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Corporate Sustainability

“Corporate Sustainability” – broadly conceived as the formal integration of economic, environmental, and social factors in managerial decision making and corporate governance – is assuming a central role in global business.

The concept of corporate sustainability builds on the earlier paradigm of corporate social responsibility (CSR), which became fashionable in the early 2000s in the wake of highly publicized scandals (Enron, Tyco, World Com, et al) and activist attacks on Western multinationals (Apple, Liz Claiborne, Nike, etc.) accused of labour abuses in foreign manufacturing operations.

Whereas CSR was a limited response to specific external challenges, corporate sustainability rests on the assumption that the viability of companies hinges on their internal capacity to accommodate ongoing shifts in the global environment. In this view, systematic attention to energy conservation, consumer protection, and related matters is not simply a public relations exercise to placate activist groups or curry favour with stakeholders. Rather, corporate sustainability is a strategic, proactive approach to global competitiveness and long-term growth.

Recent studies confirm the rapid adoption of corporate sustainability practices across the international business community. An October 2010 survey by the Economist Intelligence Unit and KPMG reported that 62 percent of respondents had adopted sustainability programmes, while 11 percent were preparing to do so. An EIU/KPMG survey conducted in February 2008 reported only half of respondents were implementing sustainability practices.

The fact that adoption of corporate sustainability grew during the global financial crisis is striking insofar as sustainability programmes often require large upfront investments (e.g., acquisition of costly renewable energy technologies) with lengthy payback periods. Amid a severe global downturn that forced deep cost cutting, companies around the world are launching sustainability projects whose measurable benefits will not materialise for years.

This article examines the factors driving corporate sustainability, analyses patterns of adoption in the global business community, and assesses the role of corporate sustainability in small and medium enterprises.

Drivers of Sustainability

A number of factors are driving the adoption of corporate sustainability programmes in the global business community:

  • Regulatory Mandates: Growing regulatory pressures compel companies to reduce greenhouse gas emissions, industrial effluents, and other environmental hazards.
  • Operational Cost Efficiencies: Rising raw materials and energy prices incentivize businesses to invest in waste recycling, waste-to-energy, water conservation and related technologies.
  • Reputational Risks: Increasing scrutiny of corporate conduct induces managers to engage environmental, social and human resource problems that might damage the company’s public standing.
  • War for Talent: Intensifying global competition for talented employees boosts the value of corporate sustainability as a mechanism to attract and retain skilled workers.
  • Global Economic Shifts: Changes in the global economy (rise of emerging markets, demographic shifts, technological advances, etc.) heighten the importance of sustainability practices that increase organisational resilience and ensure companies’ long-term competitiveness.

Adoption of Corporate Sustainability

Adoption of corporate sustainability varies significantly by industry. A new study by MIT Sloan Management Review (Knut Balagopal et al, “The Second Annual Sustainability & Innovation Survey”, Winter 2011) reports the highest levels of commitment to sustainability in heavily regulated industries (e.g., chemicals), brand-sensitive industries (consumer products), and resource-intensive manufacturing industries (commodities, industrial products).

Adoption rates are lower in service industries (finance, media/entertainment) where energy consumption, environmental protection, and related factors are less salient. But even in late-adopting industries, organisational commitment to sustainability is steadily rising, signaling widening acceptance of sustainability as a standard part of the repertoire of international corporate management.

Surveys of global executives also show important regional variations. European corporate managers report a greater commitment to sustainability than their U.S. counterparts, an unsurprising finding given stronger regulatory pressures in the European Union and the prevalence of “shareholder” models of corporate governance in continental Europe over American-style stakeholder capitalism.

The factors driving adoption of corporate sustainability also differ by region. Corporate executives in North America are less motivated by advisory boards, advocacy organisations, and NGOs than managers in Europe, Asia-Pacific, Australia/New Zealand, Africa/Middle East, and Latin America. But North American managers face increasing pressure to converge toward rest-of-world standards on sustainability, as weak growth in the domestic market induces U.S. companies to expand their global operations.

Recent survey research provides interesting findings on the role of ownership structure in corporate sustainability. A study by McKinsey Quarterly reported 74 percent of respondents from publicly owned companies were systematically integrating environmental and social factors in corporate decision making, against 63 percent of privately owned firms. (“McKinsey Global Survey Results: Valuing Corporate Social Responsibility”, 2009). The high rate of adoption by listed companies illustrates the increased sensitivity of managers to shareholder concerns over the impact of corporate conduct on equity values and corporate earnings.

Managers of private enterprises are not beholden to shareholder interests, and their adoption of sustainability practices eventually depends on the personal commitment of the founders/owners. But private companies are not wholly immune from external pressures to adopt sustainability programmes, particularly enterprises in global industries where environmental protection and brand equity are critical issues. In response to those pressures, Cargill (commodities), Ikea (consumer retail), and other large private enterprises have launched major sustainability programmes.

Sustainability Leaders

Underscoring the investor community’s growing interest in sustainability, Dow Jones and Sustainable Asset Management (the Swiss-based specialist in sustainability investing) have developed the Dow Jones Sustainability Index (DJSI) to evaluate the sustainability performance of global companies.

The Dow Jones index includes three dimensions of sustainability (economic, environment, and social), each of which include a set of performance criteria and sub-criteria. The purpose of the index is to deliver practical guidance to professional investors chiefly interested in long-term returns, not “socially responsible investing” as an altruistic exercise.

