Corporate Sustainability in Practice: A Guide for Strategy Development and Implementation [1st ed.] 9783030563431, 9783030563448

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Management for Professionals

Paolo Taticchi Melissa Demartini Editors

Corporate Sustainability in Practice A Guide for Strategy Development and Implementation

Management for Professionals

More information about this series at http://www.springer.com/series/10101

Paolo Taticchi • Melissa Demartini Editors

Corporate Sustainability in Practice A Guide for Strategy Development and Implementation

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Editors Paolo Taticchi University College London London, UK

Melissa Demartini University of Genoa Genoa, Italy

ISSN 2192-8096 ISSN 2192-810X (electronic) Management for Professionals ISBN 978-3-030-56343-1 ISBN 978-3-030-56344-8 (eBook) https://doi.org/10.1007/978-3-030-56344-8 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

This book is dedicated to a number of colleagues who have inspired my work and given me opportunities: Aldo Taticchi (who happened to be my father too!), Piero Lunghi, Paolo Carbone, Lawrence Chiarelli and Kashi R. Balachandran. It is also dedicated to my mother for her unconditional love; and to Manuela, William Paolo, Derek Manuel and Jackson Vittorio who give meaning to my life—every day. Paolo Taticchi

This book is dedicated to Prof. Flavio Tonelli, my mentor and guide over the years. Moreover, it is dedicated to my family for their love and support and keeping me fed and watered! Melissa Demartini

Preface

Sixty-seven years have passed since American economist Howard Bowen (1953) published his book Social Responsibilities of the Businessman, remarking the importance of a fundamental morality in the way a company behaves toward society and the relevance of ethical behaviour toward stakeholders. Since then, the topics of Corporate Social Responsibility and Corporate Sustainability have received a lot of attention, up to the point that corporations have created departments and functions to address these matters and academics built scientific disciplines and courses on those topics. In the last twenty years only, we have seen a number of notions becoming popular in the business jargon such as Triple Bottom Line, ESG and Purpose that have shaped the modern definitions and practices of Corporate Sustainability. Indeed, the matter of integrating corporate sustainability strategies with business strategies has emerged as a key one, and it is often mentioned by executives, practitioners and consultants as a priority. In fact, a fully integrated corporate sustainability strategy can help organisations to better manage risks, to win business opportunities and to ultimately strengthen reputation. Building on the experience of renowned strategists, sustainability and finance leaders and academic experts, this book offers practical tools and approaches that can be used to develop and implement fully integrated corporate sustainability strategies. Among many practical and innovative things, the reader will also find an update definition of Corporate Sustainability (in Chap. 4) and a detailed framework to develop and implement corporate sustainability strategies (in Chap. 9). The book is organised in three sections, so as to highlight the drivers of the corporate sustainability debate (part I), the building blocks of modern corporate sustainability and the business case from a strategic and financial perspective (part II), and the concepts and tools relevant for the development and implementation of corporate sustainability strategies (part III).

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Preface

We invite executives, consultant and practitioners to use the concepts and tools presented in this book to build better organisations with a clear sense of purpose. We also invite students interested on the topic of corporate sustainability to learn with passion from the following chapters, as sustainability thinking is a key skill of modern leaders of business and society. London, UK

Paolo Taticchi Melissa Demartini

Acknowledgements

We would like to gratefully acknowledge a number of friends and colleagues for their significant contributions. First of all, a special thank to the chapters’ Authors for the quality of their work. Without you, this book would simply not exist. Davide Stronati (Mott MacDonald), Christian Hampel (Imperial College Business School) Simon Sylvester-Chaudhuri (CIV:LAB)—thank you for your advice, feedback and friendship. Lynne Fairclough and Elizabeth Rota—thanks for your help in proofreading the manuscript. Finally, we would like to thank Christian Rauscher and Nitza Jones-Sepulveda at Springer thanks to whom this project was brought to fruition.

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Contents

Part I 1

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Corporate Sustainability: The Big Picture

How Environmental and Social Issues Affect Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Melissa Demartini and Paolo Taticchi

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The Sustainable Development Goals: A Framework for Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valérie Amato

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Thinking in Systems: The Long-Term Impacts of Short-Term Business growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Roberto Pasqualino

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Part II

The Business Case for Corporate Sustainability

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A Modern Definition of Corporate Sustainability . . . . . . . . . . . . . . Paolo Taticchi and Melissa Demartini

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Sustainability Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Melissa Demartini and Paolo Taticchi

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The Link Between Sustainability Investing and Financial Returns: An Asset Management’s Perspective . . . . . . . . . . . . . . . . Daniel Ung

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Sustainable Finance––Integrating Sustainability into Corporate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Laura Maida

Part III 8

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Definition and Execution of Sustainable Strategies

