The four stages of sustainable transformation
The following is an edited excerpt from "Sustainability: A Guide for Boards and C-Suites" by Gib Hedstrom (Corporate Sustainability Scorecard, 2017).
The sustainability conversation has been long dominated by environmental and social headlines. The vast majority of articles and books written about sustainability over the past 30 years have focused largely on the environment: degradation, resource limits, externalities, climate change, pesticides, toxics and waste. How depressing!
Dozens of books describe the global environmental challenges, while too many business-oriented books paint a picture that sustainability is all about "win-win" and "green is gold." This is far too simplistic and often just not true. Moreover, not only has the subject been beaten to death, it is the wrong conversation.
The "right" conversation about sustainability focuses on corporate positioning and strategy. It begins with a deep examination of the megatrends impacting every company. As reported by the World Economic Forum in its 2017 annual update (PDF), a number of the highest-risk megatrends are not only sustainability-related but also focused squarely on climate change.
Four of the top five risks are: extreme weather events, failure of climate change mitigation and adaptation, water crises and large-scale involuntary migration. These risks — interwoven with other societal challenges (inequality, technology impact of digital transformation on job creation and more) — will impact different industry sectors in different ways.
With the robust understanding of the ESG trends in hand, board members, CEOs and other top executives should examine questions like these:
- As the sustainability transformation unfolds, how are we positioning ourselves?
- Are we at risk of "missing the boat" by doing business as usual?
- Will we, as with Borders Books overcome by Amazon.com, find ourselves saying, "Whoops. We missed that!"?
The four-stage transformation model
Engaging. Accelerating. Leading. Transforming.
Because sustainability is fundamentally about industry transformation, board members and C-suite executives have found it helpful to assess their company’s current corporate sustainability position in terms of four stages. The four-stage transformation model described below refers to Hedstrom Associates' Corporate Sustainability Scorecard.
Note that the rating scale in the Corporate Sustainability Scorecard is a tough one. This is not your traditional rating scale where Stage 4 is the top quartile of companies today. The bell curve on this scorecard is skewed left, reflecting the fact that the vast majority of companies today are early in their sustainability transformation.
The four-stage transformation model helps companies assess and manage progress proactively through the "messy transformation." During the early stages, this involves engaging deeply with (and learning about) sustainability. Toward Stage 3 and Stage 4, it involves disruptive innovation — in the way that Airbnb, Tesla and Novelis are transforming their industries.
While it is convenient to express a company as being "in Stage 1" or "a Stage 2 company," in reality, most companies exhibit a range of attributes that fall across several stages of maturity on this scorecard.
Resilient: The capacity to innovate amidst disruptions
Perhaps more than any other trait, the "need to operate outside of its comfort zone" will characterize tomorrow’s elite corporation. Why? At its core, sustainability is about not only being fit and trim but also resilient.
Companies must build the capacity to adapt and innovate amidst disruptions. They need to adopt and embrace what can be an uncomfortable set of assumptions about the world around us. Sustainability requires: 1. "unlearning" how industrial society has operated for 150 years, and 2. "charting a new route" to reach the same goal of delivering shareholder value.
Going forward, C-suite executives and boards must treat social responsibility and environmental stewardship not as separate functions largely disconnected from strategy, but rather as integral to corporate and business strategy.
This requires CEOs and those who succeed them to be better prepared to make decisions about the environmental and societal impacts of sustainability — and the important tradeoffs required. Likewise, the connection between public policy and strategy is becoming interwoven. The power of social media magnifies the risk of stumbling on a key social or environmental issue of keen interest to employees, customers or other stakeholders.
The path forward
Sometimes individuals, companies and countries make things too complicated. It is true that sustainability can be complex, challenging, perplexing and amorphous. The objectives for sustainability include everything from solving climate change and tackling world hunger to protecting human rights and providing access to potable water.
Yet, tomorrow's leading companies systematically will shed their old ways of doing business in the "take-make-waste" world. With a new understanding, they will embrace, drive and reap the benefits from the circular economy, where business activity is reconsidered as a closed loop instead of a chain. The resource revolution represents the biggest business opportunity in a century.
McKinsey notes that rather than settling for historic resource-productivity improvement rates of one to two percentage points a year, companies need to deliver productivity gains of 50 percent or so every few years. Incremental improvement such as energy efficiency gains of 2 to 3 percent per year will no longer cut it.
At its core, sustainability is about leadership. Sadly, for the past 20 years, we have had a collective failure of leadership — across government, industry and civil society. The vast majority of companies over the past two decades have more or less continued "business as usual." Few have taken bold measures. They go on with their day-to-day business in designing, making and selling the same stuff as in the past. They know sustainability is important. They assign a senior executive to look after it.
They set goals and reduce their footprints. They report progress and try to be more transparent. Yet, honestly, the majority of companies today continue to dabble in sustainability. They see ESG issues almost entirely as risks to manage. Moreover, many C-suite executives have yet to view the "power of sustainability" to drive profitable growth and value creation.
The Corporate Sustainability Scorecard C-suite rating system comes in here. Aimed specifically at the C-suite and the board (perhaps via those advising them), the scorecard can help create the right conversations about both governance and leadership, and strategy and execution.
At some point, the first light bulb goes on in the C-suite or boardroom. Board members see the mess that humans are making of the planet and the coming global impact of doubling middle-class consumption on this planet with fixed resources. They think about stranded assets and they recognize that sustainability risks and opportunities are several orders of magnitude higher than in the past.
And then a second light bulb goes on. The executive team begins to see the massive growth of the global middle class not only as a source of risk, but also as a huge business opportunity. They imagine growing a profitable business without consuming non-renewable resources.
Today’s leading companies are positioning themselves to grow and profit from addressing the world’s most pressing challenges. As companies transform and realign toward this new overarching goal, sustainability leadership in the C-suite and boardroom can be enabled by this simple agenda:
Understand new and diverse risks.
Determine what it would take to be carbon neutral.
Target zero waste throughout the value chain.
Work with your suppliers and customers to close the loop on everything.
Understand the agendas of people who can influence your business.
Inspire your employees.
Prevent nasty surprises.
Be proud to tell your kids what you do.
The leaders of today’s companies have a choice: Will we transform with the times and position our company as a fit, trim and resilient company of tomorrow? Or will we "say the course" and hope for the best?
*Author's note: Students can receive a discount by purchasing the book here.