The Dow Jones Sustainability Index highlights the following factors:

  • There is a strong correlation between rankings on the sustainability index and financial performance: i.e., the leaders in the DJSI index exhibit financial performance metrics (including earnings growth) above the average of their industry averages, rendering those companies attractive long-term investments.
  • European companies generally outperform American companies in the sustainability arena, illustrating (1) the rigorous regulatory standards of the European Union in areas pertinent to the DJSI criteria (e.g., greenhouse gas emissions), (2) the salience of sustainability factors for globally active companies headquartered in small, resource-poor European companies (Denmark, Finland, Sweden, Netherlands), and (3) Europe’s status as a first mover in renewable energy and other clean technologies whose adoption advances the corporate sustainability agenda.
  • Companies headquartered in emerging markets (South Korea’s Hyundai, Posco, and Samsung; Taiwan’s TSMC; South Africa’s Sasol) appear on DJSI’s list of sustainability leaders.
  • Other emerging market-based companies (e.g., India’s Tata, Mexico’s CEMEX) score well in corporate sustainability, illustrating (1) the increasing strategic and operational sophistication of these emerging global players, (2) their ability to “leapfrog” the international value chain by accelerating adoption of advanced clean technologies, and (3) the growing imperative for emerging market companies to embrace sustainability to burnish their brand images in developed markets.

Sustainability and Large Companies

Large multinationals companies figure prominently among early adopters of sustainability, including corporations with dubious records in the corporate citizenship sphere.

In 2005, General Electric (whose emission of PCBs into New York’s Hudson River precipitated a series of legal actions in the 1970s–1980s) launched Ecomagination, a programme that has yielded $100 million in operational cost savings and supported the rollout of 80 new products generating some $17 billion in revenues.

Around the same time, Wal-Mart (whose regressive labour policies and heavy handed treatment of suppliers made it a symbol of corporate abuse) initiated a green programme aimed at reducing solid waste and lowering energy consumption. In July 2009, Wal-Mart launched a sustainability index to promote environmentally friendly products and embed sustainable practices in the company’s global supply chain.

Other large early adopters of corporate sustainability include Apple, Dow Corning, IBM, Federal Express, Novartis, and Siemens.

Beyond these examples, survey research confirms wider adoption of sustainability by large corporations than by small and medium enterprises. The domination of the corporate sustainability wave by large companies reflects:

  • The role of public ownership in Fortune 1000-sized companies, which heightens shareholder pressure on managers to implement sustainable practices that bolster financial performance.
  • The visibility of multinational companies in global industries where competitive forces draw managerial attention to sustainability.
  • The ability of large companies to dedicate financial, human, and operational resources to sustainability programmes.

Corporate Sustainability and SMEs

Notwithstanding the large company bias of the sustainability movement, small and medium enterprises (SMEs) stand to reap significant gains from sustainability programmes. Indeed, SMEs enjoy certain advantages over large companies in the sustainability sphere: Their organisational flexibility enables them to inculcate a sustainability culture across the enterprise, while their strategic agility permits them to capitalise on new market opportunities resulting from sustainability campaigns.

The benefits of sustainability for small and medium enterprises include:

  • For SMEs plugged into the global supply chains of multinational corporations, dedication to sustainability bolsters their standing as preferred vendors.
  • For SMEs positioned in brand-sensitive markets segments, sustainability generates “halo effects” that strengthen brand equity and boost customer loyalty.
  • For SMEs pursuing commercial opportunities in clean technology, the internal adoption of sustainability practices facilitates entry into renewable energy, environmental management, and other high-growth markets.
  • For SMEs dependent on skilled employees, sustainability programmes increase their capacity to attract highly talented persons who are likely to be entertaining rival offers.
  • For SMEs seeking private equity or venture capital and/or contemplating initial public offers, commitments to sustainability increase their long-term growth potential and hence raise their attractiveness to putative investors.

SMEs are poised to learn from the mistakes committed by large companies in the sustainability arena, including the “green washing” label attached to multinational corporations that publicly commit them to environmentally friendly policies then failed to deliver (e.g., British Petroleum).

Small and medium enterprises launching sustainability programmes can also draw on the experiences of large early movers to design supportive corporate governance structures including:

  • Sustainability evaluation
  • Transparency standards
  • Measuring/monitoring/reporting
  • Regulatory tracking/compliance
  • Independent validation
  • Internal/external communications

While these governance structures are critical for SMEs’ implementation of sustainability programmes, the success of such programmes ultimately depends on demonstrated commitment by company leaders. Sustainability is an enterprise-wide undertaking that frames the company’s external relations and anchors its long-term competitive strategy. Accordingly, senior leaders (including the CEO/President) must take a visible and aggressive role in driving sustainability campaigns.
 

About David Bartlett

David Bartlett, Economic Consultant, has over ten years’ experience of consulting, researching and teaching on international corporate strategy. He specialises in international growth, global manufacturing, foreign sourcing and distribution and corporate risk management.

David is Adjunct Professor of Strategic Management and Organization at the Carlson School of Management, University of Minnesota. He has also held faculty appointments at Vanderbilt University (USA), Yerevan State University (Armenia), and the University of World Economy and Diplomacy (Uzbekistan).

David has received a Fulbright Senior Scholarship, Salzsburg Seminar Fellowship and other scholarly awards. He holds a PhD and BA from the University of California and an MA from the University of Chicago.

E: david.bartlett@rsmi.com

By David Bartlett
Economic Advisor
RSM International

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