SUSTAINABILITY BUSINESS SPECIAL Sustainability’s
strategic worth: McKinsey Global Survey results
Executives at all levels see an important business
role for sustainability. But when it comes to mastering the reputation,
execution, and accountability of their sustainability programs, many companies
have far to go.
Company leaders
are rallying behind sustainability, and executives overall believe the issue is
increasingly important to their companies’ strategy. But as it continues to
grow into a core business issue, challenges to capturing its full value lie
ahead. These are among the key findings from our most recent McKinsey survey on
the topic,1 which
asked respondents about the actions their companies are taking to address
environmental, social, or governance issues, the practices they use to manage
sustainability, and the value at stake.
One such challenge is reputation management.
Year over year, large shares of executives cite reputation as a top reason
their companies address sustainability; of the 13 core activities we asked
about, they say reputation has the most value potential for their industries.
However, many of this year’s respondents say their companies are not pursuing
the reputation-building activities that would maximize that financial value.
Comparing companies with the most effective
sustainability programs (our sustainability “leaders”) with others in their
industries highlights another obstacle: incorporating sustainability into key
organizational processes, such as performance management, one area where the
leaders report better results than others. Beyond strong performance on
processes, the leaders share other characteristics that are keys to a
successful sustainability program—among them, aggressive goals (both internal
and external), a focused strategy, and broad leadership buy-in.
Sustainability rising
According to executives, sustainability is
becoming a more strategic and integral part of their businesses. In past
surveys, when asked about their companies’ reasons for pursuing sustainability,
respondents most often cited cost cutting or reputation management. Now 43 percent
(and the largest share) say their companies seek to align sustainability with
their overall business goals, mission, or values2 —up from 30 percent who said so in 2012.
One reason for the shift may be that company
leaders themselves believe the issue is more important. CEOs are twice as
likely as they were in 2012 to say sustainability is their top priority. Larger
shares of all other executives also count sustainability as a top three item on
their CEOs’ agendas.
As sustainability rises in significance,
capturing its full value grows more challenging—perhaps because the more that
companies prioritize sustainability, the more it needs to be integrated into
(and even change) the core business. At companies that are already taking
action, respondents most often cite challenges related to execution: the
absence of performance incentives and the presence of short-term earnings
pressure that’s at odds with the longer-term nature of these issues.
Accountability is an increasing concern: 34 percent of executives (compared
with 23 percent in 2011) say too few people at their companies are accountable
for sustainability. At companies that aren’t pursuing sustainability
activities, respondents continue to cite a lack of leadership prioritization as
the top challenge to taking action.
Reckoning with reputation
Of 13 core sustainability activities we asked
about, executives most often say their companies are reducing energy use in
operations (64 percent), reducing waste (63 percent), and managing their
corporate reputations for sustainability (59 percent). These actions were cited
most often in 2011 and 2012, and a growing share of executives now identifies
reputation management as a core activity. They are also most likely to say that
among these activities, reputation management has the highest value-creation
potential for their industries over the next five years.
Yet there’s a lack of clarity around reputation
management, compared with other, better-defined activities, such as reaching
new markets with sustainable products. We asked executives what actions the
companies they work for take to manage their reputations, and, on average,
companies most frequently communicate their activities to consumers and
maintain stakeholder relationships. Yet the results vary by industry,
indicating that companies understand and value reputation in very different
ways .
Many of the
differences depend on how much action companies are taking on
reputation, and on the overall sustainability agenda. In extractive services,
executives say their companies are pursuing seven core sustainability
activities, with three-quarters saying reputation management is one of them
(compared with 59 percent of all respondents). The reputation-building actions
these companies focus on—local community investments, external reporting, and
employee volunteering—differ, then, from those of their peers in high tech,
where companies take an average of five actions and just half of respondents
say reputation management is one of them. These results confirm that there’s no
one-size-fits-all approach to reputation, possibly one reason why reputation,
like sustainability more broadly, is hard for many companies to manage.
When asked which activities maximize financial
value, respondents most often cite customer communications. Beyond that, there
are disparities between current reputation-management activities and the ones
that are most critical to value creation (Exhibit 4). These results also vary
by industry and reflect the importance of understanding and communicating
sustainability’s financial value, from the leadership down. In extractive
services, where the board and C-suite are most engaged and respondents are the
most likely to expect that sustainability will create value, respondents
identify the same activity (community investment) as a current action and a
source of value. In contrast, those in financial services—where respondents
report the lowest level of leader engagement and perceived value—most often
cite employee volunteering, the activity they rank lowest with respect to value
creation.
