Sustainability’s deepening imprint
Companies are more
active than ever in pursuing sustainability to align with values and engage
stakeholders, a new survey shows. To see financial returns, though, integrating
sustainability into core functions is key.
As environmental,
social, and governance issues
have become ever more important influencers of customer and employee
expectations, organizations have tightened their embrace of the sustainability programs that address those issues. According to the latest
McKinsey Global Survey on the topic,1companies are
increasingly formalizing the way they govern sustainability programs, as well
as elevating the importance of diversity and inclusion. And a larger share of respondents than ever before say
the top reason for implementing a sustainability agenda is better alignment between
an organization’s practices and its goals, missions, or values.
The results also shed
light on how companies are deploying technologies to manage and support their
sustainability agendas. For example, companies have greatly increased their use
of both familiar tools, such as energy-efficient equipment, and more innovative
ones, such as digital platforms. Despite these advances, many organizations
still struggle to capture financial value from their sustainability efforts.
Integrating sustainability into one or more core business functions, for
instance, is a practice that can help. The integration of sustainability into
functional work doubles the likelihood that a company will report financial
value from these efforts.
Deeper engagement with sustainability as key issues and
stakeholders evolve
Nearly six in ten
respondents say that their organizations are more engaged with sustainability
than they were two years ago—and just 9 percent that engagement has declined.
In some industries, the shares reporting greater engagement are even larger:
more than 80 percent of respondents in consumer packaged goods and
three-quarters of those in infrastructure, for example. Respondents also report
that their organizations have increased their formal governance of sustainability:
70 percent say their companies have some form of governance in place, compared
with 56 percent in 2014. What’s more, an increasing share of respondents (16
percent, up from 12 percent previously) now report that their companies have a
board-level committee dedicated to sustainability issues.
When asked about their
companies’ top reasons for addressing sustainability, respondents most often
cite alignment with the organization’s own goals, mission, and values. The
results also suggest that some stake-holders are becoming more important.
Meeting consumer expectations is now among the top five reasons, and the share
citing the attraction, motivation, or retention of employees also grew since
2014. The sustainability topics that matter most to businesses vary across
industries. Respondents cite diversity and inclusion
among the top five most important topics, and it is a top three issue in
financial services and high tech. Five years ago, when respondents were asked
which issues would be most important by now, renewable energy and
waste management topped the list. But relative to other topics, renewable
energy has fallen in importance over the same period—during which installations
of renewable-energy sources also increased. Waste management,
too, is no longer among the top five topics that matter most to respondents’
organizations.
Technology’s growing role
This year, the survey
also looked at the influence of key trends or events on the organizations’
commitment to sustainability. Respondents indicate that advances in
sustainability-related technologies, as well as safety and security concerns,
are the top reasons these organizations have increased their commitment. Other
events, such as national elections, the release of UN Sustainability
Development Goals, and global climate negotiations have had less influence.
Since our last survey,
the cost of sustainability-related technologies has dropped dramatically, making it cheaper and
easier for companies to use them—renewable energy, energy storage, digital platforms,
and advanced data analytics, in particular. Accordingly, respondents report the
wider adoption of various technologies across all regions, notably India and
the Middle East and North Africa, compared with five years ago. Among these
technologies, the greatest gains in adoption have occurred in big data and
advanced analytics, as well as digital platforms.
Meanwhile, 49 percent
of respondents in India say their companies have adopted renewable sources of
energy—the highest percentage of all regions, up from 28 percent five years
ago. Responses from the Middle East and North Africa also show that
organizations in that region have accelerated their adoption of
energy-efficient equipment more than their counterparts in other regions have.
The gap between values and action
Respondents report
little change in the number of activities their organizations are pursuing to
achieve sustainability goals. The survey asked about 11 such activities in
three categories: growth, return on capital, and risk management, as we have
done since 2011.5In the areas where organizations
were most active in previous years—managing reputation, improving resource
efficiency, and responding to regulatory constraints—they remain active still. Companies are more active
than before in only three of the 11 areas. But in line with the most common
reasons that organizations are pursuing sustainability, two of these three
areas relate to employees and customers: engaging employees in
sustainability-related activities and marketing sustainability-related attributes
to customers.
Notably, respondents
indicate that their organizations’ pursuit of all three growth-related
activities has declined in recent years. One-quarter of respondents say their
companies are committing R&D resources to sustainable products or services,
down from one-third in 2014. Among respondents who say their companies are
pursuing all three, 39 percent report a positive financial impact from their
sustainability programs; by contrast, only 26 percent of all respondents say
the same.
