THE TOP TEN REASONS WHY BUSINESSES AREN’T MORE SUSTAINABLE
by Pamela Laughland and Tima Bansal
Social Responsibility |
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“It doesn’t fit the business case,” or “How are we supposed to measure the impact?” are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations. These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices.

The evidence is in: Firms that invest in sustainability are no worse off financially than those that do not.1 Plus, their employees, customers, and investors are happier and more committed.2 Even the simplest of activities, such as philanthropy, can yield financial rewards.3 So, why isn’t every firm jumping on the sustainability bandwagon? 

We asked 15 organizations that are on the leading edge of sustainability to tell us why. In fact, every year, we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons why Canadian firms don’t take action on social and environmental issues. The top 10 reasons they identified are listed below. 

 Top 10 hurdles for business sustainability in 2011

  1. There are too many metrics that claim to measure sustainability—and they’re too confusing.
  2. Government policies need to incent outcomes and be more clearly connected to sustainability.
  3. Consumers do not consistently factor sustainability into their purchase decisions.
  4. Companies do not know how best to motivate employees to undertake sustainability initiatives.
  5. Sustainability still does not fit neatly into the business case.
  6. Companies have difficulty discriminating between the most important opportunities and threats on the horizon.
  7. Organizations have trouble communicating their good deeds credibly, and avoid being perceived as greenwashing.
  8. Better guidelines are needed for engaging key stakeholders, such as aboriginal communities.
  9. There is no common set of rules for sourcing sustainably.
  10. Those companies that try leading the sustainability frontier often end up losing.

 We discuss each of these hurdles below.

 1. There are too many metrics that claim to measure sustainability—and they’re too confusing.

What gets measured gets managed. Issues or goals without obvious metrics are much harder to tackle. Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level, and their organizational implications are unclear. Further, their impacts are not immediately obvious and they depend on who implements them and how. Many suites of metrics and measurement systems—such as the Global Reporting Initiative, ecological footprint, and life-cycle assessment—currently exist to help managers measure their sustainability. 

The range of options often results in more problems than solutions. What makes one metric or suite of metrics better than another, and how can businesses judge which is most appropriate for their needs? As one manager said: “It’s important to know which sustainability metrics are most meaningful and integrate them with traditional business metrics.” Managers recognize that different metrics serve different purposes: some are most relevant to particular sectors, such as manufacturing, while others focus on specific issues, such as carbon. Some metrics focus on products whereas others focus on organizations; some set common benchmarks, whereas others inspire leadership. It seems as if there is a veritable cacophony of metrics, standards, and certifications. Even leading businesses need guidance on which ones will help them benchmark, signal their commitment to sustainability, and identify areas that need improvement.

2. Government policies need to incent outcomes and be more clearly connected to sustainability.

 Governments have several tools at their disposal, such as taxes, regulations, and markets, to encourage businesses to steward environmental resources. However, they are often applied in piecemeal fashion, poorly measured, or used ineffectively. Businesses and management often want to “do the right thing”, and appropriate policy can support this mindset. Leading businesses want policies that push all organizations to improved sustainability outcomes. In doing so, firms can put into place long-term measures and innovate new products and practices that move them closer to those goals.

 Businesses also want to know the best practices for collaborative consultation and policy development involving government, business, and other stakeholders. They do not want to be adjuncts, but to work with government collaboratively and meaningfully. One manager asked, “How can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policies?” In other words, business wants to be involved in the process such that the resulting policy is effective, efficient, and consistent with both the needs of business and society.

3. Consumers do not consistently factor sustainability into their purchase decisions.

Many decisions consumers make—from what food to buy to how much energy to use—involve sustainability-related tradeoffs. We constantly trade off different types of impacts (social, environmental, or economic) at different levels (personal, communal, or societal) over different time periods (now or later). In the words of one manager: “Many people demand cleaner energy but refuse, for example, to allow windmills in their community. How can we help consumers make informed tradeoffs when it comes to sustainability?”
 
Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs. Further, there may be a role for business in educating consumers on issues and product attributes, resulting in more informed purchasing decisions.