Business’ Role in a Changing Society. Key Steps to Deliver a Purpose-Led Strategy that Responds to Climate Change and Social Inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Charlotte Wolff-Bye

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Contents

How to Approach the Development of a Corporate Sustainability Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Sally Taylor

10 Sustainability Transformations—From Theory to Practice . . . . . . . 165 Diana L. Copper 11 The Evolution of Sustainability Reporting: Integrated Reporting and Sustainable Development Challenges . . . . . . . . . . . . . . . . . . . . 191 Cristiano Busco and Elena Sofra 12 Sustainable Supply Chain Management . . . . . . . . . . . . . . . . . . . . . 207 Marco Formentini Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

Editors and Contributors

About the Editors Prof. Paolo Taticchi (Editor and Author) is Professor (Education) in Strategy and Sustainability & Deputy Director (MBA and International at UCL School of Management. He teaches modules on sustainability and competitive advantage, strategy, consulting, and the future of cities. Before UCL, Paolo spent six years at Imperial College London where he led top-ranked programmes such as the MSc Management and the Global Online MBA. Alongside his work at UCL, Paolo is regularly invited to teach on international MBA and EMBA programs in Europe, Africa, Asia, and the Americas. In the recent years he has visited and hold teaching appointments in top universities like EADA, ESAN, and NYU. Paolo’s research on performance measurement and management, business networks, and corporate sustainability is internationally recognised. He has authored over 50 published academic journal articles, and edited and co-authored three books. Outside of the academy, Paolo has significant consultancy experience in the fields of strategy, operations, and sustainability and today he serves in the advisory board of influential organisations in the UK, US, Canada, Italy and India. Paolo is also active in the entrepreneurial space, co-founding three firms in the fields of engineering and consultancy. His projects, quotes and opinions have been featured over 200 times in media outlets like The Financial Times, Forbes, The Telegraph, Semana Sostenible, La Republica, Inspire, Sole 24 Ore, La Nazione, Corriere della Sera, La Stampa, RAI, Sky News, Sky News Radio, Mediaset, and CNN. In 2018, Paolo was chosen as one of Poets & Quants’ top 40 business school professors under the age of 40. In the same year, Paolo received the title of Knight of the Order of Merit of the Italian Republic. In 2019, Paolo received the “Talented Young Italian Award” from the Italian Chamber of Commerce and Industry in the UK.

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Editors and Contributors

Dr. Melissa Demartini (Editor and Author) is an Adjunct Professor of Operations Management and Sustainability at the Department of Mechanical and Industrial Engineering, Faculty of Engineering, University of Genoa (Genoa, Italy). She holds a M.Sc. in “Industrial Engineering” and a Ph.D. in “Industrial Engineering” from the same institution. She is currently Visiting Researcher at Imperial College Business School (London, UK). Her research interests are mainly in the areas of corporate sustainability, operations management, and modelling. She has co-authored nearly 20 papers published in international indexed journals. She currently teaches undergraduate, graduate, and MBA students, with teaching activity covering general management, operations management, and sustainability. So far, she has taught in universities in Italy and the UK. Melissa Demartini has worked as a project manager for the EU’s Advanced Manufacturing in Central Europe (AMiCE) project since 2017. She is also industrial sustainability coordinator for the Intelligent Factory Cluster’s Roadmap Project—an Italian government initiative which aims to develop a national strategy to improve the international competitiveness of manufacturing companies. Outside of the academy, Melissa has significant consultancy experience, she is a consultant for Ansaldo Energia’s ‘Lighthouse Plant’ project. She has also worked as a consultant for Siemens, gaining experience in strategy, operations, internationalization, and business planning.

Contributors Valérie Amato ESCP Business School, West Hampstead, London, UK Cristiano Busco LUISS Guido Carli University, Rome, Italy; University of Roehampton, London, UK Diana L. Copper Commonwealth Secretariat, London, UK Melissa Demartini Adjunct Professor of Operations Management and Sustainability, University of Genoa, Genoa, Italy; SDU Centre for Sustainable Supply Chain Engineering, Dept. of Technology and Innovation, University of Southern Denmark, Odense M, Denmark Marco Formentini Department of Information Engineering and Computer Science (DISI), University of Trento, Trento, Italy Laura Maida Intesa Sanpaolo, Milano, Italy

Editors and Contributors

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Roberto Pasqualino Global Sustainability Institute, Anglia Ruskin University, Cambridge, UK; Innovation, Exoshock LTD, Ascot, UK; Faculty of Science and Engineering, Anglia Ruskin University, Cambridge, UK Elena Sofra LUISS Guido Carli University, Rome, Italy Paolo Taticchi London, UK; UCL School of Management, University College London, London, UK Sally Taylor Imperial College Business School, Imperial College London, London, UK Daniel Ung Head of Quantitative Research and Analysis, ETF Division of a Global Asset Manager, London, UK Charlotte Wolff-Bye Surbiton, UK

