Originally published in Times of Israel here
Sustainability has gone beyond just doing-good, and has now emerged as a strong business case in its own right! Millennials, set to comprise the lion’s share of consumers in high-growth emerging economies, are talking about climate change and sustainability with a vociferousness that even global institutional investors are taking notice and demanding action. As someone who spent several years working in institutional investor relations, I can say when institutional investors sneeze, the corporates catch a cold. These institutional investors (i.e. major shareholders) traditionally obsessed about short-term profits of the business. But now, growing concerns about the very longevity of the business model and its competitive advantage is giving them sleepless nights.
But how can sustainability impact a business? Let us start with risk. Technically, anything that negatively impacts the continuity of its demand-supply equation for the business in the future is a risk. At the same time, this risk is not just about the detrimental impact of our production and consumption processes on the natural and social ecosystems, both of which can affect the demand-supply equation. Sustainability-related risk also impacts the availability and cost of capital, the nature of competition, operating costs and processes, the cost of innovation, the price and revenue model and the need for regulations. All this makes sustainability a pretty broad canvas that any business worth its salt just cannot ignore. And while most businesses, especially in emerging economies, continue to resist owing to the short-term mindset that transition costs outweigh the benefits, the long-term imperative of ensuring longevity and survival is slowly hitting home!
At the same time, with so much noise about sustainability, companies are struggling to understand how to plan their transition. Assessing what its stakeholders think and expect and the external issues / trends that can materially impact the industry in the future, and applying sustainability solutions to counter those risks, may be a good place to start.
Each industry operates in its unique social, technical and environment ecosystem, and a continuous dialogue with stakeholders along with deep-diving into the industry mega and micro-trends would help it assess how to respond to changes in those ecosystems. It would help it assess which components of its operating model and value-chain it needs to overhaul. It would help it assess how changes in stakeholder expectations and industry impact consumer preferences, operational processes, innovations and product-design? It would help it assess how those changes impact the availability and budget of raw material in its supply-chain? It would help it assess if its needs new types of skills and talent? It would help it assess how and where disruptions are occurring? It would help it assess how climate and weather patterns can impact business-as-usual? These are just some questions that may be answered based on the business’ assessment of its stakeholder expectations and industry trends. Once these inputs are executed within its business strategy, it may require alterations to its branding strategy, target customers, geography or price model as well. That implies the business must also agile and adaptable!
Eventually, incorporating sustainability in the business model is about realigning the value-proposition to maintain, if not elevate, its competitive advantage in the industry. At times, the industry itself may change. For instance, the product called camera has moved from the camera industry to the mobile phone industry today.
Incorporating sustainability in the business model also involves a mindset to accept that there is a problem and a solution is needed, thus making acceptability as important as action. While sustainability is an inter-department function, companies might institute a separate group to monitor and liaise the strategy’s progress with the various departments. Lastly, the senior management must drive this so that any changes to the operating model and value-proposition are well integrated with all the departments. Else, department lethargy to move out of comfort-zones may prove the Achilles’ heel. And wherever the management remains reluctant despite all the evidence, institutional investors may do best to sell out!
As the business’ sustainability model evolves further, the next step would be to adopt a prescriptive approach to business changes, rather than continue a reactive approach. In any case, ample research shows companies who incorporate sustainability (or score high on ESG, i.e. environment, social and governance parameters), perform relatively better in the stock markets. That is a bonus!
At the end, incorporating sustainability would help future-proof the business, at least for any company that aspires to remain relevant in the future. And if companies are worried whether their new value-proposition would find any takers amongst the customers who were used to its incumbent style, it would do well to move incrementally – first build a community, and then leveraging that community to scale up the customer base further. Organic food products in the market are already doing this!