To get beyond the starting line, CEOs need to approach the challenges of sustainability from a strategic and value-creation perspective in terms of both the questions they ask and the answers they seek.
Rarely in business history have CEOs had more significant opportunities to capture advantages, reset industries, and anchor their legacies than at this moment in the global race to sustainability. These opportunities span industries and regions, and they extend beyond current net-zero ambitions and environmental, social, and governance (ESG) targets. CEOs should formulate strategies that create and capture long-term competitive advantage from the transition to net zero and sustainability.
This is a race—one that has already begun and is quickly accelerating. Capital markets have seen tremendous growth in ESG-related assets under management, and they are projected to rise from $35 trillion in 2021 to $50 trillion globally by 2025. Sustainability-linked loans and financing exceeded $1.6 trillion in 2021, up by a factor of three since 2019.1 Banks are starting to engage their business customers to drive down financed emissions. And governments are seeking to drive sustainability through green public-procurement initiatives, which will provide an estimated $6 trillion boost to global GDP and create 3 million net new jobs by 2050.2 In addition, the number of companies committed to science-based targets more than doubled in 2021, and their most common goal is in line with keeping the global temperature rise to less than 1.5°C.
And yet, most companies are still making their way to the starting line of the race to sustainability and have not addressed it in a strategic manner. This isn’t surprising: when confronted with long-term endeavors, many CEOs struggle to balance the imperative of meeting quarterly expectations with the need to grapple with the many uncertainties of transforming their businesses. When it comes to sustainability, more than a few CEOs are attempting to walk this line by pointing to ambitious net-zero statements and ESG targets as evidence that their companies are front-runners in the race to sustainability. These are good moves, but they are quickly becoming de rigueur for well-managed companies, and they are insufficient to seize competitive advantage.
If public commitments and ESG targets are no longer considered evidence of being a front-runner, what is?
The Leaders in Sustainability Strategy
- Assessing the relative scope, scale, and speed of a company’s business transformation can reveal whether it is a leader in sustainability strategy. Specifically, a company should have some degree of scale in all the following indicators:
- A morphing corporate portfolio, business boundary, and asset base that enable sustainability transformations in a company’s operations, its customers’ operations, and industry infrastructure
- An evolving product portfolio with a growing share of revenues and higher margins from the sustainability segments in the company’s markets
- Restructured supply chains that are designed to improve business resilience and lower emissions via more sustainable suppliers, capabilities, and content
- An innovation portfolio and supporting ecosystems that accelerate investment in sustainability technologies, infrastructure, products, and services
- New customer value propositions that are differentiated and priced according to their sustainability benefits
- A portfolio of commercial arrangements, investments, and ventures that mitigate and exploit sustainability scarcities in the value chain
- The creation of new business ecosystems that enable sustainability solutions and markets
- Strategies aimed at resetting the basis of advantage for the industry that prompt commensurate competitor reactions and industry disruption
We examined more than 500 sustainability initiatives from companies around the world, and we found that only 1 in 5 initiatives showed any meaningful connection to drivers of business value and advantage, and only 1 in 15 was changing the basis of industry competition and the boundaries of the company’s business model.
To get beyond the starting line of this race, CEOs need to approach the challenges of sustainability from a strategic and value-creation perspective in terms of both the questions they ask and the answers they seek. This approach will not only ensure that their company will act on sustainability imperatives in an aligned and rigorous way but also assure their boards, investors, and other stakeholders that the company is properly prepared to enter the race to sustainability. Developing a strategic perspective involves answering four questions.
Courtesy BCG By David Young and Simon Beck
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