8 minute read 29 Aug 2018
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How an integrated sustainability strategy can help you stand out

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EY Global

Multidisciplinary professional services organization

8 minute read 29 Aug 2018

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Sustainability integration is important to futureproof business. Consider the global megatrends that could have an impact. 

Today, more than ever, integrating sustainability into your strategy is important to futureproof business. However, organizations around the world are realizing that to do so, they should plan for and address potential impacts of global megatrends — drivers that can fundamentally change the way they may operate over the coming decades. It is important for businesses to look beyond their own challenges — direct or indirect — and consider the broader influences that are changing the way the world works. These influences include: the increasing number of requirements to demonstrate ethical behavior and to describe an organization’s purpose; and a growing consumer base more in touch with the connection between the products and services they buy and their impacts on people and the environment.

Investors are increasingly taking note of this — as evidenced by EY’s annual investor survey.[1] The survey shows that 80% of all respondents agreed or strongly agreed that environmental and social factors (not just governance) offer both risks and opportunities, but that companies have not considered these in their business.

Aside transparency, there has been a recent shift in investor sentiment to focus also on whether organizations have integrated sustainability into their business strategies to enhance performance and build resilience.

What does integrating sustainability into business mean?

To respond to investor demand for greater integration, it is necessary to explore what “integration” actually means. There is no widely acknowledged definition or even a universal view of how to accomplish it. A number of studies around the concept of integration have offered definitions, including:  

  • A push toward operational excellence: utilizing processes to reach expected results by enriching and updating them through the lens of sustainability (for example, this includes the introduction of clauses on environmental and social sustainability in the process of selection or management of suppliers, or the integration of sustainability risks into risk management processes)
  • Integrated thought: a holistic way to think of an organization and how it creates value, is considering the interaction between tangible and intangible assets as it operates
  • Innovation engine: a way to innovate new products, including environmental and social aspects, from their conception to enhanced product innovation
  • Answer to a changing world: the capability of an organization to activate and interpret social, environmental and economic changes to anticipate needs that may lead to transformation of the business’s purpose in addition to its operational practices
  • New social impact models: situations in which boundaries between sustainability (considering environmental, social and governance (ESG) factors) and traditional (focus on financial value) business become blurred, in conjunction with the emergence of new, social impact-driven business models.

However, as you can see, these concepts differ significantly. And, while being exercised successfully by some, they do not necessarily resonate with the decision-makers involved in the development of corporate strategies. Given that sustainability integration is of increasing importance to many organizations, they should better understand “integrated sustainability” and how it can enhance business performance.

A new definition of integrating sustainability in business

With continued focus on sustainability by some of the world’s leading organizations, a forward-looking view on the definition of sustainability is emerging. Consistently, this new definition incorporates a redesigning and redefining of strategy and operational processes that meet the changes, needs and expectations of the market and society alike to support long-term value.

In this definition, the word “sustainability” becomes a synonym for the capability of the organization to adapt to the potential impacts of global megatrends, and endure over time. Here, integration can be interpreted as an opportunity to improve day-to-day operations and also to look at business transformation for the future, be it new products, a new purpose or a new business model.

How do you go about integrating sustainability?

Over the past few years, there has been a proliferation of new management theories related to sustainability strategy that seeks to provide method or guidance on integration. Some significant examples include:

  • The Gond model identifies eight levels of maturity for integrating sustainability in business, from sustainability and business strategy managed in parallel, to integrated strategy — where sustainability is directly managed through managerial practices and systems.
  • The Lozano approach is more focused on the types of sustainability initiatives[2] that are assessed according to the potential contribution to the dimensions of sustainability. They are the economic, environmental, social and time dimensions, on a scale including the complete, partial or variable coverage of dimensions, depending on the use of the tool.