Part I

Corporate Sustainability: The Big Picture

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How Environmental and Social Issues Affect Business Strategy Melissa Demartini and Paolo Taticchi

Abstract

This chapter reviews the drivers of the sustainability debate by offering the ‘bigger picture’ of economic, environmental and social problems. Greater emphasis is given to three phenomena (climate change, population growth and wealth disparity) that are particularly relevant for both business and society and offer interesting insights into understanding the link between sustainable development at large, the sustainability challenges faced by business and the implications for business strategy. The aforementioned challenges, which are already complex when analysed individually, become increasingly more complex when analysed together. Keywords




Sustainability drivers Sustainable development population growth Wealth disparity







Climate change




World

M. Demartini (&) Adjunct Professor of Operations Management and Sustainability, University of Genoa, Via all’Opera Pia 15, 16145 Genoa, Italy SDU Centre for Sustainable Supply Chain Engineering, Dept. of Technology and Innovation, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark e-mail: [email protected]; [email protected] P. Taticchi UCL School of Management, University College London, Level 38 One Canada Square, Canary Wharf, London E14 5AA, UK e-mail: [email protected] © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_1

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Introduction

The topic of corporate sustainability, which is central in today’s agenda for corporate executives around the world, is of course linked to the wider topic of sustainable development and the role played by business in society. The most frequently quoted definition of sustainable development is from the United Nations’ ‘Our Common Future’ report 1982 (Imperatives 1987), also known as the Brundtland Report: ‘Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. The entire issue of sustainable development centres around inter- and intragenerational equity anchored essentially on three-dimensionally distinct but interconnected pillars, namely the environment, economy and society. Decision-makers need to be constantly mindful of the relationships, complementarities and trade-offs among these pillars and ensure responsible human behaviour and actions at the international, national, community and individual levels in order to uphold and promote the tenets of this paradigm in the interest of human development (Mensah and Casadevall 2019). The big challenges faced by society are indeed summarised by the Sustainable Development Goals (United Nation 2015) set by United Nations which are presented, and critically discussed, in the next chapter. Interestingly, and relevant to corporations, is the work of the World Economic Forum which annually publishes the ‘Global risks report’. The report relies on a global survey in which nearly 1,000 decision-makers from the public sector, private sector, academia and civil society assess the risks facing the world. The risks are categorised in the following categories: economic, environmental, geopolitical, societal and technological. The key findings of the Global risks report 2019 are presented in Fig. 1.1. The risks identified by the World Economic Forum, which are already complex when analysed individually, become increasingly more complex when analysed together as presented in Fig. 1.2. Hence, the importance of a system thinking approach in the effort of addressing these challenges as highlighted in the third chapter of this book. A number of ‘mega forces’ will be key drivers for business change to 2035 and beyond (KPMG International 2012). These include climate change, population growth, energy and fuel, material resource scarcity, water scarcity, urbanisation, wealth, food security, ecosystem decline and deforestation. Each of these individually is predicted to have a significant impact on the way we do and can-do business, but it is critical to understand that the drivers are irreducibly inter-related (Tennant 2013). In this chapter, we review three phenomena that are particularly relevant for business and society with the goal of explaining the link to corporate sustainability and impact on business strategies.

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Fig. 1.1 Global risks (Source World Economic Forum, Global Risk Report 2019)

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Fig. 1.2 The Risks-Trends Interconnections Map (Source World Economic Forum, Global Risk Report 2019)

1.1.1 The Impact of a Changing Climate on Business Climate change is considered by many the greatest challenge faced by modern society. Indeed, this is confirmed by the unremitting attention of media and governments. Extreme weather events are nowadays more frequent and more devastating. Examples of major disasters that took place in 2019 include (Masters 2020)