 Still, this doesn’t just apply to consumers—it also applies to investors. Shareholders and lenders must decide where to invest their money. How do they choose between different companies, which requires trading off one set of corporate attributes for another? Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy? Understanding how people make tradeoffs will help businesses make sustainable choices.  

4. Companies do not know how best to motivate employees to undertake sustainability initiatives.

 Survey research shows employees would rather work for sustainable firms—and some would even forego higher earnings to do so.4  Firms must better leverage this knowledge to attract and retain the best employees. To do this, sustainability managers want to know which employee incentive plans are most valued, and so likely to be effective. One manager clearly identifies this need, asking: “What does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentives?”

 These mechanisms should allow firms to leverage their sustainability initiatives and values, building the right capacity internally and ensuring progress is made towards sustainability goals. An enduring commitment to sustainability, one that can only be achieved over a long time horizon, may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers. One manager at a leading firm points out: “It’s easy to generate ideas and start initiatives at the grassroots level. But how do we sustain that momentum for fruitful innovation across the entire organization—and over the long term?” However, such commitment requires the buy-in and sustained interest of employees. In this way, good employees attract other good employees, and the firm moves towards a virtuous and enduring cycle of sustainability.

5.  Sustainability still does not fit neatly into the business case.

Most sustainability managers are beyond asking if it pays to be good (or green). However, they are often called on to explain and defend sustainability activities. Current financial decision-making does not fully capture the value of sustainability-related investments. These investments are often based on long-term and intangible rewards, whereas many investments made are based on the short-term impact on the bottom line. One manager pointed out that the payback period for sustainability investments often exceeds that required to approve projects. Sustainability executives may resort to intangibles to justify corporate environmental and social investments. Initiatives are often treated therefore, as ‘off-grid’ or ‘one-offs’, rather than a recurring component in all decision-making activities.  Another manager said: “We need to be able to value brand, reputation and the externalities arising from our business activities.”

Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen. What are the short-term and long-term ways to assess and justify these investments? How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives? Until sustainability becomes accepted as a legitimate—and value-creating—activity, it may lose out to projects that are more easily understood and evaluated. 

6. Companies have difficulty discriminating between the most important opportunities and threats on the horizon.

Numerous threats are looming for business—from financial crises, to climate change, to local land issues, to health pandemics. It is difficult to judge which of these risks warrants attention, and often more challenging to prioritize them. Businesses need guidance on how to evaluate the materiality of an issue, both for disclosure purposes and for strategic planning. One manager points to the complexity facing their business: “There are myriad opportunities and risks we could tackle as an organization. We need to understand where to focus our attention to advance our practices now and in the future.”

Equipped with an understanding of which risks and opportunities are most material to their organization, managers can then prioritize material issues, translate them into internal strategies, and communicate them to stakeholders.

7. Organizations have trouble communicating their good deeds credibly, and avoid being perceived as greenwashing.

Claims made by some businesses and NGOs regarding sustainability are perceived to be credible, whereas others are met with skepticism or disbelief. The different reactions are likely related to attributes of the organization making the claims—its size, its structure, its actions, or its motivations. Even leading businesses are wary of touting their successes, as such communications can invite public criticism for the things that they aren’t doing.

Companies want to know how to communicate their message credibly, so the integrity of their efforts is clear. This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful. One manager noted: “Polls show people consider academics and NGOs more credible than corporations and government. What sincere action can organizations undertake to foster public credibility?”

8. Better guidelines are needed for engaging key stakeholders, such as aboriginal communities.

Many businesses have experienced very positive interactions with aboriginal groups, resulting in benefits for both parties. Other businesses—sometimes operating in the same regions—have had negative interactions. One manager recognizes the unique viewpoint that is required to navigate such situations: “Organizations need to understand the aboriginal perspective on sustainable development—which extends the traditional view of sustainability in resource development beyond the environmental, social and economic pillars to include cultural and spiritual dimensions.”

By building a more robust understanding of the aboriginal perspective on sustainability, the relationship between the business and the aboriginal community can be built on mutual respect and trust, which is more likely to lead to positive engagement. Furthermore, this understanding may inform the business community of new approaches to sustainability and stakeholder engagement, both within the aboriginal communities and outside of them.

