Sustainable Transformation: An urgent transformation that businesses should prioritize
Sustainable transformation is not a new topic, we have come to realize the problem of climate change since the 19th Century, when we first identified the impact of natural greenhouse effect. However, it wasn’t until recent years that we saw an unprecedented increase in pressure towards businesses in leading the sustainable transformation. Investors are becoming increasingly focused on ESG metrics and impact investing; consumers are adopting a more sustainable lifestyle and changing their consumption patterns; government and international organizations have been constantly reviewing and putting tighter regulatory constraints on businesses’ environmental impacts.
The World Business Council on Sustainable Development has set various targets including net zero emission by 2050. More than 200 of its members have committed to such ambitious goals, including renown corporations such as tobacco firm Philip Morris International, Google, IKEA. Businesses need to be aware that the wave of sustainable transformation is emerging on a global scale, it is not only the large corporations that need to transform. According to BSR’s report in 2019, 52% of companies are putting climate change as the top priority for corporate sustainability, the competitive pressure is pushing businesses onto the edge of sustainable transformation.
The importance of engaging various stakeholders
Sohow could businesses accelerate their sustainable transformation and achieve concrete results? One of the most important factor contributing to successful business transformation is to engage all its stakeholders. In the process of business transformation, businesses need to be aware of how changes in management, operations and strategies could affect both external and internal stakeholders. Communication is crucial and businesses need to take different approaches when managing its relationship with various stakeholders.
On one hand, keeping stakeholders well informed could ensure that they are prepared for upcoming changes and are aware of the potential impact of these changes on themselves. This helps to prevent disputes could build a positive, socially responsible corporate image. On the other hand, effective two way communication with stakeholders allows businesses to better understand the expectations and demand from stakeholders, getting feedback from them helps businesses to evaluate on its current transformation strategy and constantly adapting them accordingly.
In this article I will focus on external stakeholders and suggest some strategies that businesses could adopt to better address ESG objectives, stay ahead of regulatory changes and establish competitive edge against unsustainable competitors.
External Stakeholders — pushing for transformation
According to the MIT Center for Transportation & Logistics, 46% out of 1,128 respondents expressed that they felt pressure from external stakeholders to adopt sustainability practices. External Stakeholders are the major source of pressure for businesses to transform, and it could be extremely difficult for businesses to manage and balance their interests. External stakeholders could include regulators, consumers, suppliers, and the community. Apart from always ensuring the transparency of sustainable business practices and reporting of sustainability related data, businesses also need to consider differences between the interest and focus of different external stakeholders and approach them differently. The following figure summaries my key suggestions and I will elaborate on each of them in turn.
1.Government and Regulators:
Ensuring responsible, proactive and accurate reporting of sustainability metrics are one of the most important things that businesses need to be aware of when interacting with regulators. This sounds very obvious and easy, but in practice, it could be very difficult.
One of the biggest challenges is ensuring the quality of ESG data, how could businesses obtain accurate data that could reflect their ESG progresses? Businesses also need to ask themselves if the data they are reporting is indeed what the regulator is asking for, it is very common for businesses to report irrelevant data. Failure to select relevant sustainability metrics conveys to the regulators that the business lacks fundamental understanding of ESG reporting and indicates a lack of ESG capabilities, impeding progress of sustainable transformation. Thus, when selecting sustainability metrics, businesses need to be selective and carefully access the relevance of their data from a context-based approach. The metrics used should be based on the business’ specific measurable target and objectives as well as taking into consideration of the broader industrial, local, national, global thresholds and context.
“Sustainability requires contextualization within thresholds; that’s what sustainability is all about.” — Allen White, Co-Founder, Global Reporting Initiative
A proactive approach in reporting could also boost businesses’ reputation, as well as helping businesses to stay ahead of changes in the regulatory environment, avoiding potential loss in adjusting production processes in response to sudden regulatory changes. For example, in India, companies are adopting voluntary principles and code of conducts to proactively comply to Environment, Health and Safety (EHS) policy and supplier code of conduct .The United Nations Global Compact (UNGC) principles have also encouraged over 9000 global businesses to voluntary report and disclose their performance on sustainability principles.
Actively encouraging community participation could also be a key to success, businesses should aim to establish trust through transparent reporting and staying compliant with their reported practices. An effective two way information flow is critical, constantly asking for feedback from the community through surveys, interviews, social media posts allows businesses to better understand expectations from the community and adjust their strategies accordingly. Businesses should also consider setting up collaborative programs to engage the community. For example, initiating programs and campaigns with environmental sustainability themes that are open for public participation. An idea could be running a campaign that asks for its local community to join the business to turn off electronic devices at home for one hour to save electricity. These kind of campaigns are good ways to inform the local community that the business is going through sustainable transformation, which immerse businesses and communities into a common culture, establishing community bonds. These effort could also potentially expose the business to new consumer groups within its local community.
When communicating with customers, businesses should adopt a different mindset and put themselves in the perspective of its customers. Disclosure of data and reports are also needed, however, businesses need to highlight the key changes and potential impacts on consumers instead of just releasing thousands of pages of reports. Consumers are not likely to go through the whole report, they are more likely to care about measurable, concrete results. For example, if the business only reports switching of supplier to a new one that aligns itself with sustainable objectives but doesn’t propose potential impact on customers, how its customers might interpret such change is ambiguous. Thus there is uncertainty in how its customers’ behavior might change in response. Instead, the business could highlight that this will reduce its carbon footprint by a specific amount, informing the customers that although they might need to increase the price of the product in the short term, in the long term, after adopting a more effective production process, the price will eventually come back down. These statements could help to clear up the uncertainties in changes in consumer behavior, informing the consumers of possible impacts while highlighting the business’ contribution to sustainability.
Furthermore, in order to accelerate the speed in which the business could establish a consistent and positive brand image, it could try to encourage its customers to get involved in adopting a sustainable lifestyle, associating itself more closely with sustainable impacts.
According to McKinsey, a typical consumer company’s supply chain accounts for more than 80% of greenhouse-gas emission and more than 90% of impact on air, land, water, biodiversity, and geological resources as a percentage of environmental impact of the business’s production process as a whole. Sustainability issues among its supply chain is often an area that businesses are unaware of. According to a report by CDP, only 25% companies have engaged their suppliers in effort to reduce emission.
In order for a business to effectively adopt a sustainable business model, it needs to ensure that all of its suppliers along the supply chain are aligned with its sustainable objective. In most cases, it would be beneficial for all parties along the supply chain to negotiate potential collaborations in sustainable transformation, as we have seen many cases of catastrophic supply chain collapses due to unsustainable processes. Businesses may face challenges in trying to influence their suppliers, thus they always need to ensure clear communication of the changes in business production processes and negotiate with the suppliers about intentions to adjust contract terms, smoothing out disruptions rather than handling it in an abrupt way. More guidance on how businesses could negotiate with suppliers on sustainable transformation have been analyzed by Mckinsey and can be found in the following link :
Apart from engaging external stakeholders, communication with internal stakeholders are equally or in some aspects even more important. Stakeholders within the organization are critical in determining the efficiency and speed in which adaptation of changes in businesses practices could take place. The level of involvement of various internal stakeholders such as employees, management team, shareholders and the alignment of sustainable objectives across all hierarchies of the business is key in determining how well the business could reach its sustainable targets. In my next article in this series I will explore why and how could businesses engage its internal stakeholders to achieve measurable and successful business sustainable transformation.
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