Development has also been undertaken by global organizations and think tanks to design frameworks to provide organizations with practical approaches on how to integrate sustainability models into their operations. Examples include:

  • The Roadmap for Integrated Sustainability by United Nations Global Compact provides a practical guide to integrate sustainability in corporate strategy, operations and culture. In particular, the road map identifies, for each key corporate function, a series of recommendations for the integration of sustainability into those corporate functions, as well as some emerging practices.
  • The guide, Sustainability Incorporated, from the English think tank SustainAbility, defines five essential elements for integration, such as the understanding of the business model, the focus on materiality subjects, the inclusion of sustainability in the design of products and services, the development of mindset and integrated reporting, and the analysis of those aspects in corporate culture that may be useful drivers for sustainability.
  • The Executive Guide: Business Models for Shared Value, drafted by the Network for Business Sustainability, explores three possible operational practices that might help corporations integrate sustainability into their business according to a shared value standpoint:
  1. The Hourglass model that can help companies look at and appraise the value creation model in an integrated and holistic way
  2. The Sustainability Strategy Roadmap that identifies the steps to orient the corporate strategy toward shared value
  3. The Business Model Thinking Framework that supports organizations in defining a new business model inspired by shared value

Each of these models differs in scope and approach, and knowing which of these models (or others) to choose and how to start the journey can be daunting. After all, many organizations are only at the point of considering sustainability, let alone embedding it into the very core of their long-term decision-making processes. Furthermore, sustainability managers who are asked to navigate change often do not have direct influence on the setting of the business strategy.

So, where to from here?

The EY investor survey provides clear direction: the majority of investors now consider sustainability ESG factors alongside other business and market factors in their decision-making. With this in mind, to the extent one of the above models, frameworks or road maps is adopted, investors can expect that businesses have done their analysis to identify:

  • External factors that can influence the business
  • Issues that may be relevant for the business now and in the future
  • Specific implications of these to the business’s risks and opportunities
  • The ambition of the board and the executive in response to the external environment and the identified risks and opportunities

The depth of the above analysis can have as much of an influence on the ability of the business to integrate sustainability as the choice of the model of integration.

So, whether you are embarking on the journey of setting a sustainability strategy for the first time or you are focused on better integrating an existing strategy, before taking the step of deciding on an integration model, it may be helpful to:

  1. Undertake or revisit scenario planning by understanding the global megatrends and considering key influencers in your market across three dimensions: stakeholder importance, impact to the business and the immediacy of the aspect to the business (i.e., short, medium or longer term)
  2. Broaden stakeholder engagement to truly understand what your key stakeholders consider important about your business, your industry and the markets in which you operate
  3. Compare your company with your competition, your suppliers and your customers to understand their strategies and their activities
  4. Broaden your market analysis and risk assessment processes to embed the scenario plans that build upon global data sets, policies and industry insights, to create a number of variants for a “future state” view of risk and opportunity
  5. Engage with your board and your executive to understand the business’s ambition for responding to the above scenarios, stakeholders and risks

Undertaking the above as a defined process (and in much more depth than has generally been done in the past) can position businesses better to identify a model for integration, which suits their needs, provides a platform for a business case for action and supports the overall integration process. Importantly, it can also help businesses provide a more detailed vision to investors of why integrating the proposed business and sustainability strategies will differentiate them now and in the future.

    1. Is your nonfinancial performance revealing the true value of your business to investors?, EYGM Limited, 2017.
    2. Gond J.P., Grubnic S., Herzig C., Moon J., Configuring management control systems: Theorizing the integration of strategy and sustainability, Management Accounting Research, Volume 23, Issue 3, 205–223, 2012.
    3. Lozano Rodrigo, Towards better embedding sustainability into companies’ systems: an analysis of voluntary corporate initiatives, Journal of Cleaner Production, 25:14-26, 2012.
    4. Roadmap for Integrated Sustainability, United Nations Global Compact website, https://www.unglobalcompact.org/take-action/leadership/integrate-sustainability/roadmap, accessed 5 March 2018.
    5. “Sustainability Incorporated,” SustainAbility website, sustainability.com/our-work/reports/sustainability-incorporated/, accessed 5 March 2018.
    6. “Executive Guide: Business Models for Shared Value,” Network for Business Sustainability website, https://nbs.net/p/executive-guide-business-models-for-shared-value-02275ff6-3d66-4109-ace3-4fa826caa9af, accessed 29 March 2018.

Summary

Today, more than ever, integrating sustainability into strategy is important to futureproof business. However, organizations around the world are realizing that to do so, they should plan for and address potential impacts of global megatrends — drivers that can fundamentally change the way they may operate over the coming decades.

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By

EY Global

Multidisciplinary professional services organization