Five Ways a Sustainability Strategy Provides Clarity During a Crisis

Thomas Singer is a principal researcher in corporate leadership at The Conference Board, Inc. This post is based on his Conference Board.memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The COVID-19 pandemic is requiring companies to focus on survivability—whether they have the financial, human, and other resources to make it through this period of intense disruption. This is also a time, however, for companies to consider the value of their existing sustainability strategies. [1] Companies with robust sustainability programs are more likely to perform well during a downturn. And five key elements of a fully developed sustainability program—a defined corporate purpose, a clear view of what is material (and what is not), an awareness of broader societal challenges, a robust level of engagement and transparency with stakeholders, and a collaborative culture—should improve a company’s ability to prosper in the long run.

Rather than setting aside their sustainability strategies, companies should view the current crisis as an opportunity to reevaluate and strengthen their sustainability programs.

Almost a decade ago, The Conference Board released a report outlining the business case for sustainability. The report highlighted that “awareness has increased among leaders that durable business models cannot be solely based on the maximization of financial performance, and that shareholder value is feeble if the company fails to recognize a broader nexus of stakeholder interests—including those of employees, customers and suppliers, regulators, and the local communities where the company operates.” [2]

In the years since the report was published, the case for corporate sustainability has grown even stronger, and the voices calling for its integration into business strategy and execution have become louder and more widespread. Mainstream investors and some regulatory bodies are increasingly embracing the idea that a strong corporate sustainability strategy can help companies better prepare for potential risks and opportunities. At its core, sustainability is about remaining viable in the long term.

The COVID-19 pandemic—unprecedented in its impact on business and society at large—is a real test of companies’ commitment to their sustainability strategies. Inevitably, this crisis will force some companies to reexamine their long-term goals in the interest of pressing short-term priorities. But the track records of companies with strong sustainability initiatives serve as a reminder that sustainability is not a luxury reserved only for good times; to the contrary, companies that have invested in sustainability are often better able to weather crises and recover from them quicker. Recently published research, for example, finds that companies with better sustainability scores are outperforming those with lower ones since the S&P 500 peaked in February; similarly, stocks with lower sustainability scores are seeing bigger cuts to earnings forecasts compared to stocks with top sustainability profiles. [3]

A review of company performance during the last recession also suggests that investments in sustainability can pay off during difficult times: between 2006 and 2010, the top 100 sustainable global companies experienced significantly higher mean sales growth, return on assets, profit before taxation, and cash flows from operations compared to control companies. [4] There is also evidence of the benefits to maintaining a focus on the long term, even during a period of crisis: companies with a long-term orientation achieved higher annual growth and total shareholder return (TSR) than their counterparts during the previous recession. [5]

The following are five ways that companies can rely on their sustainability strategies to provide clarity during this crisis and give them an edge during the recovery phase:

1. Purpose: to help frame decision making and keep employees engaged Crises can put significant strain on an organization’s decision making: they can make it challenging to determine how to act, what initiatives to implement, and how best to support relief efforts. Purpose gives a company a North Star. A sustainability strategy encourages companies to distill their purpose and reason for existing. Employees of companies that are purpose driven have a clear sense of how their company can best contribute to society, particularly in times of crisis. When it comes time to act quickly or make difficult decisions, this clarity of purpose can give companies an important edge.

  • Forthcoming research by The Conference Board finds a significant increase in the number of companies publishing purpose statements: in 2019, 77 companies in the S&P 500 had published a purpose statement, more than two and a half times as many as in 2015. Of these companies, about one-fourth claim to be purpose driven.
  • Purpose enables organizations to perform well in times of volatility, raises employee engagement, acts as a unifier, makes customers more loyal and committed, and helps frame effective decision making in an environment of uncertainty. Purposeful companies also outperform the market by 42 percent. [6]

2. Materiality: to zero-in on what matters most The volume of environmental, social, and governance (ESG) issues that companies are increasingly asked to deal with can be overwhelming. It is neither realistic nor effective for companies to tackle every potential ESG issue. What is more effective is to identify the issues that are most material to the company and where the company can have the greatest impact, then focus resources and strategy around those issues. This is where materiality analysis—a key element of a sustainability strategy—plays a significant role. During a time of crisis, companies that have undergone a materiality analysis benefit from knowing what their priorities are likely to be.