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• the 3.4 million people who were evacuated from their homes in India and Bangladesh before Cyclone Fani barrelled over the Bay of Bengal; • the high-water levels seen 5 times in a week in Venice, recording the highest tide ever, flooding its historic basilica and leaving many of its squares and alleyways deep under water; • the second strongest Atlantic hurricane on record (Dorian) that hit the Bahamas with winds of 185 mph, causing $150 million in damage; • tropical cyclone Idai (it affects Africa and the Southern Hemisphere) which left thousands of people stranded on rooftops in an ‘inland ocean’ up to 30 miles wide and killed 964 people; • the record heat and drought in Australia that produced some of the most apocalyptic fire activity ever witnessed in the country, with at least 21 people killed, 15 million acres burned and 3500 structures destroyed. • typhoon Hagibis that unleashed unprecedented rains and catastrophic flooding across much of Japan, killing 98 and causing over $15 billion in damage, making it Earth’s most expensive weather-related disaster of 2019. Extreme hurricanes caused by warmer air and oceans, such as hurricane Dorian, will be more common: these phenomena used to occur once every 100 years, today the projections are that they will occur once every 16 years. In drier areas, droughts will be more enduring and severe, this can have a negative impact on the fire season which in turn will be more extreme, disruptive and costly. According to scientists, these events will not only be more powerful and frequent but will also expose more people to sufferance and unsettling situations. In this context, some interesting scientific evidence is the positive correlation between climate change and migration of people (Fig. 1.3). Experts predict that by 2050 one in every 45 people in the world will be displaced by climate change (Brown 2008) and certain parts of the world will be much less viable places to live. One of the main causes of climate change is global warming, which is a consequence of growing CO2 (carbon dioxide) emissions resulting in a rise in temperature. Current economic and production systems are based on carbon and fossil fuel consumption which generate a huge amount of CO2 emissions driving the global warming problem (Fig. 1.4). In 2014, the Intergovernmental Panel on Climate Change (IPCC) which is the leading scientific body informing policymakers, published a ground-breaking report (IPCC 2014) that gave clarity to a number of issues that had caused debate in the scientific community for decades: • Human influence on the climate system is clear, and recent anthropogenic emissions of greenhouse gases are the highest in history. Recent climate changes have had widespread impact on human and natural systems; • Continued emission of greenhouse gases will cause further warming and long-lasting changes in all components of the climate system, increasing the likelihood of severe, pervasive and irreversible impacts for people and ecosystems. Limiting climate change would require substantial and sustained

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Fig. 1.3 Climate change and migration of people (Source Migration and Climate Change—IOM International Organization for Migration)

reductions in greenhouse gas emissions which, together with adaptation, can limit climate change risks; • Adaptation and mitigation are complementary strategies for reducing and managing the risks of climate change. Substantial emissions reductions over the next few decades can reduce climate risks in the twenty-first century and beyond, increase prospects for effective adaptation, reduce the costs and challenges of mitigation in the longer term and contribute to climate-resilient pathways for sustainable development; • Many adaptation and mitigation options can help address climate change, but no single option is sufficient in itself. Effective implementation depends on policies and cooperation at all scales and can be enhanced through integrated responses that link adaptation and mitigation with other societal objectives. In 2015 under the Paris Agreement, 197 countries committed to cut greenhouse gas emissions with the objective of limiting the global average temperature to below 2 °C above pre-industrial levels. The global temperature is currently rising by about 0.2 °C per decade and it achieved 1 °C above pre-industrial levels in 2017. Projections say that if warming continues to increase at this frequency, the 1.5 °C increase in temperature will be achieved by 2040 and potentially up to a 5 °C increase reached by the end of the century. This could be potentially

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Fig. 1.4 CO2 emissions trends (Source IPCC 2014)

disastrous. The increase in temperature would result in the melting of ice caps and glaciers and lead to a rise in sea level, damaging coastal communities and infrastructures. Entire island nations could face the possibility of submersion. Moreover, the population could be exposed to extreme heat, losing many ecosystems and species such as coral reefs and marine fisheries. It is interesting to note that, what could be at first sight classified as an environmental problem, has in fact impacted on several other systems, including business and industry. Virtually, all industries may be affected by climate-changerelated impacts with some being particularly vulnerable. Good examples include the wide concern in the insurance industry (which is expected to be one of the most affected, as companies in this industry pay for the damages caused by extreme

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weather events and the difficulties inflicted on business activities), disruption in the oil and gas sector (oil and gas are limited natural resources in any case, but the switch to alternative sources of energy is accelerated by climate action), transformation of the automotive industry (with electric mobility and business models based on sharing) and of course major impacts on the agriculture and food industry (as extreme weather events and global warming are impacting heavily on productivity and capacity). The case of Illy

Hotter temperatures and droughts make coffee supplies less stable, leading to price spikes and shortages. In particular, the ‘Arabica’ variety, which is of superior quality and the most consumed, is particularly sensitive to climate changes. This situation affects the economy of entire countries in South and Central America (e.g. Brazil and Colombia), Africa (e.g. Ethiopia) and Asia (e.g. Vietnam). With coffee consumption increasing every year at a rate around 2.5%, this is a massive problem for coffee producers. Illy is a global coffee brand that is sold in 140 + countries and employs 1200 + people globally. In 2018, the chairman of Illy, Andrea Illy, declared to journalists that climate change is the biggest risk to the business: availability of coffee and volatility of prices are major issues for the firm which has the ambition of growing steadily in international markets. Based on research carried out with the Earth Institute, Illy forecasts that only half of the current suitable land for coffee plantations will remain suitable by 2050. In order to address the issue of supply chain vulnerability, Illy has decided to re-think the business strategy in light of sustainability needs. As part of this process, the supply chain management strategy was reviewed and strategic collaborative partnerships with suppliers established with the goal being better control of quality, quantity and price. New initiatives were launched as a consequence of this new strategy, including for example the ‘Ernesto Illy Quality Award for Espresso Coffee’ which aims to encouraging the sustainable production of quality coffee. The award has already bestowed more than $4 million to coffee growers in Brazil (Toni et al. 2012).

