If you think the disruption caused by digital has been far-reaching, just wait. That impact will pale in comparison to the changes coming as companies wrestle with how to transform their businesses to become truly sustainable.
Sustainability, a company’s ability to create positive environmental and societal impact, is rapidly reshaping competitive advantage. It is remaking whole industries, blurring and in some cases obliterating boundaries between industries, and generating new waves of growth. The scale of the disruption that will play out over the next few decades, along with the opportunity it creates, will be staggering. Just the push to limit global temperature increases to 1.5°C—the central sustainability challenge of our time—will drive a massive transformation of the global economy and require investments totaling an estimated $100 trillion to $150 trillion by 2050.
On the basis of our extensive experience working with companies and investors to drive sustainability transformations, we have identified six actions that distinguish leaders from the rest of the pack:
1. Develop a sustainability strategy anchored in purpose.
2. Capture business value.
3. Build new sustainable businesses.
4. Make the core sustainable.
5. Build capabilities.
6. Own the narrative, and engage investors and stakeholders.
Companies that fail to take up the challenge, and instead continue to view sustainability through a compliance or ESG reporting lens, will miss the opportunity to tap into lucrative new markets and create new, winning business models. They will also see their space for creating shareholder value narrow dramatically. On the other hand, companies that execute effectively in all six areas will truly transform their business and turn sustainability into a competitive advantage.
DEVELOP A SUSTAINABILITY STRATEGY ANCHORED IN PURPOSE
Companies must devise a strategy that takes as its starting point the principle that sustainability is a source of durable competitive advantage. The strategy must clearly connect to the company’s purpose, focus on long-term value creation, and be driven from the top, including the CEO and board.
CAPTURE BUSINESS VALUE
Companies that lead in sustainability, as reflected in ESG performance, can also outperform their rivals financially. To start, they must develop a robust business case that accesses all sources of value that their sustainability efforts create. These sources are numerous and varied. Take, for example, decarbonization for auto OEMs. According to BCG analysis, eliminating 60% of scope 1 and 2 carbon emissions during an initial phase of decarbonization will generate significant annual savings, and those cost reductions can help fund the costs of eliminating the remaining 40%. Even in cases where manufacturing a sustainable product leads to higher costs, the increase often proves to be marginal and more than offset by the enhanced value perceived by customers. For instance, the increased cost associated with creating a smartphone with a net zero supply chain is less than 1% for a $400 smartphone, according to BCG analysis.
BUILD NEW SUSTAINABLE BUSINESSES
Companies have a major opportunity to unlock new sources of growth, particularly in relation to the trillions of dollars that the public and private sectors will be investing every year to drive the global economy to net zero carbon emissions. They should look for places in those new markets where they have unique advantages, and create new offerings and business models to leverage those advantages.
MAKE THE CORE SUSTAINABLE
Companies that aim to become sustainability leaders must assess and enhance the sustainability of their existing portfolio and operations. In supply chains, for example, they have an opportunity to create end-to-end transparency, from sourcing through distribution. New tools and technologies are critical in this area. AI can help companies monitor, predict, and reduce their carbon emissions. At the same time, companies can engage suppliers to impose standards, track and improve their performance, and push the ecosystem in which they operate toward greater sustainability.
BUILD CAPABILITIES
Companies that want to drive a sustainability transformation must ensure they have the right capabilities and foundation in place to succeed. First, they must design robust governance of sustainability efforts, both at the board level and within the company itself, including accountability and incentives linked to ESG targets. Second, they need to develop strong, granular data capabilities and robust ESG reporting processes to enable the business to direct and adjust efforts on the basis of real-time performance data and to meet increasingly stringent regulatory reporting standards. Third, they should build new partnerships that allow them to pool resources, combine expertise, co-invest in ways that minimize risks associated with high-fixed-cost investments, and deliver sustainable outcomes at scale more quickly. Fourth, they must embed sustainable business model innovation in the organization.
OWN THE NARRATIVE, AND ENGAGE INVESTORS AND STAKEHOLDERS
Leading companies must create a compelling and distinctive narrative around their sustainability strategy—one that connects and amplifies their purpose. At the same time, they can own their sustainability story in the public markets and share that story in a way that resonates with investors, rather than letting ratings agencies and investors tell their story for them. This means going beyond sharing the relevant information with rating agencies, and instead going directly to investors with an effective narrative.
(courtesy Boston Consulting Group)
By Rich Hutchinson, Vinay Shandal, Judith Wallenstein, Mark Wiseman, David Young, and Kilian Berz
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