is working to develop rules governing public disclosure of financially material corporate sustainability information. SASB’s stated mission is to develop and disseminate sustainability accounting standards that help public corporations disclose material, decision-useful information to investors.14 SASB is developing a materiality matrix that identifies key sustainable issues for companies in 79 industries and 10 sectors. SASB claims to be the only sustainability standard to cover 79 industries.15

Investors are not just looking for information; they are also looking for new sustainability-oriented investment products. A 2016 Wall Street Journal article, “‘Sustainable Investing’ Goes Mainstream,” documents the trend, discussing new sustainability products from BlackRock and Goldman Sachs.18 Likewise, the emergent labeled green bond market is expanding rapidly, reaching $118 billion in 2016.19 Green bonds are debt issuances that meet certain international standards ensuring projects will have a positive environmental impact: They represent a growing, but still tiny, fraction of the overall global bond market, which has a value close to $90 trillion.20 Indeed, all new multi-decade bond issuances are being increasingly scrutinized through a sustainability lens. With such long payback periods, lenders need to know that a borrower’s business can be sustained in an increasingly hot, crowded, and uncertain world.
Even with the proliferation of information, tools, products, organizations, and networks aimed at advancing or exploiting corporate ESG conduct — along with heightened awareness among executives and public interest in corporate sustainability — the advancement of sustainable business practices within companies is irregular across industries, geographies, and company size.

• The UN’s Sustainable Stock Exchange Initiative, established in 2009, works with stock exchanges to develop more sustainable capital markets. According to a 2016 report on the Initiative’s website, “More than 70% of listed equity markets — 58 stock exchanges altogether — have signed on. Twelve exchanges incorporate reporting on ESG information into their listing rules, and 15 provide formal guidance to issuers.”16

Uneven Progress
Companies that are leading the corporate sustainability movement have many things in common, but a fundamental one is having a sustainability strategy. Sustainability strategies are not created equal, however, and their relevance to core business activities varies widely among organizations. Since every com-

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pany has a unique organizational structure, supply chain, employee base, geographic footprint, and so on, it is logical that every company also has a unique sustainability profile. This makes variety in sustainability strategies inevitable. Some managers will say they have a sustainability strategy, but often it’s just a near-term plan for achieving incremental environmental or social improvements or complying with relevant existing regulations. For other companies, sustainability strategy is linked to their overall business strategy, often encompassing the supply chain and customer segments. In the most advanced companies, sustainability strategy is the business strategy, fully embedded in the company’s purpose. We discuss differences between these strategies below.
Key Lesson #1: Set your sustainability vision and ambition: 90% of executives see sustainability as important, but only 60% of companies have a sustainability strategy.
FIGURE 1: THE IMPORTANCE OF A SUSTAINABILITY STRATEGY Ninety percent of respondents see sustainability as important, but only 25% have developed a positive business case.
90% of companies consider a sustainability strategy important to remaining competitive
60% of companies have a sustainability strategy
25% have a business case for sustainability

Corporate leaders in sustainability not only articulate a vision for their sustainable business but also connect that vision to a strategy. Although 90% of managers agree that having a sustainability strategy is important to their business, only 60% claim that their organization has any kind of sustainability strategy (see Figure 1). Many companies have no real sustainability strategy at all. Instead, they have projects, anecdotes, and examples they make available to shareholders, regulators, and consumers in the form of glossy sustainability reports. Our research indicates that companies struggle to find a payoff from sustainability until they develop a true sustainability strategy and build a solid business case. Dave Stangis, vice president of public affairs and corporate responsibility at Campbell Soup Co., explains that many companies are not acting strategically and haven’t figured out how to really integrate sustainability. “They are throwing things against the wall to see if they stick,” he says. “They probably are losing money on sustainability.”
Uneven Progress Across Industries
Industries that have the highest percent of companies with a sustainability strategy are in chemicals, energy and utilities, industrial goods and services, and machinery (see Figure 2, page 7). These, of course, are highly regulated industries with substantial environmental and health and safety concerns, as well as significant resource needs or constraints. Sustainability issues are an inescapable aspect of these industries, with many concerns becoming material to the success (and failure) of their businesses. For companies in these industries, having a sustainability strategy is practically mandatory. In the energy sector, for example, oil and gas companies often need to address environmental and social factors in order to meet the expectations of communities in their operating and market environments; a broader strategic approach to sustainability that embraces more of their business is a necessity. “For us, this is a key part of the business driver behind sustainable development,” says Tom Albanese, CEO of Rio Tinto. “It is the license for our asset base to operate.” Some sectors within the energy industry may not survive as pressures mount to move toward

