As the demand for businesses to create shared social and environmental value increases, and the climate change doomsday clock counts down, Council members are seeing corporates coming to terms with their role in society. But businesses face significant challenges in closing the say-do gap and meaningfully embedding sustainability in their strategies and business models.
“The need for companies to deliver genuine value, as opposed to tokenistic corporate responsibility policy, that’s built into the company’s core purpose is becoming increasingly pronounced.”
The US Business Roundtable (BRT) last year dropped its commitment to “shareholder primacy”1 in favour of shared value. Accordingly, and by the “modern standard for corporate responsibility,”2 businesses must focus on creating value for all stakeholders, including consumers, employees, supply chains, governments, civil society and the planet, as well as shareholders.
Some commentators treated the BRT’s statement with scepticism – Larry Summers, for example described it as a “rhetorical embrace”3 aimed at warding off real regulatory change.
Or as old news – since at least the 1960s, organisations have had Corporate Social Responsibility (CSR) policies with the broad goal of,“contributing to the well-being of the communities and society they affect and on which they depend.”4
But for many Council members, the BRT’s announcement does signal something real and burgeoning. Shared value is not the same as CSR, it’s argued. While CSR is essentially philanthropic and extrinsic, shared value requires that environmental and social value become functions of business’ operations themselves.
It’s this shift, say members, that poses a major challenge. It raises profound questions about what exactly shared value looks like, and how to measure it? How fundamentally should or can businesses adapt? And how quickly? And how to communicate intrinsic changes in a way that cuts through with stakeholders?
“Companies are trying to figure out the balance between responsibility to shareholders and to society. We were doing positive things before the BRT statement, but it has brought focus.”
“The debate has been going in that direction for the thick end of a decade, at least in terms of talk. So, the reaction is, “yes of course,” and the next question is, “what are you going to do about it?”
THE INCREASING DEMAND FOR MEANINGFUL ACTION
In dropping a credo it’s held since 1997, the BRT is reacting to demand for environmental and social action that is radically increasing. Much of this demand is directed at business.
To complicate matters, it comes from multiple stakeholders across many issues. The UN Sustainable Development Goals, for example, cover 17 areas of sustainable development, from sanitation to gender equality to education. Every one of these to a greater or lesser degree presents a challenge for businesses. Each is a potential lens of scrutiny, with discoveries likely to be amplified and distorted online.
Expectations of corporate citizenship have increased. Last year, more than half of Council members (56%) said that consumers expected them to take a stand on socio-political issues, against only a quarter (23%) who disagreed.5
“I think we live in a new and much more complex world within which it isn’t just shareholder value that means everything. I think corporates are generally aware of their place in society now more than ever.”
For some members, the driving force behind this change is the millennial generation (born around 1980-2000) – which, based on some projections will make up 75% of the global workforce by 2025 – flexing their muscles as citizens, consumers and of course employees.
“You have work forces, in particular the millennial work forces, that are legitimately concerned about sustainability and corporate responsibility in terms of whether they want to work for a company.”
But there’s evidence that the investment community is catching up. Increasingly businesses are evaluated on non-financial, Environmental, Social and Governance (ESG), metrics alongside more traditional financial metrics. BlackRock CEO Larry Fink’s recent letter to investors claims that, “investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk.”6 And BlackRock now claims that, “sustainable investing is the strongest foundation for client portfolios going forward.”7
The factor that really “changes everything,”8 however, that underpins the shift to shared value, is climate change. It is both an existential threat and, “the wickedest kind of problem imaginable: complex, interconnected, and requiring massive collective action.”9 It raises the stakes for what counts as value, and makes demonstrable action and impact a necessity for any organisation. It makes ‘greenwashing’ a threat to reputation rather than an asset. In sum, “climate change has become a defining factor in companies’ long-term prospects.”10
IN THIS WAVE, MORE THAN HALF OF MEMBERS (57%) SAY THAT BUSINESS LEADERS ARE NOW OVERTAKING POLITICIANS AS A FORCE FOR PROGRESSIVE CHANGE IN THE WORLD; WOULD THIS HAVE BEEN THE CASE JUST 10 YEARS AGO?
“All of us can see that the investment community is really much, much more interested now in the way that businesses operate beyond just the financials. Financials stay important but it is about how people do business and we see that all the time in our analyst briefings or when we go out to meet the investment houses.”
“This is how sustainability is moving – from communications to true business. Greenwashing was about communication, now the finance industry thinks of sustainability as financial survival.”
“Because of the actions of Greta Thunberg and the spotlight that Extinction Rebellion has placed on the environment, I think all businesses have got to take responsibility and accountability for sustainability.”
“Investors rate us on our sustainability practices. I think that today everyone has a sustainability imperative.”
THE SAY-DO GAP
A study by Boston Consulting Group and MIT in the US in 2016 found that, while 90% of executives described sustainability as important, only 60% of companies had incorporated it in their strategy, and just 25% had it incorporated in their business models.
Four years on, for many Council members, particularly outside Europe, crossing this chasm from recognition to meaningful action remains a key challenge.
“I think companies are finding it quite hard after the first wave of enthusiasm for green topics, where they said lots of nice things, to embed that into what they actually do day to day.”
“At present, keywords such as Sustainable Development Goals are flying around in Japan and there is consciousness about instilling social purpose into business purposes, but I think that many companies are wondering how to do it.”
While the majority of Council members consider the shift towards shared value to be a long-term trend, there is much less agreement that a company’s performance on sustainability is currently important in determining valuation.
