April 20, 2023
Why Sustainability Matters Even More in a Time of Scarcity
The amount of sustainability initiatives leaders launched over the past few years is tremendous. Now that the economy is far more volatile and uncertain, there’s a real question about whether those initiatives will remain on the agenda. Skeptics argue that when organizations are under financial stress, the focus should be on the bottom line of what matters, and sustainability can be set aside until conditions improve. We think that’s a big misread. Sustainability is what really matters right now, for two main reasons.
First, sustainability is a major technology shift, with trillions of dollars at stake over the next several decades. Any big shift in technology upends the business environment and presents new options and opportunities. Think of the railroad boom of 125 years ago or the commercialization of the internet in the 1990s. This time, it’s a global cross-industry disruption. How we produce and consume energy is an excellent example, with tremendous opportunities on both sides and the potential to impact virtually every business. Putting sustainability on the back burner today is like a company in the 1990s saying it doesn’t want to waste any resources thinking about the internet.
Second — and more important — when sustainability measures are assessed and implemented the right way, they don’t detract from business performance. They add to it. The key, however, is finding a clear logic for which initiatives a company will pursue, and how those link to its underlying business model.
A time for scarcity calls for more rigor around the value of investments
Over the past few years, some companies have gotten into bad habits by not being rigorous about the sustainability initiatives they pursue. When times are flush, it’s easy to take an all-of-the-above approach. CEOs could say, in essence, “We’re doing this because it’s the right thing to do.” Many CEOs used that language, verbatim. And if some of those projects didn’t generate results, no big deal. The company could make up the difference elsewhere.
Now that we’re in a time of scarcity, boards and investors are more skeptical and demanding. They want a detailed, rigorous analysis for the sustainability initiatives the company is pursuing. Not “whether” but “which.” Moreover, they want to know the value those initiatives will create, directly or indirectly.
For CEOs, that requires assessing and understanding the options and taking a tailored, differentiated approach to identifying and implementing the sustainability initiatives that are most closely aligned with the company’s business model. Leaders need to justify all investments and how each one will create value — acknowledging that in a portfolio approach, some will generate benefits quickly and with little risk, while others will require time, perseverance, and luck. In that way, the downturn is pushing leaders to do something that they should have been doing all along — a smart portfolio analysis of investments.
Notably, the value need not be directly financial. It could be the mitigation of environmental risk, creating new business concepts, investing in a nascent growth market, reinforcing community relationships, or strengthening employee value propositions to attract more engaged talent. It could even be all of the above. Regardless of the type of value involved, CEOs need to work across the leadership team to push the entire team, not just the chief sustainability officer to understand the risks and opportunities ahead and to answer the fundamental question of how each initiative can add value.
Unlocking the next wave of growth
The skeptic’s argument that a company can only generate business impact if it steers clear of sustainability is deeply flawed. We would argue the exact opposite. Sustainability both encourages and results from long-term strategic and existential thinking. This type of thinking and debate can often lead to an organization preparing itself to accelerate out of a downturn and positioning itself for success in the next cycle. Part of the challenge facing boards and CEOs will be to balance sustainability projects that may be beneficial in the long-term against the short-term needs of a business that is under pressure — no new task for leaders. CEOs need to be rigorous about determining where to place bets, how best to allocate resources, and precisely how a given investment links to the company’s business model (or future business model) to unlock value. In this financial climate, sustainability and the energy transition surrounding it could be the catalyst to unlock the next wave of growth. That’s a far more durable, fundamental approach than merely saying sustainability is the “right thing to do.”