  • While there are easily over a hundred ESG issues that companies may face (climate change, water scarcity, child labor, sexual harassment, cybersecurity, etc.), a materiality analysis aims to distill a laundry list of ESG issues into no more than a handful of truly material issues. A focused list of ESG priorities can facilitate decision making during a time of crisis. For example, General Mills’ materiality assessment identifies 24 material ESG issues and nine priority issues, among them food safety, commodity availability, and climate change. In a different example, Nielsen considered hundreds of ESG topics to arrive at a list of seven top issues, among them data, diversity & inclusion, and transparency.
  • The materiality analysis process provides external input, an important perspective that can help companies uncover issues that an internal process may have overlooked. The process can lead to a greater appreciation for external stakeholders and can help companies better understand their role in society and how best to support the communities they operate in.

3. The Sustainable Development Goals (SDGs): to provide context on the company’s role in society The SDGs were adopted by all United Nations Member States in 2015 as a universal call to action by governments and an array of other stakeholders to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity by 2030. The SDGs provide a framework for addressing some of the biggest issues facing society, and a large number of companies have aligned their sustainability targets and goals with those of the SDGs.

But even if a company does not use the SDGs as a framework for its sustainability efforts—and several of the SDGs (such as eliminating poverty and hunger and providing a quality education) go beyond the remit of any individual company or industry in general—considering the SDGs can have several benefits. As part of the strategic planning process, they can encourage the kind of long-term, creative, and big-picture thinking that spurs innovation. Much like purpose, aligning corporate targets with societal challenges can also give companies and their employees a new appreciation for their role in society. Consider the following:

  • The number of companies referencing the SDGs in their annual reporting has surged since the goals were introduced. Research by The Conference Board finds that more than half of companies in the S&P Global 1200 now mention the SDGs in their annual reports. [7] Most companies are reporting sustainability data that fall under the following five SDGs: affordable and clean energy; responsible consumption and production; climate action; good health and well-being; and partnerships for the goals.
  • Some companies are taking a step further and introducing sustainability targets explicitly tied to the SDGs. The Conference Board found that 17 percent of S&P Global 1200 companies are linking their targets to the SDGs. [8] Some notable examples include Nissan, Unilever, and Verizon.

4. Reporting and Engagement: to provide guidance and transparency A sustainability strategy encourages regular engagement with stakeholders. A key component of this engagement is reporting on a company’s nonfinancial impacts, risks, and opportunities, as well as the progress the company is making toward achieving its sustainability targets. The process of reporting (including tracking, collecting, and analyzing nonfinancial data) can shed light on a company’s biggest areas of impact— whether those impacts are positive or negative. This knowledge can help expedite the allocation of resources and efforts during a time of crisis. Transparency through regular reporting can also help manage stakeholder expectations by providing clear guidance on a company’s priorities, strategies, and long-term goals. This can help investors, employees, and other stakeholders anticipate a company’s actions and prevent surprises during a time of crisis.

  • Companies are becoming more transparent about their nonfinancial impacts. Among the S&P Global 1200, for example, sustainability disclosure has increased by more than 50 percent compared to 2014. [9]
  • Some companies are experimenting with innovative ways of assessing and communicating their total impact on society by taking into account their positive and negative impacts across economic, environmental, and social dimensions, and placing monetary values on those impacts. [10] BASF, for example, monetizes more than 20 different types of environmental, social, and economic impacts, including those in its value chain. This type of impact assessment and reporting delivers a powerful picture of where a company’s biggest impacts are.
  • A company’s sustainability messaging can provide clarity during a time of crisis, and with authenticity and proper controls, these communications can avoid being seen as “greenwashing.” Companies need to be authentic in their messaging and ensure that the data in their sustainability reporting are reliable, consistent, and of high quality. This is an area where external assurance can play a role. A growing number of companies are opting to have a selection of their sustainability data assured by an external party; in fact, more than half (51 percent) of S&P Global 1200 companies now obtain external assurance of at least some sustainability information. A recent survey by The Conference Board found that, for companies, one of the biggest benefits of obtaining external assurance is the credibility and trust it can help build with stakeholders. [11]

