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Two Steps Forward

How sustainability leadership drives innovation

<p>Measuring the innovation benefits of sustainability leadership has been difficult. But a new report by Deloitte shows that it can be done.</p>

The business case for sustainability is a well-worn litany of benefits, both tangible and intangible: cutting costs, improving quality, attracting and retaining talent and enhancing reputation, among others. Somewhere on that list is innovation — sustainability’s potential to create opportunities for companies to tweak or radically improve their products and services in a way that reduces their environmental impacts, often while delivering new features and benefits.

Measuring the innovation benefits provided by sustainability leadership has been difficult — a guess at best. But a new research report, published today by Deloitte, shows that it can be done.

The report, "Sustainability Driven Innovation" (download here), written by Daniel Aronson, a leader in Deloitte’s Sustainability Transformation & Sustainability Strategy practice, quantifies for the first time how sustainability leadership is linked to innovation leadership. It concludes that “companies that pursue sustainability significantly increase their chances of becoming innovative leaders in the process.”

How significantly? Aronson drew on a number of lists ranking both sustainability and innovation leaders, including Fortune, Businessweek, Newsweek and Corporate Responsibility magazines. He analyzed the relationship between the two and came to the following conclusion: “When we averaged across multiple lists (to prevent the results from being affected by the characteristics of or definitions used by any specific list) … sustainability leaders are more than 400 percent more likely to be considered innovation leaders.”

The paper offers a modestly wonky explanation of why the relationship between sustainability and innovation is causal — that is, that sustainability leadership enhances innovation leadership. Aronson tested two hypotheses to ensure that their relationship wasn’t due to another factor — such as “highly effective corporate management.”

“The simple version is that you have two competing hypotheses,” Aronson explained to me last week. “One is sustainability actually causes innovation. The other is that some third factor causes both of them and they’re correlated but not causal — much like right wheel on your car doesn’t cause the left wheel to turn; some third factor, the steering wheel, causes that. Each of those two possibilities — it’s causal or that some third factor causes it — would show up differently over time. If it were caused by some third factor, the most common being good management, then you would expect that the relationship would be pretty constant over time.”

Instead, Aronson saw a pattern where innovation became stronger over time — the assumption being that using sustainability as a lens can lead to innovative ideas, some of which take time to become visible from the outside and therefore would show up in future years’ innovation results.

“That’s consistent with what you would expect if sustainability were in fact causing this, and non-consistent with what you would expect if there was some third factor causing it, and it was just correlation,” he says. “That’s how we know it’s not likely to be just correlation. It’s more likely that, in fact, sustainability is causing it.”

Sustainability spurs innovation in at least a couple of ways. One is that it can provide a different lens for thinking, helping companies to approach situations differently — for example, thinking about supply chains through the lens of reducing suppliers’ environmental impacts. This, says Aronson, “can unlock companies’ innovative potential,” enabling them to see situations from a different point of view. Sustainability also can drive innovation by adding constraints — reducing weight or packaging, improving operating efficiency or allowing for takeback and disassembly, for example. “The constraints imposed by sustainability can actually serve as an impetus for companies to think differently and therefore innovatively,” says Aronson.

The report cites Sterilmed, a unit of Johnson & Johnson, as an example of how sustainability can add value through innovation. Sterilmed — which offers products and services including single-use medical device reprocessing, equipment repair and pre-owned equipment sales — was hearing more and more from customers looking for it to bring additional solutions to market that would align with their sustainability strategies.

“SterilMed already does a very sustainable thing," explains Aronson. "They take these devices that are designed to be single-use, and they re-process them in a way that they can be used again, which saves money, because it costs less than making new ones."

The company wanted to do more to align its sustainability efforts with its customer value proposition, as Erol Odabasi, Director of Sustainability for Johnson & Johnson Medical Device & Diagnostics, explained to me recently. “Our customers are starting to ask more and more questions about sustainability and starting to incorporate those questions into the RFP and tender processes, and it’s starting to get a weight in the procurement decision process. We also see our competitors in the medical device space starting to talk more about the sustainability benefits and value of their products. What we wanted to create was a tool that would put a dollar figure around the potential opportunity of growing the sustainability attributes of the products that we’re selling.”

Odabasi explained how his company worked with Aronson’s team at Deloitte to build a valuation model for sustainability “to show our teams what, from a revenue perspective, sustainability is worth if you look at the customer trends, the opportunities to gain market share based on changing customer preferences, and what is the risk if competitors are able to respond and we don’t.”

The process, says Odabasi, enabled him “to bring our finance organization on board. They were a key partner in developing this. Our vice president of finance for supply chain became a strong proponent” and has joined with Odabasi in joint presentations on the valuation tool. The valuation, in turn, opened the door for Odabasi to conversations with the R&D department. “Everybody aligned to the fact that these trends are here to stay and they’re growing, and we need to continue the focus on the sustainability attributes of our products in order to maintain our market share,” he says.

“I do believe that, when it comes to the actual results, we’re one of the leaders in the healthcare space,” he added. “But we don’t really translate that into our value proposition to customers and talk about that. When we do, it opens the door for other conversations and increases our ability to partner with our customers.”

I asked Aronson what he hoped would happen as a result of his new report. “I hope that two things happen," he said. "One is that people start to see that sustainability connects to the core of the business in more ways than they currently see. For example, everybody understands that sustainability can help you save money on lighting and heating and so forth. But for most businesses, the lighting costs or the heating costs of running their buildings is not how they compete. They compete on product, service, brand or innovation, which means that a lot of times people may not see how sustainability connects to the core of how they compete. This demonstrates that sustainability strongly connects to a key area in which businesses compete, and that is around innovation. Now they can see how innovation and sustainability go together, and how sustainability creates value for them. That’s the first hope.

“The second is that these techniques and these kinds of actions like Sterilmed took will become more common — that people will not only see that these things are connected, but they’ll start to hardwire it into the innovation process.”

And in doing so, Aronson hopes, companies will see that they can drive both innovation performance and sustainability performance — the perfect win-win.

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