1.1.2 The Impact of a Growing Population on Business A major phenomenon that has characterised the last two centuries is the growth and ageing of world population. Population grew close to eight times in the last two centuries (from 1 billion in 1800 to 7.7 billion in 2019). The world population could reach a peak of 10 billion people by the end of the century (Fig. 1.5).

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Fig. 1.5 Annual growth rate and world population (Source Our world in data 2019)

A larger population means a larger virtual demand of everything: food, energy, cars, buildings, etc. Without a well-planned decarbonization of the economy and/or industrial activities, the sapient use of technology, and more efficient industrial systems, carbon emissions could boom and global warming and climate change accordingly. In this regard, in its ‘Landmark 2018 Report’, the IPCC specifically identified high population growth as a ‘key impediment’ to hitting the critical target of limiting global warming. The implications of a growing population have stimulated a lot of scientific research and books like ‘Limits to growth’ (Meadows et al. 1972) have a made a dent in the understanding of the consequences and contributed to the popularity of systems theory and system thinking (an overview is provided in Chap. 3). The world population is growing, but there are clear differences between world regions and countries (Fig. 1.6). Some countries like India, China and Nigeria are growing very fast while other countries will continue to see decreasing population rates. The world population depends on the balance between births and deaths; therefore, it is essential to analyse this data to understand what is happening. The improvement of life expectancy and the reduction of child mortality is without doubt a top priority of each country; however, it is also important to focus on the fertility rates of developed countries to understand why these populations are stagnant or falling. This is clarified by Fig. 1.7 where the fertility trend is depicted. Up to the 1960s,

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Fig. 1.6 Overview of the most populous countries by 2050 (Source Forbes)

Fig. 1.7 Evolution of the number of children per woman (Source Our world in data)

the average world fertility rate was 5 children per woman, while today it has dropped to around 2.3. The top 20 countries with the highest fertility rankings are all African. In the countries where the fertility rate is high, population growth is increasing, but it is important to note that there is also a positive correlation between high birth rate and increased child mortality (Fig. 1.8). In light of the above, there will be a so-called ‘Africa boom’ phenomenon. As we can see from Picture 8, there is a huge difference between African and European population projections. The population of Europe is forecasted to remain static,

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Fig. 1.8 Forecast of population growth in Europe and Africa (Source Samir et al. 2010)

while the population will explode in countries like Nigeria which will be ranked in the ten most populous countries by 2030. With population growing, PwC’s report ‘The World in 2050’ (Hawksworth and Chan 2015) projected the world economy to grow at an average of just over 3% per annum in the period 2014–50, doubling in size by 2037 and nearly tripling by 2050. The global middle class is expected to grow and reach 5.5 billion by 2030. Some 87% of the additional middle-class population will be Asians. This is an unprecedented opportunity for business growth. However, it is unlikely that the planet can support the level of exploitation associated with a rising population consuming at the same level as occurs in post-industrialised countries today. Global manufacturers, and business in general, need to find ways of delivering the same products with vastly reduced impacts and also to shift to different modes of

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consumption, including selling performance and service provision instead of goods. Consumer behaviour change is a critical dimension in this debate and effective programmes for change will require that social scientists be given equal footing with scientists and engineers so that the issues can be tackled in an informed manner (Tennant 2013). The Case of Unilever

At the 2019 Deutsche Bank Global Consumer conference in Paris, Unilever’s CEO Alan Jope said ‘the combination of quite a big population, strong GDP growth and rapid consumption in the categories we sell means that countries like Vietnam, Pakistan, Bangladesh, Myanmar and even Ethiopia will be our growth stars over the next few years’. Unilever, which makes household goods ranging from Dove soaps to Knorr packet soups, is indeed a great example of a company that fully understands the opportunities given by a growing and wealthier population in developing countries. The company keeps growing in developing markets, where it already gets 58% of its sales (mainly from China, India and Brazil). To do so, they keep introducing innovative business practices that try to reduce the environmental impact of operations and amplify the positive impact on the local communities where they operate. Mahajan (2016) has closely analysed the modus operandi of Unilever and identified several of these practices, such as • The concept of training local women in India as rural sales agents who sell Unilever products door to door in their communities (70,000 sales agents serving 165,000 Indian villages when they started in 2015) • The use of large stores as sub-distributors in the Philippines which allowed Unilever to double its rural coverage whilst also reducing distribution costs • The use of low-cost, single-use packets to make its products affordable for lower income consumers who often shop daily for necessities. Since the Unilever Sustainable Living Plan (USLP) launched in 2010, it has received great recognition in industry and academia for reflecting the firm’s ambitious vision to grow the business, whilst decoupling the environmental footprint from growth and increasing positive social impact. The three pillars of the plan include • By 2020 to help more than a billion people take action to improve their health and well-being • By 2030 to halve the environmental footprint of production and use of their products as they grow the business • By 2020 to enhance the livelihoods of millions of people while growing the business.