On average, nearly
two-thirds of respondents say they expect that activities across the three
categories will create value for their organizations in the years ahead, up
from 58 percent in the past two surveys—and perceptions of value-creation
opportunities vary by industry (Exhibit 6). More than 80 percent of
retail-sector respondents, for example, see modest or significant potential
value in managing the sustainability impact of their supply chains, compared with 60 percent of all
others.
Even within industries,
the results indicate notable differences between the activities that
organizations are pursuing and the activities that executives think have the
most potential for creating value. Nearly two-thirds of respondents in metals
and mining say they see significant value in bringing existing
sustainability-related products—conflict-free minerals, for example—to new
markets or customers; only 7 percent, though, say that their organizations are
doing so. More than 60 percent of financial-services respondents see
significant value potential in managing the business portfolio to capitalize on
sustainability trends, but only 28 percent say this is something their
organizations actually do.
Limited integration with core functions
Companies not only
struggle to pursue the sustainability activities with the highest potential
value but also find it challenging to measure the financial implications
accurately. One in five respondents say they don’t know what financial impact
sustainability programs have had on their organizations in the past five years.
Respondents whose companies have measured the financial impact are as likely to
say that sustainability is a cost as to say that it creates value.6What’s more, about one-quarter of
respondents say that they don’t know how much, if anything, their organizations
spend on sustainability-related initiatives—and a similarly small share say
sustainability’s financial benefits are clearly understood across their
organizations.
One place to start, the
results suggest, is integrating sustainability into core business functions—and
finance, in particular. The survey asked how integrated sustainability is into
11 core business functions, and respondents indicate that integration into
finance is the least common. Yet, along with R&D and strategic planning,
integration with the finance function appears to yield the greatest value.
Respondents who say that sustainability is formally integrated into at least
one of the functions—regardless of which—are at least twice as likely to report
a positive financial impact as those who say that sustainability isn’t
integrated into any of them.
But finance is not the
only function where the results suggest room for improved integration: less
than one-quarter of respondents say that sustainability is formally integrated
into the sales and marketing function. What’s more, only 18 percent say that
employee compensation is linked to sustainability performance at their
organizations. And even though respondents say that both customers and
employees are increasingly powerful drivers for acting on sustainability, only
one-third report that employees across the organization understand how
sustainability efforts align with the overall strategy.
With technology, we see
similar results. Even as respondents identify technological advances as a main reason for the
growing commitment to sustainability, just one-quarter report the formal
integration of sustainability into IT. Digital platforms and energy-efficient
equipment are cited most often as the technologies that support sustainability
work. But stronger integration with IT could foster stronger stakeholder
engagement with customers, employees, and suppliers.
Looking ahead
In response to the
evolving priorities and reasons to pursue sustainability, here are some steps
that companies can take to adapt their approaches and capture greater value
from their sustainability efforts:
·
Align
sustainability strategy with business strategy. Executives should develop
sustainability strategies with the same rigor they use to develop the business
strategy, and with the overall business strategy in mind. This will enable
their sustainability efforts to deliver value to the business, especially when the
sustainability strategy is translated into clearly articulated goals, metrics,
and lines of accountability across the organization (as would be the case in
other areas of strategy development).
·
Enhance
governance for better results. In our experience, companies with good governance
structures to oversee and manage their sustainability efforts see better
financial results from it. The survey confirms this: value creation is nearly
twice as likely when at least one formal governance structure is in place.
There is no “right” governance structure—an organization’s setup should align
with its overall sustainability approach and strategy. Some companies may have
teams that focus on sustainability, while others use cross-functional
leadership teams to drive their programs. But regardless of structure, there
are some key success factors, including executive-team oversight and clear
lines of accountability, that will support better financial and sustainability
results.
·
Embed
sustainability into business functions. The survey results indicate a gap between the
reasons for addressing sustainability and where in the company sustainability
actions are pursued. Since alignment with a company’s goals, mission, and
values is the most common reason for action on sustainability issues, there is
an opportunity to embed sustainability programs into the fabric of the business.
Most companies have a sizable opportunity to integrate sustainability into more
of their core business functions, from finance to sales and marketing and HR,
and for functional leaders to have their own sustainability action items—all of
which would help close the gap between reasons and actions.
·
https://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/sustainabilitys-deepening-imprint?cid=other-eml-alt-mip-mck-oth-1712
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