Sustainability as Strategy

In the wake of the European Union's omnibus and what could plausibly be described as the arrival of the sustainability winter (or at least frost), I've been thinking quite a bit about where companies and those supporting them go from here.

While it's certainly possible to pick out some persistent good news stories (the unstoppable energy transition, a certain degree of progress around biodiversity, the coming consolidation of certification and disclosure standards, the persistent demand for quality non-financial data and the continued endorsement of some of the CSRD regime from companies and investors alike), it's also undeniable that urgency and momentum have slowed as regulations are rolled back and other priorities take centre stage.

It is worth leaning into these changes.

Sustainability is dead, long live sustainability

With all the focus in the past cycle on regulatory standards, it is unsurprising that companies took a compliance-based view of ESG. But such a view comes with a lot of baggage: compliance is seen as a cost and the natural reaction is to take a minimisation approach. With so much being spent on simply gathering, auditing and assuring data the other (more salient) elements of ESG were pushed aside.

ESG is ultimately a strategic issue for companies.

Take a food & beverage company. Understanding biodiversity-linked risks within a supply chain is business critical and making investments to ensure that farmers are able to deliver their expected outputs has a definite return on investment which can be modelled and quantified in terms of price stability and supplier switching and disruption.

Or look at product development. Starting with a sustainable focus can help companies - established or start-up innovate around product design through material selection and supply chain optimisation. The founders of Wild, the natural deodorant company recently sold to Unilever for $100 million.

Or take a manufacturing company that relies on grid electricity. The installation of renewable energy systems will establish a fixed price for energy supply at a time of increasing uncertainty and volatility in the energy markets.

A framework for value creation

To be sure there is not a one size fits all approach. Companies need to take steps to develop frameworks that are fit for purpose:

• Get buy-in - Work across board level, senior management and within key departments to communicate a new approach and why a value mindset is legitimate and imperative
• Conduct a materiality assessment - Understand the issues that are meaningful to your business and your stakeholders
• Strategise around key issues - Determine which are the most meaningful and set goals and objectives
• Link your metrics, actions and objectives with your bottom line - Establish prices for metrics. Understand the cost of carbon, water, electricity and waste and model out the costs and benefits on the issues that matter to you. Use these pricing inputs to guide decision making.
• Prioritise - You can't do everything but you can apply the same financial techniques to assessing which actions make sense
• Understand areas for innovation - Review product and operating processes with a sustainability lens to surface opportunities for both incremental change (material switching, packaging improvements) or to open new markets.
• Monitor performance - Review whether your sustainability investments are delivering the financial and non-financial returns you expected, and feed those learnings back into the next planning cycle.

The frost will pass

Regulatory cycles ebb and flow, but the underlying drivers - resource scarcity, customer expectations, the cost of capital advantage available to credible operators - are structural. The companies that treat the current pause as an opportunity to embed sustainability into how they actually compete will be the ones with the strongest hand when the cycle turns.

Compliance was the warm-up. Strategy is the game.