The Sustainability Ship Has Sailed. Latecomers, Grab a Raft and Hope for the Best
We are finally getting there. Sustainability is going mainstream. After years of spotlight and trillions of dollars of investment in digital transformation, we see a major shift in priorities for medium and large companies. Sustainability and social impact have become a main area of focus in strategic development and financial reporting. In a 2022 study of 850 companies worldwide, 80% said they plan to increase their investments in sustainability.
I posit that there are two forces at play in this push for sustainability:
1. Regulation is becoming a reality in some parts of the world. That is the top-down pressure coming from governments, regulators, and other global institutions. Regulations can impact every aspects of a company’s business model.
2. Consumers and customers are demanding more from their suppliers: that is the bottom-up effect where consumers are changing their buying habits. Two key statistics to consider: 88% of consumers will be more loyal to a company that supports social or environmental issues. And 83% of consumers will always choose a brand with a better sustainability record.
You got it. Companies have no choice. They have to comply, and they have to respond to consumer needs. And they have to do that seriously. “Greenwashing” will not satisfy regulators, investors or consumers.
This is much more serious and much more pressing than a decade ago. Why? Because the financial world is all over sustainability investing and responsible financing. Just look at this statistic: “Through the third quarter (of 2022), global sustainable funds amassed almost $4 trillion in assets, including more than $330 million in U.S. sustainable mutual funds and ETFs, which is almost twice the level of a year ago.”
Like with any organizational innovations, some companies have taken the bull by the horns and made sustainability a strategic corporate pillar. HP, Schneider Electric, Assa Abloy, Interface and others started their transformations a few years ago and are going full speed ahead. They have already embraced sustainability and have systematized ESG accounting and reporting in their annual reports. The laggards are just getting started and have just hired a chief sustainability officer to catch up. They are late to the party, and they are running!
Two questions remain in my opinion:
1. Can sustainability just be a compliance play?
Compliance in the following areas is for sure the biggest motivator for investing in sustainable and social development.
Regulations: The level and complexity of regulations are increasing every year. That cannot be ignored.
Shareholders: Similarly, C-suites can no longer ignore board mandates to get started and to invest in compliance efforts.
Investors: Investing and promoting sustainability can open the doors to new sources of financing, which is quite relevant in times of recession and a financing crunch.
Consumer requirements: The “do nothing” or “in denial” plays do not longer work. Consumers in both the B2B and B2C worlds pay attention. They want action.
Compliance with industry trends: Finally, you do not want to be the last one to get started in your industry. First-mover advantage in sustainability can create superior competitive advantage.
2. Can organizations investing in sustainability move beyond the cost discussion?
Industrial companies are obsessed with costs. Most of their strategies are cost-based, including marketing and pricing. I would anticipate that the same will apply to sustainability efforts.
Cost of technology development: Building an electric commercial plane or an electric glass furnace is not a simple proposition. There will billions in R&D investments needed.
Cost of producing sustainable products: Sourcing and developing products with higher recycle content might increase their costs and therefore their prices. That leads to more cost-plus pricing decisions and greater focus on cost in general.
Cost of securing sustainable raw materials: Some raw materials are scarce and supply chains are tight.
Capex financing costs: With sustainable assets comes a fair amount of cash requirements to finance them. Cost of capital has increased recently, and it might be a strong constraint.
Cost of ESG process management: Managing ESG professionally require people, data systems, and a rigorous process.
The combination of compliance and cost dynamics has made companies much more aware of what it takes to do the required transformation. Leaders have no choice but to get started and start their journey with the right people and investments.
A Critical Differentiator
However, there is another consideration that is missing from this equation. Sustainability can become a critical differentiator for companies to put it at the heart of their corporate value proposition. That means transforming the core business into a sustainable one and creating a strong strategic pillar around sustainability and social impact. It is not an afterthought or a simple corporate program somewhere in the corporate maze. It becomes part of the business model.
When done right, sustainability becomes a strong corporate differentiator that transpires in the services, products and software offered to customers. These companies have turned intangibility into tangibility and demonstrated the value of their sustainable offers.
Ask yourself this question: Is sustainability in your organization an internal compliance play or a competitive advantage play to bring value to your customers? That is a heck of a difference!
Stephan Liozu is founder of Value Innoruption Advisors, a consulting boutique specializing in industrial pricing, XaaS pricing and value-based pricing. He is also the co-founder of Pricing for the Planet, which specializes in pricing for sustainability. Stephan has 30 years of experience in the industrial sector with companies like Owens Corning, Saint-Gobain, Freudenberg and Thales.