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The USLP is allowing Unilever to address market opportunities in developing countries, to cut business costs, to reduce business risks and to generate long-term value for multiple stakeholders. Therefore, it is a great example of an approach to corporate sustainability which is fully integrated into business strategy.

1.1.3 The Impact of Wealth Disparity on Business The objective of reducing inequality within and among countries is one of the modern challenges of today’s society (SDG number 10). The international community has made significant steps towards lifting people out of poverty, but disparity persists, and large differences remain regarding access to health, education services and quality of life in general. The United Nations (2020) estimates that 40% of the world’s population receives less than 25% of the overall income (bottom of the pyramid), while according to Credit Suisse (Shorrocks et al. 2019) the world’s richest 1% (top of the pyramid), those with more than $1 million, own 44% of the world’s wealth. Indeed, it is important to note that addressing the poverty problem is not only about economic growth. In fact, following the principles of sustainable development, economic growth should not come at the cost of the economy or society. Unfortunately, this is easy to say but hard to put in practice. An interesting country to study in this context is China, which has made fantastic progress in reducing poverty in the last decades. In fact, the World Bank estimates that more than 850 million Chinese people have been lifted out of extreme poverty (750 million since 1990). As presented in Fig. 1.9, China’s poverty rate fell from

Fig. 1.9 Poverty trend in China (Source Poverty & Equity Databank and PovcalNet)

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Fig. 1.10 Inequality trend in China (Source Poverty & Equity Databank and PovcalNet)

Fig. 1.11 Total of greenhouse gas emissions (% change from 1990) in China (Source The World Bank)

66.2% in 1990 to 0.5% in 2016 (measured by the percentage of people living on the equivalent of US$1.90 or less per day in 2011 purchasing price parity terms). China today is the world’s second-largest economy, but its per capita income is still only about a quarter of that of high-income countries, and about 373 million Chinese are living below the upper middle-income poverty line of US$5.50 a day (The World Bank 2019). Moreover, economic growth has led to social imbalance, as evident from an analysis of the GINI coefficient (the GINI coefficient measures inequality among values of a frequency distribution, e.g. levels of income; a GINI

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coefficient of zero expresses perfect equality, while a GINI coefficient of 100% expresses maximal inequality among values) (Fig. 1.10). Similarly, an analysis of China’s carbon emissions reveals the environmental cost of economic growth (Fig. 1.11). Reducing these environmental and social imbalances requires a profound re-thinking of the structure of the economy itself. China today needs to evolve from a low-end manufacturing country based on exports and cheap labour to a high-end manufacturing country competing on services too. Inequalities around the world combined with the growing globalisation of business have significantly impacted the strategy of many firms, who when seeking a cost advantage, have moved manufacturing and supply chain activities to low-income developing countries. This movement has been further enhanced with the incentives offered by local governments seeking direct foreign investments, by providing land, infrastructure and tax relief. As documented by Crane et al. (2019), the establishment of these global production networks led to ethical and sustainability problems falling into four categories: issues associated to different ways of doing business, issues associated to the impact of multinational firms on indigenous businesses, issues associated to different labour and environmental standards and issues associated to the increased level of responsibility of companies with extended global chains. The case of Foxconn Technology Group

Founded in 1974, today, Foxconn Technology Group is the world’s largest provider of electronics manufacturing services supplying well-known brands like Apple, Nokia and Sony to name but a few. Originally from Taiwan, the company operates a huge industrial park in Shenzen, China where it employs more than 400,000 people (hence the name Foxconn City). In 2010, Foxconn became unpopular in the media as 14 employees committed suicide, jumping from the roofs of the factory’s buildings. The key drivers of such extreme actions were attributed to low wages (about $130/month at the time for new hires), long working hours above the legal limit, poor working and living conditions in the dormitories and the little level of integration for migrant workers (Eccles et al. 2013). In reaction to this alarming situation, the management at Foxconn raised salaries (a decision that impacted directly on the profitability of the business), hired psychiatrists and took the controversial measure of installing 1.5 million square metres of suicide nets. What happened at Foxconn raised the attention of the problem of fair pay and working conditions of an entire industry. In fact, Foxconn was not particularly a ‘bad’ company, as it was probably above the average in terms of salaries and working conditions (Msnbc.com news services 2010).