As these responses reveal, the say-do gap is partly based on a perceived tension between short and long-term priorities. Still, for many businesses, financial and sustainable aims are seen as different in kind. Companies and CEOs are seen to live or die based on financial metrics, and investors care far less about an organisation’s performance on ESG metrics.
The US Business Roundtable, consisting of CEOs from some of the country’s biggest companies, recently issued a statement saying that shareholder value was no longer the overriding corporate priority and that companies should have a broader social purpose and remit.
“Some hedge fund managers may be more interested in immediate returns, as opposed to pension funds that want long-term sustainable returns which can only come if a business is planning to be sustainable.”
“If your business is run through short-term measures all the time, would you ever put money into doing something that might not return an investment for 5 years, when CEOs are only there for 3 years?”
“If economic conditions deteriorate, unless you can show immediate ROI or growth because of the strength of being sustainability-oriented, you’re going to see companies get right back to basics.”
Understood in this way, sustainability and purpose remain a risk and a cost to businesses.
Meanwhile, the Harvard Business Review enumerates the benefits of creating shared value: competitive advantage through stakeholder engagement, improving risk management, fostering innovation, improving financial performance and building customer loyalty.11 And at the same time, there are plenty of warnings about the long-term threats of failing to adapt. For example, the outgoing governor of the Bank of England warned businesses in 2019 that those who don’t move towards zero-carbon emissions will ultimately go bankrupt, “without question.”12
So, what our Council members highlight is that, while there’s a growing long-term business case for focusing on shared value, the shift in mindset required to set this in motion is proving difficult in the short-term.
APPROACHES TO CLOSING THE SAY-DO GAP
Clearly, the scale of this challenge differs by company and industry. In some cases, there appears a fundamental tension between historical business models and sustainability – for example, in extractive industries or ‘fast’ fashion. This inevitably impacts the rate of change. But the lesson from Council members, is that companies that are performing well on sustainability are at least moving towards, “a sustainable approach that is not an add-on but is integral, integrated to their business and their strategy and their purpose.”
EXAMPLES GIVEN BY COUNCIL MEMBERS OF BUSINESSES THAT STAND OUT AS BEING AT THE CUTTING-EDGE OF SUSTAINABILITY TEND TO FALL INTO ONE OR MORE OF FOUR CATEGORIES.
01. DELIVERING SUSTAINABLE PRODUCTS
For some businesses, sustainability is the key feature of a product. Council members cite Telsa’s electric cars as a good example of this type. Oil companies that are investing in renewable energy also fall into this category, though there is a long way to go before they become providers of a sustainable product. The technology sector may count, as it focuses on offering the technology to underpin sustainability efforts of others.
02. CLEANING UP SUPPLY CHAINS
As the focus on sustainability increases, supply chains continue to be a problem for many companies – sourcing of resources, labour conditions, air miles. Innovation in packaging also falls under this banner, in that by reducing the use of plastics, businesses are aiming to reduce a harmful by-product of distribution. For Council members, Unilever, Nestlé and Coca-Cola are good examples of businesses focusing on this area.
03. COMMITTING TO OBJECTIVE TARGETS
Several companies identified by Council members have made commitments that align to external standards. Microsoft, for example, has committed to aligning its operations with the UN’s recommended target of 1.5°C global warming by 2030, a commitment certified by the Science Based Target Initiative (SBTi). Danone is aiming to become a B corporation, thus will be legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.
04. BECOMING CORPORATE ‘ACTIVISTS’
Some companies are conspicuous in supporting particular external causes. Patagonia is a flag-bearer for this approach, committing a percentage of its revenue to support grass roots climate movements. Though clearly it could not do this if it did not also commit to other behaviours (e.g. clean supply chains). Another example would be Coca-Cola, which directly supports the Global Environment and Technology Foundation’s work in Africa to replenish water sources.
Each of these approaches does something to incorporate sustainability into strategy or business model, and offers established paths for other companies to start to cross the say-do gap towards shared value. And the greatest value, of course, is likely to be delivered through a combination of these approaches.
COUNCIL MEMBERS IDENTIFY SEVERAL PRINCIPLES THAT UNDERPIN ANY OF THESE STRATEGIES:
“Above all, as one Reputation Council member puts it, the future must be ‘action-leadership’, not just ‘thought-leadership.’”
01. MAKE COMMITMENTS THAT INSPIRE
Commitments need to be fundamentally meaningful, credible and inspiring to a range of stakeholders, including governments, customers, employees and investors. Every business needs to assess what issues it is best placed to address and whether these issues are really the important ones for its stakeholders. And all businesses need to make commitments on climate change. To do these things, they must be prepared to innovate.
02. MEASURE SHARED VALUE
There’s an adage: “what gets measured, gets managed.” Measurement of stakeholder opinion should also inform strategy and communications, while helping provide evidence of the effectiveness of a business’ commitments. Council members see ESG-style measurement as key, in that it links directly to the financial performance of businesses and CEOs.
03. EVIDENCE-BASED COMMUNICATIONS
There is broad agreement that greenwashing is finished. Communications should be evidence-based, and tailored to the priorities of different stakeholder groups. Commitments should be embedded in the corporate narrative that companies tell internally and externally.
- Businesses are facing significant challenges in moving from CSR to creating shared value.
- While businesses recognise the long-term importance of shared value, there is a tension for some between this and short-term priorities; this tension underpins the say-do gap.
- There are existing paradigms to help companies begin to cross this gap: focusing on sustainable products, cleaning up supply chains, making meaningful commitments or engaging in corporate activism.