Three years ago, PricewaterhouseCoopers started hearing from more and more clients seeking help on how to become more sustainable. But when executives at PwC looked at their own environmental impact, they were at a loss. “We had no idea what our footprint was,” says Shannon Schuyler, corporate responsibility leader for PwC. “As you get to those questions, it makes you reflect on what do we do?”
It’s the kind of question companies are seeing thrown at them from consumers, regulators, clients, investors, community leaders and the like, demanding they address sustainability in a more systemic way. On top of these pressures comes the strain of a tough economy. And companies are responding. According to a study of 766 CEOs conducted by Accenture and released at the United Nations Global Compact Leaders Summit 2010, faced with pressures from all sides, CEOs are changing the way they think and act when it comes to sustainability.
“Actions now emanate from a deeper conviction than a ‘wait and watch and see what others do,’” says Carolyn Woo, dean of the Mendoza College of Business. In June 2010, she was a panelist at the summit in New York where executives met to discuss the study findings and set goals moving forward. Of those surveyed, 81 percent of CEOs said sustainability is now embedded in their company’s strategy, up from 50 percent in a similar 2007 study conducted by McKinsey & Company. What’s more, 93 percent of surveyed CEOs said sustainability is important to their company’s future success.
It’s not just an inclination to do good that’s driving companies, or a need for new products, says Peter Lacy, the study lead for Accenture. “They are starting to see signs of this contributing to revenue growth and helping to manage cost reduction,” he says. “It is more clearly part of core business strategy in the way of thinking about operations.”
THE CAUSES FOR CHANGE:
At PwC, the growing demand from clients led the company to calculate its own carbon footprint three years ago. What the leaders found—an emission rate of more than 300,000 metric tons—was a surprise, a figure that has since been reduced by 20 percent. “If we want to talk to clients about this, we have to understand it inside and out in how we operate,” says Schuyler.
Of those surveyed in 2010, 80 percent of CEOs said the economic downturn has increased the importance of sustainability issues. For many, that is largely driven by a need to rebuild consumer trust marred by the economic crisis. “Now CEOs are saying we want to invest in [sustainability] because it has something to add to our reputation,” says Schuyler.
But other factors are also at work. As the media and regulators look more critically at how companies are performing, CEOs must think about how to step up to such close scrutiny. “There have never before been so many public rating systems that look at companies from a corporate-reputation perspective,” says Dan Bena, director of sustainable development for PepsiCo.
In response, PepsiCo has created a strategy around corporate social responsibility ranking surveys in the past year and a half. “As a company, you need to spend significant resources reacting to that,” he says.
CHALLENGES TO CHANGE:
Sustainability is often synonymous with climate change, but executives across industries are recognizing that their role in sustainability stretches further than their carbon footprint. This year’s study found that 72 percent of CEOs ranked education as the most critical global development issue for their company’s success, followed by climate change and poverty as the top three issues.
What’s more, there’s a shift from thinking about how to address issues immediately to creating long-term plans around sustainability. In 2009, PepsiCo ran a study to pinpoint key issues that would impact the company 30 years down the line to help develop a longer-term sustainability strategy. “It’s not something you are going to turn around in a quarter, which is, unfortunately, what Wall Street expects from us,” says Bena. “Everyone needs to shift their mentality to a long-term view.”
While executives recognize that running a more sustainable business ought to be part of their corporate strategy, making that a reality is still out of the reach of many companies. Putting regulations in place all the way through a company’s supply chain continues to be a particularly big challenge, especially as companies grow increasingly decentralized and spread out across the world. While 88 percent of CEOs surveyed recognize the importance of integrating sustainability through all channels of their supply chain, there’s still a substantial gap between theory and practice with only 54 percent actually taking steps in that direction.
At PwC, a vendor survey and code of conduct on issues like child labor, risk protocols and diversity were put in place two years ago to try to address this challenge. But with countless vendors across the world, regulating an entire company’s suppliers is still a huge logistical nightmare that many companies aren’t yet ready to handle. “That means you have to fundamentally know each one of the businesses that the functional areas are using,” says Schuyler. “That’s really hard.”
It’s not always the operational challenges that hold companies back, but changing the way executives themselves think about these issues. While CEOs recognize consumers as the biggest influence in decision making, Accenture’s Lacy says too few CEOs acknowledge the important role that other stakeholders play.
Only 22 percent of CEOs surveyed believe investors would be key stakeholders in developing sustainability efforts, a figure Lacy says needs to be higher given the important role investors play in allocating resources. “There’s a real missing conversation [that needs] to go on,” he says. “[Companies] need to be much more on their game about how to present sustainability to investors.”
METRICS TO SHOW IMPACT:
Letting investors know the impact sustainability projects have is a challenge because often there are no metrics in place to show non-financial impact. While some efforts are more easily measured, like the amount of water conserved in water-stressed areas or a company’s reduction in energy use year-over-year, others can be more complex, such as the impact of farmer education in developing economies or the measure of livelihood improvement, says Bena. “Analysts and shareholders are expecting increasing rigor in how we report those things,” he says. “These are the kinds of metrics that matter, but they are also the kinds of metrics that are not traditionally financial so they are hard to develop.”
It’s a challenge that presents a huge opportunity for banks, says Dean Woo, who are in need of rebuilding consumer trust after the global financial crisis. But beyond rebuilding trust, banks will play a key role in helping companies with responsible investing, says researcher Lacy. Knowing when to say no to the wrong investments and how to identify the right ones is a skill many banks will need to build, he says. “We need enormous amounts of capital to flow into the right places to drive sustainability issues,” he adds. “That requires you to think through innovative financial products and services.”
It also means capital markets need to become more adept at helping companies measure sustainability, says Woo. For example, at Goldman Sachs the SUSTAIN index launched in 2007, was designed to help quantify the strategic impact of sustainability commitments on a company’s assets. “This is a good challenge for the financial community,” Woo says.
CEOs have a growing interest in having these kinds of conversations with analysts. This year, 72 percent of them expressed interest in discussing environmental, social and corporate governance issues with analysts, up from 51 percent in 2007.
GETTING EMPLOYEES ON BOARD:
While executives are beginning to acknowledge the importance of integrating sustainable practices into the core of their business strategy, getting that message across to employees is easier said than done. “What does that mean to 32,000 people sitting in 82 offices around the country?” Schuyler says, of employee outreach at PwC. In the past three years, the company has developed what it calls “green teams” at 60 locations around the country, giving employees a way to get involved with setting sustainability initiatives in their company branch.
“The goal is to look at every area of the organization … and embed sustainability into each of their functional metrics,” says Schuyler. “Therefore it becomes embedded in their culture.”