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With Foxconn on the news daily, the attention soon shifted to Apple which was attacked by media, customers and industry bodies alike, for not controlling (and caring) about the situation in Shenzen. Similarly, the role played by the Chinese government was debated as labour practices were poorly defined and monitored in China. Problems like the one described above are unfortunately still very common in many industries, especially when operations are in low-cost developing countries. Addressing these types of problems is not easy, as many stakeholders with conflicting interests are involved. Moreover, addressing the problem very often calls for re-thinking the distribution of economic value in the chain, as well as an alignment between governance and ethical practices.

1.2

Conclusions

Many challenges faced by society that could be labelled as ‘environmental’ or ‘social’ have a direct impact on business activities and therefore business strategy. It is important that practitioners are aware of these challenges as they often shape the sustainability agendas and strategies of organisations.

References Brown, O. (2008). Migration and climate change. International Organization for Migration. https:// www.ipcc.ch/apps/njlite/srex/njlite_download.php?id=5866. Crane, A., Matten, D., Glozer, S., & Spence, L. (2019). Business ethics: Managing corporate citizenship and sustainability in the age of globalization. USA: Oxford University Press. Eccles, R. G., Serafeim, G., & Cheng, B. (2013). Foxconn Technology Group (A). Harvard Business School Accounting & Management Unit Case. Global risks report (2019). World Economic Forum. Available at https://www3.weforum.org/docs/ WEF_Global_Risks_Report_2019.pdf Hawksworth, J., & Chan, D. (2015). The world in 2050 will the shift in global economic power continue?. PricewaterhouseCoopers LLP. https://www.pwc.com/gx/en/issues/the-economy/ assets/world-in-2050-february-2015.pdf. Imperatives, S. (1987). Report of the World Commission on Environment and Development: Our common future. Accessed 10 Feb 2020. IPCC (2014). Climate change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. https:// www.ipcc.ch/report/ar5/syr/. KPMG International (2012). International Annual Review 2012. https://assets.kpmg/content/dam/ kpmg/pdf/2013/12/kpmg-international-annual-review-2012.pdf. Mahajan, V. (2016). How Unilever reaches rural consumers in emerging markets. Harvard business review. https://hbr.org/2016/12/how-unilever-reaches-rural-consumers-in-emerging-markets.

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Masters, J. (2020). The top 10 weather and climate stories of 2019. Scientific American, a Division of Springer Nature America, Inc. https://blogs.scientificamerican.com/eye-of-the-storm/thetop-10-weather-and-climate-stories-of-2019/#. Meadows, D. H., Meadows, D. L., Randers, J., & Behrens, W. W. (1972). The limits to growth. New York, 102, 27. Mensah, J., & Ricart Casadevall, S. (2019). Sustainable development: Meaning, history, principles, pillars, and implications for human action: Literature review. Cogent Social Sciences, 5(1), 1653531. Msnbc.com news services (2010). Chinese factory asks for “no suicide” vow. http://www. nbcnews.com/id/37354853/ns/business-world_business/t/chinese-factory-asks-no-suicide-vow/ #.Xpf9PVMzZp8. Accessed 14 Apr 2020. Samir, K., Barakat, B., Goujon, A., Skirbekk, V., Sanderson, W., & Lutz, W. (2010). Projection of populations by level of educational attainment, age, and sex for 120 countries for 2005-2050. Demographic Research, 22, 383–472. Shorrocks, A., Davies, J., & Lluberas, R., (2019). Global wealth report 2019. Credit Suisse Research Institute. https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/ publications/global-wealth-report-2019-en.pdf. Tennant, M. (2013). Sustainability and manufacturing. https://assets.publishing.service.gov.uk/ government/uploads/system/uploads/attachment_data/file/283909/ep35-sustainability-andmanufacturing.pdf. The world bank (2019). The world bank in China. https://www.worldbank.org/en/country/china/ overview#1. Accessed 14 Apr 2020. Toni, A. F., Biotto, M., & Nonino, F. (2012) Illycafe case study: Sustaining quality from green coffee to the cup: Logistics as a competitive weapon. In A. F. Toni (Ed.), International operations management: Lessons in global business. Gower Publishing. United Nations (2015). Sustainable development goals knowledge platform. https:// sustainabledevelopment.un.org Accessed 14 Apr 2020.

