Success in sustainability and profitability occurs when leaders, strategy, structure, management systems and performance align, writes Dr Kaushik Sridhar.
Companies usually take on and achieve sustainability goals in three stages:
- Complying with regulations – Companies have no choice in this area; they must obey the law. Regulations are often the impetus behind sustainability initiatives.
- Achieving competitive advantage – This is necessary if you want your business operations to make a profit.
- Social, economic and environmental integration of sustainability practices – Embrace the responsibility of sustainable operations as a best practice beyond the mandates of government or competition.
Four main reasons why sustainability demands our urgent attention include regulations, community relations, cost and revenue imperatives, and societal and moral obligations.
Stakeholders (including shareholders, consumers, vendors, workers, “regulators and communities”) care about a company’s sustainability practices. To meet their expectations, a company must make business decisions that account for the current and future environmental impact of its products, services, processes and activities. Their leadership challenge is to integrate sustainable environmental practices profitably into the firm’s daily decision making – from the factory to the boardroom.
Using the ‘corporate sustainability model’
Social and environmental impacts must be included in ROI calculations and managerial decision making at all levels. Identifying, evaluating and improving your firm’s social, environmental and economic impact calls for accountability in every area of your operations – from product design and cost to capitalisation, information management and execution.
Accountability begins with each person and department. Every staffer should be proactive about carrying out the firm’s commitment to sustainability as a core value. And each department should assess its contribution in every area. To that end, this model analyses four areas of business practices necessary to implement a successful sustainability strategy:
- Inputs – What does your company contribute to sustainability in terms of staff and financial resources? Is your business environment conducive to meeting environmental goals? Maintain open communication across hierarchies and departmental silos to foster the information flow needed to make and execute critical sustainability decisions.
- Processes – Corporate leaders should establish principles and practices that institutionalise the concept of sustainability. The board and CEO must develop a sustainability strategy, allocate the necessary resources, and steer appropriate programs and initiatives through the organisation. Along with its leaders’ commitment, a company needs the right structures, systems, performance measures, rewards, culture and people to execute its sustainability strategies.
- Outputs – This category of business practices covers the corporate cost/benefit of actions for sustainability. It includes stakeholder reactions and sustainability performance (which may be both an output and an outcome). When focusing your sustainability activities, consider your organisation’s culture, your competitive position and your environmental performance. Factor in regulations, market considerations and geographic conditions. Global businesses must align their overall sustainability strategies with the realities of their operating structure, be it centralised – with less local autonomy – or decentralised – with more local autonomy. Seriously consider all the associated risks and benefits before outsourcing sustainability functions to external providers.
- Outcomes – What feedback do you receive on sustainability issues? What are your marketplace results? Strong sustainability leads to better product design, production efficiency and good customer service, all of which result in higher profits, increased customer and employee retention, and greater social and environmental benefits. Help your company understand the direct connection between improved sustainability performance and improved financial performance.
Costing, capital investments and the integration of social risk
There are several management tools that can help you assess the way you incorporate sustainability programming into your overall strategy:
- Capital investment decision systems – Some 84 per cent of companies fail to consider social and political risk when they make spending decisions related to sustainability, though such risks affect many areas, including product quality, workload capacity, productivity, innovation, cost and revenue.
- Costing systems – Rather than using traditional discounted cash flow analysis, some companies achieve better social and environmental cost accounting by using activity-based or life-cycle costing. Firms that use full-cost accounting to evaluate sustainability projects can make simple changes to identify and eliminate environmental expenses and to develop better pricing and customer value.
- Risk assessment systems – Identify and quantify background sources of risk. What is the possibility of environmentally related social and political risks actually coming to fruition?
Keep this concern in mind as you make decisions.
Performance evaluation
Building a culture of sustainability requires the right corporate setup, from your leaders’ commitment to your organisational structure and rules, systems, communications, performance measurement, and incentive structure. As you coordinate these factors, measure your firm’s individual and group sustainability performance with tools like these:
- Performance evaluations – Appraise your sustainability program’s results at the corporate, business unit and individual levels.
- Incentives and rewards – Recognise excellence, and offer incentives for reporting potential violations of the law or of corporate environmental policy.
- Accountability for internal waste – Make each business unit responsible for its own discards.
- Emissions trading – Corporate options include leasing emissions allowances, making offset agreements or balancing pollution against positive environmental contributions.
- Strategic management systems – Institute administrative structures, such as a balanced scorecard, that provide genuine accountability and managerial control.
Social, environmental and economic impacts
As you collect information about each phase of your sustainability activities, analyse it in financial terms so you have the information to align your corporate financial goals to your sustainability goals. Assess the factors that drive your sustainability performance, including potential risks and benefits, and appraise your social and environmental results. Advances in technology allow improved identification, collection and interpretation of data to help you make better decisions and perform more thorough assessments of sustainability-related issues. Proper evaluation will reveal the links between your firm’s activities and its performance in environmental, social and financial matters.
Strategy adjustment
All your company’s activities – not just sustainability – benefit when managers adjust their strategies based on concrete performance indicators. Your measurement systems must include appropriate mechanisms to give feedback to managers, so they can promote knowledge sharing and continuous learning. Feedback allows managers to check their assumptions about earlier plans and to modify them for the long term. Your company can improve its sustainability performance by redesigning products, re-engineering processes, involving the members of its supply chain, rethinking markets, and using organisational learning and life-cycle analysis. Enhance your internal reporting to boost decision making and strategic planning. Use your data to show staffers the value of their contributions.
Success in sustainability and profitability occurs when leaders, strategy, structure, management systems, performance and continuous learning align. Even if your current efforts may not seem to affect your finances or market performance immediately, your company will feel a positive impact in the future.
