Firms around the globe are shifting their focus on sustainability from talk to action. They are developing sustainable products and services and supply chain practices to increase revenue, satisfy investors and regulators, and improve their reputation. Additionally, these practices help them reduce their environmental footprint while saving costs associated with waste and resource and energy consumption.
Many corporate leaders find sustainability also helps deepen their organization’s sense of purpose to engage and retain a new generation of employees. This shift has been fueled by increasing energy insecurity, rapidly changing regulatory and reporting standards, and investor appetite for environmental, social and governance (ESG) performance.
The COP27 United Nations Climate Change Conference in Egypt and the UN Biodiversity Conference COP15 in Montreal stressed the need for business to create action plans to mitigate human influence on the climate and on nature. The Russian attack on Ukraine and subsequent surge of refugees, growing inflation, and lingering concerns about the COVID-19 pandemic also raise doubts about governments’ ability to ensure an inclusive society. In addition, ESG investors and rating agencies are holding firms accountable for their sustainability records. Expectations are growing for business to play a proactive role in driving efforts to secure a sustainable and inclusive future for the next generation.
For 2023, IMD experts have identified a series of sustainability trends that will drive further business transformation to create value, manage risks, and reconfigure industries and entire systems to ensure we respect our planetary boundaries and create a more inclusive and resilient economy.
1.) From net zero to climate-positive supply chains
Carlos Cordon, Professor of Strategy and Supply Chain Management
Many companies are working hard to meet net-zero sustainability targets by 2050 or other target dates. These include Scope 3 emissions, those which do not come from their own operations but from their larger value chain. That is the hardest part, as usually 90-99% of a company’s greenhouse gas emissions are Scope 3. In that journey, many are also realizing that it is impossible to achieve net zero without looking outside of their traditional business. For example, quite a few food companies can’t achieve net zero without having their suppliers (farmers) planting crops that are of no use for the company supply chain, but which capture CO2. Along that path, they are now asking themselves if they could push even more and transform their supply chains to become CO2 negative, going “beyond net zero”. Not only are they asking those questions, but they are also planning how to pay back the CO2 “debt” that the company has created since its creation.
2.) Organizational readiness for sustainable transformation
Vanina Farber, elea Professor of Social Innovation
Patrick Reichert, Term Research Professor and Research Fellow
There is an urgent need for private capital to enter frontier markets to help solve systemic grand challenges. However, organizational transformation and readiness is needed to push the boundaries of the problems that private capital can address and solve. For example, the humanitarian sector is currently experiencing a $32.3bn shortfall between funding and what the UN says is needed. Can development organizations, governments, firms and private financial institutions work together with the humanitarian sector to fill the gap? Collaborative systemic solutions require new approaches to fragility and call for alternative sources of capital to complement traditional grant funding. However, meeting these objectives will require actors to undergo organizational transformation: NGOs will need to be receptive to more market-based approaches, governments will need to provide stable policies and backstop the riskiest initiatives, development finance institutions will need to identify opportunities to provide additionality (i.e., focus on interventions that would have not occurred without their participation), and corporates will need to be willing to collaborate with traditional non-market actors. We tend to think about collaboration as an “external challenge” but the key to success lies in redesigning organizations that can align incentives around impact and mobilize complementary resources to achieve it.
3.) The next generation in family business will power data-driven sustainability
Peter Vogel, Professor of Family Business and Entrepreneurship
Ivan Miroshnychenko, Research Fellow and Term Research Professor
Family businesses will adopt new digital capabilities to manage sustainability data that guide sustainable business practices. Whether it is reducing waste, optimizing the supply chain, or eliminating emissions, insights from sustainability data can help to reach net-zero emissions. A total of 60% of family businesses with strong digital capabilities, surveyed by PwC in 2021, placed sustainability at the core of their daily operations. One main driver for this is the next generation of family owners. The new generation of business owners and leaders care deeply about the environment and are striving towards more sustainable and equitable business practices. Being tech-savvy, the digital natives are willing to take a more data-driven approach in order to lead the way towards a net-zero future.
4.) War and energy shortages accelerate adoption of energy efficiency and renewable energy
Natalia Olynec, Head of Sustainability
Russia’s invasion of Ukraine disrupted energy supplies across Europe, creating energy insecurity, soaring costs, and a strong incentive for investment in renewable energy sources. In the short term, businesses of all industries and sizes will look at energy-saving measures to reduce both costs and carbon emissions. To save on energy bills, firms will renovate buildings to prevent heating loss and implement digital solutions for temperature controls, shut off lighting and equipment when not in use, and replace less efficient outdated equipment. In the longer term, this will likely lead to increased adoption of new types of energy and fuels. Policy incentives will also continue to emerge to stimulate innovation, help tackle climate change and fund the shift to clean energy. Many companies will see an opportunity to accelerate the green energy transition, and the plans that were put in place before the war in Ukraine, as renewables become more cost competitive.