5. Collaboration: to catalyze innovation Companies that manage to integrate sustainability into the business do so by breaking down silos and by encouraging a culture of collaboration, both internally (across functions, regions, and business units) and externally (with business partners, suppliers, NGOs, and governments). A high level of collaboration is necessary to tackle issues that extend beyond the four walls of the company—issues such as plastics waste, water stress, and the transition to a low-carbon economy. A sustainability strategy is as much about innovation as it is about risk reduction, and a culture of collaboration can be a catalyst for innovating solutions to society’s thorniest challenges. A culture of collaboration can yield heightened levels of inward and outward awareness: employees know whom to go to for information and resources, regardless of their function, department, or region, and they are empowered to tap into resources outside of the organization. This level of awareness and connectivity is crucial in a time of crisis and can speed the deployment of resources and innovation.

  • CEOs and C-suite executives believe that collaborating externally with nontraditional partners is critical to remaining competitive, The Conference Board C-Suite ChallengeTM 2020 survey finds. Notably, CEOs point to “improving sustainability performance” as one of the most important drivers of external collaboration. [12]
  • For many companies, the interconnectedness and complexity of sustainability issues drives the need to collaborate. Building alliances and partnerships can help catalyze the innovation process. Open innovation is one way companies are leveraging resources outside their organizations to drive innovation. [13] Procter & Gamble (P&G), for example, uses a technology-enabled platform to gain stakeholder input to co-create and crowdsource. The platform is used to foster collaborative networks for innovation and sustainability. The result: more than 35 percent of P&G’s new products have elements that originated from outside P&G. [14]

Let’s be clear: the middle of a crisis is not the right time for organizations to start developing a sustainability strategy. Few organizations will have the time and resources to craft a purpose statement, conduct a materiality assessment, or refine their ESG goals and targets. The priority for companies—and society at large—should be survivability. But this is also not the moment to let go of an existing sustainability program; the very elements that form the foundation of a sustainability strategy are the pillars that will help companies recover from the crisis and thrive in its aftermath. For many companies, this crisis offers an important wake-up call: the resilience that a sustainability strategy offers is not a nice-to-have, but a must-have to remain competitive and relevant in uncertain times.

Endnotes

1While definitions vary, sustainability encompasses efforts focused on the company’s long-term viability and its impact on the well-being of multiple stakeholders, society at large, and the environment.(go back)

2Matteo Tonello et al., Sustainability Matters: Why and How Corporate Boards Should Become Involved, The Conference Board, October 2011.(go back)

3Leslie P. Norton, “Sustainable Companies Are Beating the Market during the Crisis. Will It Last?Barron’s, March 26, 2020.(go back)

4Rashid Ameer and Radiah Othman, “Sustainability Practices and Corporate Financial Performance: A Study Based on the Top Global Corporations,” Journal of Business Ethics 108, October 2012.(go back)

5Martin Reeves et al., Advantage in Adversity: Winning the Next Downturn, BCG Henderson Institute, February 4, 2019.(go back)

6Global Leadership Forecast 2018, Development Dimensions International, The Conference Board, EYGM, January 2018, pp. 10–11.(go back)

7Thomas Singer, Anuj Saush, and Anke Schrader, Sustainability Practices: 2019 Edition, The Conference Board, February 2020, p. 9.(go back)

8Singer et al., Sustainability Practices: 2019 Edition.(go back)

9Singer et al., Sustainability Practices: 2019 Edition.(go back)

10Thomas Singer, Total Impact Valuation: Overview of Current Practices, The Conference Board, June 2018.(go back)

11Thomas Singer, Sustainability Assurance Practices, The Conference Board, November 2019.(go back)

12Charles Mitchell et al., C-Suite ChallengeTM 2020: Collaborating to Compete, The Conference Board, March 2020.(go back)

13Anuj Saush, Unlocking Growth through Sustainable Innovation, The Conference Board, April 2020.(go back)

14Mitchell et al., C-Suite ChallengeTM 2020: Collaborating to Compete.(go back)

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