What leadership looks like
Regardless of a company’s industry, its
value-creation efforts require certain organizational traits. From our
experience and previous work,3 we
identified a few as the building blocks of a successful sustainability program.
Indeed, when we identified our sustainability leaders—companies where
executives report the strongest performance on core sustainability activities, relative
to industry peers—we found that they share these characteristics.
It’s not surprising that leaders are much
likelier than other companies to possess all 12 of these characteristics,
though the results suggest which traits differentiate leaders from the rest
(Exhibit 5). Executives at these companies are almost five times more likely
than others to say they use aggressive external goals for sustainability, more
than three times likelier to report a focused strategy, and nearly three times
likelier to report an organization-wide understanding of sustainability’s
financial benefits. In addition, leaders more often have in place the key
components of performance management, such as aggressive internal goals and
broad leadership coalitions to develop their programs.4
What’s more, much larger shares of executives at
the leader organizations say their top leaders prioritize sustainability and
report higher employee engagement on sustainability at every level, including
CEOs, board members, and sustainability advisory committees. They report that
their companies are taking more action to manage the life cycles of their
products, and are four times more likely than others to say they have already
implemented a life-cycle strategy. And they say their companies face fewer
barriers to realizing value from sustainability, because they report better
overall performance on the practices that underpin a healthy sustainability
organization.
Organizing for sustainability
To better understand the defining traits of
well-performing sustainability programs, we examined the organizational
practices that underlie these characteristics. Of these, executives say their
companies are better at fostering an organizational culture around
sustainability and setting the direction for their programs. They struggle most
with components of program execution, including employee motivation, capability
building, and coordination of their sustainability work, which is reflected in
the responses on specific practices (Exhibit 6). These results make sense,
given the current levels of alignment between sustainability and various elements
of the organization. Fifty-eight percent of executives say sustainability is
fully or mostly integrated into their companies’ culture, compared with 38
percent who say so for performance management.
Looking more
closely at individual practices, some interesting patterns emerge. We
identified four distinct approaches to the sustainability organization: leader
supported, execution focused, externally oriented, and deeply integrated (see
sidebar, “Four approaches to the sustainability organization”). The first
approach is characterized by actively engaged leaders across the company,
employee encouragement, and clear strategy; the second by clear structure,
accountability, and middle-manager engagement; the third by the use of external
ideas, networks, and relationships, as well as top-leader and middle-manager
engagement; and the fourth by employee incentives for sustainability work, a
focus on talent, and even engagement on sustainability at all levels of tenure.
Our sustainability leaders are represented in each of these four approaches,
confirming that there’s no single formula for sustainability success.
Looking ahead
·
Extend
the product life cycle. Today,
resource constraints are creating unprecedented prices and volatility in
natural-resource markets. Yet the results indicate that most companies have not
even begun to implement strategies that extend the life of their products and
thereby reduce their resource dependence in a significant way. According to our
other research,5there is huge value potential in better design and in
the optimization of products for multiple cycles of disassembly and reuse.
Forward-looking companies should begin investing in the “circularity” of their
products, for the benefit of society and for their bottom line. On materials
alone, companies could potentially save more than $1 trillion per year.
·
Look
to technology. Similarly,
technological advances are creating opportunities to drive sustainability
solutions.6 Yet only 36 percent of respondents say their
companies are mostly or fully integrating sustainability into their data and
analytics work. Companies that want to capture increasing value in a
resource-constrained world should spend more time thinking about how to
integrate their technological capabilities into their overall sustainability
agenda.
·
Focus
your strategy. As
sustainability becomes more central to the business, companies should align
internally on what they stand for and what actions they want to take on these
issues, whether it’s economic development or changing business practices.
Whatever approach companies take, they should develop a strategy with no more
than five clear, well-defined priorities—one of the key factors for successful
sustainability programs.
FOR THE FULL ARTICLE AND EXHIBITS SEE
http://www.mckinsey.com/Insights/Sustainability/Sustainabilitys_strategic_worth_McKinsey_Global_Survey_results?cid=other-eml-alt-mip-mck-oth-1407About
the authors
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