5.) Accounting for nature and biodiversity in climate targets
Amanda Williams, Term Research Professor and Research Fellow
More than 40,000 species are at risk of extinction in the coming decades, according to the UN progress report on the Sustainable Development Goals released in July 2022. The biodiversity challenge is closely intertwined with the climate crisis – the consequences of climate change have negative consequences for the survival of vulnerable species and preserving biodiversity can help mitigate climate change. This interconnected challenge presents a timely opportunity for companies that are getting serious about ambitious climate targets to account for nature and biodiversity protection in their climate targets as a means to net zero. At COP15, the 2022 UN conference on biodiversity, leaders decided on our collective goals for the post-2020 global biodiversity framework and businesses advocated for mandatory biodiversity assessments and disclosures by 2030. Firms are advised to get ahead of the game and start accounting for biodiversity.
6.) Sharing emotions for healthy, sustainable high performance
Susan Goldsworthy, Affiliate Professor of Leadership, Communications and Organizational Change
Research with more than 3,000 executives since April 2020 shows that between half and two-thirds of leaders say they are operating from a place of ‘dis-ease’ rather than a position of well-being. Many report feeling overwhelmed, experiencing increasing anxiety, frustration and irritability, as organizations face a multitude of challenges in a world dealing with ecological collapse, biodiversity loss, social division and economic decline. Executive teams will increasingly have to address these emotional challenges. One simple exercise can be powerful in creating a more inclusive, productive environment. Taking a stack of post-it notes, team members write down all the things that are concerning them from their personal and professional perspectives. They place them all on the wall, acknowledging and accepting them. They then write down all the things they can influence and achieve in the upcoming meeting, placing those post-it notes on the opposite wall. Through this process, leaders co-create the conditions where people can flourish amidst adversity.
7.) Luxury developing sustainable supply chains
Stéphane J.G. Girod, Professor of Strategy and Organizational Innovation
The luxury industries have continued in 2022 to accelerate innovation towards greater sustainability. Automobile and fashion have had by far the heaviest adverse impacts on the environment and society, so actors operating in these two sectors have been ahead of the pack in reversing this trend. For years now, car makers like Porsche have been working on their shift to electrical power traction, while Kering started its journey towards decarbonization in 2012, introducing along the way the first Environmental Profit & Loss account in luxury fashion and sharing its methodology so that other companies can learn from it and use it as a model. In watches and jewellery, transformation started later, perhaps due to the longer life cycle of these products and their smaller volumes. Luxury actors, traditionally fearless competitors, have come to realize that they need to collaborate to shift to positive impact. In 2022, Cartier and Kering formed the Watch & Jewellery Initiative 2030 which, like the Fashion Pact, aims to drive progress on sustainability in its sector. In 2023, luxury players need to accelerate their decarbonization efforts by working on their Scope 3 emissions, and shift from a mindset of managing ESG risk to creating opportunities for strategic renewal and greater brand desirability through new purposeful and positive-impact business models. All this will require considerably more investments and capability building.
8.) Board composition and responsibilities adapt to ESG purpose
Didier Cossin, Professor of Governance and Finance, Founder and Director of IMD Global Board Center
Sophie Coughlan, Associate Director, IMD Global Board Center
Many boards have responded to increasing ESG pressures by recruiting a sustainability specialist. This is understandable in the face of competing metrics and reporting requirements – and the resulting confusion – but as with digital, geopolitics, or other specific areas of general impact, such roles have been limited to board work. That is not what makes for successful ESG governance. While there is a degree of technical knowledge required, including integrated reporting methodologies and disclosure, there is the risk of a tick-box compliance focus that does not lever a real ESG identity. Instead, boards need to understand their own true personality around ESG and then evolve the board composition in that direction – whether it is climate change, next generation, social justice, or diversity concerns. Finnair Chairman Jouko Karvinen values age and background diversity as part of the airline’s emphasis on sustainability, shifting the scope of the dynamics – and the discussion – in the process. Boards leading on ESG drive the ESG culture of the board through its composition.
9.) Innovation, investment, and business transformation fuel climate hopes
Knut Haanaes, Professor of Strategy and Lundin Chair Professor of Sustainability
As we head out of COP27, many are disappointed to see climate deterioration going much faster than any governmental moves to address the crisis. But there are also reasons to be optimistic. Fundamentally, if we take a long-term perspective, we will deal with climate change. It is not a question of “whether”, it is a question of “when”. We will go through the whole energy transition, and we will build a circular economy. We will scale new technologies to gradually disrupt our carbon economy. Some facts are encouraging:
- First, the world is searching for new solutions. At any given time, we have at least one million green startups exploring new energy solutions. According to HolonIQ we already have 47 climate unicorns worth more than $1bn.