9. There is no common set of rules for sourcing sustainably.

Businesses want to purchase products and services that are environmentally and socially responsible. But the process of identifying sustainable suppliers is not always straightforward, and the means for comparing products is not always obvious. Sustainable sourcing decisions may also require industry-specific knowledge and practices, or data that just may not be available.

Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains. It would also yield an opportunity for leading businesses to showcase their good practices. One manager says: “Sustainable sourcing is key for us. How can we get people to understand what it means for our business? Are there lessons from what we’ve done that can help other industries?” Sustainable sourcing is not just about sustainability—it is also about managing and mitigating risks. This issue is clearly one in which the business case and societal good are aligned, and yet many businesses remain perplexed about how to manage their supply chains sustainably.

10. Those companies that try leading the sustainability frontier often end up losing.

Leadership in any field—sustainability included—carries with it some clear rewards. For instance, leading organizations can attract new customers, and foster loyalty with employees and community stakeholders. But there are also risks associated with being on the cutting edge. For example, sustainability leaders may overinvest in technologies that never yield the expected rewards, be overtaken by a second-mover who builds on the leader’s ideas to leapfrog into the lead, or lose the support of internal stakeholders with shifting corporate priorities.

One manager highlights this paradox: “Being a leader means sticking your head above the parapet: it exposes you to criticism internally and externally, but the potential rewards are great. Executives introducing new sustainability targets have to do their homework. The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar.  

 The Business Model for the 21st Century

In most discussions about the business case for sustainability, the emphasis has been on the bottom line. The value of sustainability has been analyzed from every direction—revenues, profits, and share prices—and it is clear that, in some circumstances, sustainability can pay off. However, sustainability is more than just about firm-level benefits. Businesses, business schools, and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits.

Businesses develop the products and services consumed by individuals around the world. The vast resources extracted by business for society’s use have created waste streams that find their way into our land, air and water and compromise human health. New businesses are being built on an understanding of the problems that have emerged through the 20th century. Increasingly, old businesses are evolving to use fewer resources, intensify the resources they do use, and renew and reuse the products they sell. New relationships are forming between businesses as firms realize synergies from interdependence; one firm can profit from another’s waste, or several firms can benefit through flexible supply chain relationships built on common interest.

The 21st century will reveal a new paradigm in which business is no longer separate from society. Realizing the new “business-as-society” paradigm will require the efforts and ingenuity of organizations across sectors and industries. It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems, and the next generation to cut their teeth on issues of unprecedented importance and complexity. Those businesses that identified the hurdles and challenges described in this report, along with those businesses that aim to overcome them, will help to shape this new business landscape. The concept of sustainability is undeniably compelling. Done right, both business and society benefit.

 

1 Orlitzky, Marc, Frank L. Schmidt and Sara L. Rynes,  (2003). Corporate Social and Financial Performance: A Meta-Analysis. Organizational Studies, 24(3): 403-441.

2 Grant, Adam M. and Sabine Sonnentag. (2010) Doing good buffers against feeling bad: Prosocial impact compensates for negative task and self-evaluations. Organizational Behavior and Human Decision Processes, 111 p13-22.

Harrison, Jeffrey S., Douglas A. Bosse and Robert A. Phillips. (2010) Managing for stakeholders, stakeholder utility functions, and competitive advantage. Strategic Management Journal, 31:58-74.

Jacobs, Brian W., Vinod R. Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm. Journal of Operations Management, 28: 430-441.

3 Lev, Baruch, Christine Petrovits and Suresh Radhakrishnan. (2010) Is doing good good for you? How corporate charitable contributions enhance revenue growth. Strategic Management Journal, 31: 182-200.

4 Montgomery, David B., and Catherine A. Ramus (2007) Including Corporate Social Responsibility, Environmental Sustainability, and Ethics in Calibrating MBA Job Preferences. Stanford Graduate School of Business, Research Paper No. 1981.

The Authors:

Pamela Laughland

Pamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability.



Tima Bansal

Tima Bansal is Professor, Richard Ivey School of Business. She is Director, Ivey's Centre for Building Sustainable Value, and Executive Director, Network for Business Sustainability.



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