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a less carbon-dominated economy. For companies in the coal sector, for instance, a sustainability strategy might mean shifting their corporate focus away from coal products. (See Sidebar: Sustainability For Some, But Not Others.) With the United Kingdom prohibiting the use of coal plants after 2025, Drax, a power company, is moving aggressively to transform its coal plants into wood pellet-burning plants and to increase its wind and solar energy capacity.21
Progress Varies Between Geographies
The share of companies with sustainability strategies varies across regions. The percentage of companies with a sustainability strategy has steadily increased in Australia, Europe, and Latin America (see Figure 3, page 8). Unsurprisingly, businesses that operate in multiple regions have the highest share of sustainability strategies. Northern America22 has a relatively low proportion of organizations with sustainability strategies, and there is a significant risk that the deregulation push of the current U.S. administration could unravel the social and environmental gains of the last few years. Companies in both North and Latin America are less likely to view sustainability-oriented strategies as necessary to be competitive (see Figure 4, page 8).
Internal or external forces may drive adoption of a sustainability strategy. In Latin America, for instance, external pressures in the form of new regulatory policies are driving adoption of sustainability strategies in the mining industry. Mining incidents and popular protests are spurring regional governments to strengthen the criteria that companies must meet in order to obtain, and maintain, their license to operate. In other Latin American industries, strong leadership motivates adoption of sustainability strategies. The Costa Rican beverage leader Florida Ice & Farm Co. SA is a case in point. In 2005, the company responded to Costa Rica’s looming water access crisis by investing in water-saving measures. Within two years, the organization had decreased its use of water in production by an eye-popping 82%, becoming Latin America’s first water-neutral company in 2012. Beyond the sustainability gains, the reduction drove down production costs and

FIGURE 2: ORGANIZATIONS WITH SUSTAINABILITY STRATEGIES BY INDUSTRY Highly regulated industries such as energy and utilities are most likely to have a sustainability strategy.

Does your organization have a sustainability strategy?

Automobiles Chemicals
Conglomerates Construction
Consumer products Energy and utilities Financial services
Health care Industrial services Media and entertainment

2013 2014 2015
2013 2014 2015
2013 2014 2015
2013 2014 2015
2013 2014 2015
2013 2014 2015
2013 2014 2015
2013 2014 2015
2013 2014 2015
2013 2014 2015
0%

20%

40%

60%

80%

100%

Yes Don’t know No

SUSTAINABILITY FOR SOME, BUT NOT OTHERS
In a sustainable future, some industry sectors may not survive. According to London Business School professor Ioannis Ioannou, the possibility that some companies may not make it in a sustainable future “is quite expected.” He explains, “In my mind, the pressure for sustainability is, in many ways, the mother of all disruption. We’re talking about challenges that go far beyond just technological innovation in terms of products and services. We’re talking about business model innovation. We’re talking about changing the very identity of organizations… It will be no surprise that a lot of companies will simply fail to meet that expectation.”
In general, corporate lifespans are shrinking; publicly traded companies in the U.S. have a 1 in 3 chance of disappearing in the next five years, a sixfold increase since 1965.i It’s a broad-based phenomenon: Most types of businesses in most industries run the risk of dying younger. Sustainability is just adding additional pressure to this trend.
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Summary Findings From The Sustainability Global Executive