- Second, we are investing. According to the REN21 renewable energy community, we globally invested $366bn in renewables in 2021 alone.
- Finally, our companies are transforming. Today, we have at least 13,000 large and medium-sized companies in Europe transitioning towards more sustainable operations by disclosing their climate footprint.
So, there is a real case for a “glass half full” view on climate. Leadership is about being positive and seeing opportunities, and we are living in a time where climate leadership is critically important.
10.) New regulations drive sustainability strategy
Florian Hoos, Professor of Sustainability and ESG accounting
In a few years, almost all companies around the world will have adopted mandatory sustainability reporting standards – either because they were obliged to by law or because they can no longer resist stakeholder pressures. Board members and top executives can make a choice today between just complying with the new standards and using this one-time change in mandatory reporting as an opportunity to prioritize sustainability even more as a key component of their strategies. The following issues are key in that discussion:
- What are material sustainability issues for your company above the standard setters’ guidelines?
- What are the new sustainability KPIs that are at the heart of your strategy execution?
- How do you incentivize the C-level and senior managers?
- What kind of regulation forecast mechanism is needed to be prepared for changes in standard setting at different levels (ISSB, EU regulation, etc.)?
- What is your plan to transition into the low-carbon era under different scenarios?
Answering those questions and going beyond just complying with mandatory sustainability reporting standards is key to gaining and maintaining competitive advantage in the future.
11.) Harnessing collaboration to enable the circular economy
Victoria Kemanian, Senior Advisor, Business Transformation Initiative
The challenges of transitioning to the circular economy are such that one single actor cannot tackle them alone. Collaboration within and outside ecosystems in circular economy solutions is central to unlock benefits that organizations cannot achieve on their own. These are accelerating systems transformation by boosting multi-stakeholder innovation, thus reducing costs for players, surmounting obstacles, and advancing solutions adoption. Yet collaborations are difficult to orchestrate as they demand systemic changes in clear contrast with the linear and profit-driven mindset prevailing in business.
Successful examples include multi-stakeholder platforms like the Global Commitment, led by the Ellen McArthur Foundation and the United Nations Environment Program, through which 500 signatories such as Nestlé, PepsiCo, Coca-Cola, Unilever, Mars, and L’Oréal – which together utilize 20% of all plastic packaging produced globally – have committed to ensuring that all plastic packaging is reusable, recyclable, or compostable by 2025, among other circularity goals. With most models still at an experimental stage, a tougher challenge is spreading solutions globally. While policy and regulation play catch up, how will the financial sector, firms, and consumers step up to the challenge?
12.) AI: a friend and a foe for sustainability?
Öykü Işık, Professor of Digital Strategy and Cybersecurity
ArtificiaI Intelligence, and specifically certain deep learning models such as those designed to process human language, requires huge amounts of energy. By their nature, they process huge amounts of data, and all those data centers carrying out storing and processing tasks require a lot of energy for cooling.
The good news is that AI can also help with better conservation of natural resources through better prediction, managing agriculture yield or managing the demand and supply of energy in energy grids. Also, several AI giants such as Google and Microsoft have already pledged to become carbon negative soon. Moving to a cloud service provider that has made such commitments may help organizations reduce their own carbon footprint as well!
The expectations from AI in terms of efficiency and costs savings is very high – it is still considered to be the most disruptive technology of today. But we need to look beyond short-term benefits and keep an eye on the long-term implications of scaling AI too.
13.) Mind the ESG reporting trap! An opportunity lens on sustainability
Julia Binder, Professor of Sustainable Innovation and Business Transformation
With all the regulatory changes ahead, 2023 will be a year dominated by managing ESG risks. Considering all these pressures, it’s all too easy to stumble into the ESG reporting trap. All too often, companies and business leaders are not getting any insights from ESG analyses, as they approach ESG reporting solely as a required disclosure exercise. While this “tick-box” approach demands an incredible amount of data, it does not provide insight on how to seize the enormous opportunities that the sustainable transformation will open up across all sectors.
In fact, a recent study by McKinsey estimated that the transition to net zero alone will provide business opportunities of $12trn per year. Beyond capturing new markets, transforming your business towards sustainability is also a way to address changing customer and investor needs, as well as to attract and retain talent.
Courtesy International Institute for Management Development (IMD) Article available here.