Melissa Demartini is an Adjunct Professor of Operations Management and Sustainability at the University of Genoa and Visiting researcher at Imperial College Business School. Her research interests are mainly in the areas of corporate sustainability, operations management, and modelling. She has co-authored nearly 20 papers published in international indexed journals. She currently teaches undergraduate, graduate, and MBA students, with teaching activity covering general management, operations management, and sustainability. So far, she has taught in universities in Italy and the UK. She has worked as a project manager for the EU’s Advanced Manufacturing in Central Europe (AMiCE) project since 2017. She is also industrial sustainability coordinator for the Intelligent Factory Cluster’s Roadmap Project – an Italian government initiative which aims to develop a national strategy to improve the international competitiveness of manufacturing companies. Outside of the academy, Melissa has significant consultancy experience, she is a consultant for Ansaldo Energia’s ‘Lighthouse Plant’ project. She has also worked as a consultant for Siemens, gaining experience in strategy, operations, internationalization, and business planning. Paolo Taticchi (Editor and Author) is Professor (Education) in Strategy and Sustainability & Deputy Director (MBA and International at UCL School of Management. He teaches modules on sustainability and competitive advantage, strategy, consulting, and the future of cities. Before UCL, Paolo spent six years at Imperial College London where he led top-ranked programmes such as the MScManagement and the Global Online MBA. Alongside his work at UCL, Paolo is regularly invited to teach on international MBA and EMBA programs in Europe, Africa, Asia, and the Americas. In the recent years he has visited and hold teaching appointments in top universities like EADA, ESAN, and NYU. Paolo’s research on performance measurement and management, business networks, and corporate sustainability is internationally recognised. He

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has authored over 50 published academic journal articles, and edited and co-authored three books. Outside of the academy, Paolo has significant consultancy experience in the fields of strategy, operations, and sustainability and today he serves in the advisory board of influential organisations in the UK, US, Canada, Italy and India. Paolo is also active in the entrepreneurial space, co-founding three firms in the fields of engineering and consultancy. His projects, quotes and opinions have been featured over 200 times in media outlets like The Financial Times, Forbes, The Telegraph, Semana Sostenible, La Republica, Inspire, Sole 24 Ore, La Nazione, Corriere della Sera, La Stampa, RAI, Sky News, Sky News Radio, Mediaset, and CNN. In 2018, Paolo was chosen as one of Poets & Quants’ top 40 business school professors under the age of 40. In the same year, Paolo received the title of Knight of the Order of Merit of the Italian Republic. In 2019, Paolo received the “Talented Young Italian Award” from the Italian Chamber of Commerce and Industry in the UK.

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The Sustainable Development Goals: A Framework for Business Valérie Amato

Abstract

The Sustainable Development Goals (‘SDGs’ or ‘Global Goals’) were adopted by the international community in 2015 as a universal, integrated and transformative set of ambitions designed to address 17 key interlinked challenges facing people and the planet. Despite some positive intentions and encouraging efforts on the part of business and other key actors to contribute positively towards their realisation, there has only been to date some slow progress in the critical implementation phase. The very nature and ambition of the SDGs requires new ways of thinking and acting, with systems and multi-stakeholder collaboration approaches representing key success factors. The acceleration of the positive transformation process on multiple and simultaneous fronts can only happen through a meaningful engagement of business, working in close partnerships with a wider circle of stakeholders and rethinking its own purpose and contribution to human progress. Keywords










Sustainable development Systems thinking Complexity Strategic alignment Transformation Multi-stakeholder partnerships







Copyright Note: The content of this publication has not been approved by the United Nations and does not reflect the views of the United Nations or its officials or Member States. V. Amato (&) ESCP Business School, 527 Finchley Rd, NW3 7BG West Hampstead, London, UK e-mail: [email protected] © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_2

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Introduction

This chapter draws and further builds on the thoughts and ideas first presented at a seminar delivered at the Open University on 16 September 2015 (Amato 2015), shortly before the adoption of the UN Global Goals for Sustainable Development, and in a subsequent blog, originally published in 2017 by the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA), and then by other collaborative platforms (including UKSSD (UK Stakeholders for Sustainable Development), SDG Philanthropy, The Practitioner Hub for Inclusive Business, The Partnering Initiative, UNDP (United Nations Development Programme) and the IIRC (International Integrated Reporting Council)). The author is immensely grateful for all the support she has received from colleagues and partners, who encouraged and invited her to develop and share these thoughts among a diverse and dispersed audience. Five years following the adoption of the Sustainable Development Goals, this Chapter is an attempt to address the following questions: (a) To which extent can businesses draw inspiration from the framework presented by the Global Goals (or SDGs)? (b) Where should business attention and efforts be more strategically and effectively placed to accelerate the implementation of this ambitious agenda?

2.2

Setting the Scene: How a New Universal Agenda for Sustainable Development Came to Light

The Sustainable Development Goals (‘SDGs’), also referred to as the ‘Global Goals for Sustainable Development’ or ‘Global Goals’, were adopted by all UN Member Countries in September 2015 as the successors to the Millennium Development Goals (‘MDGs’). As per Fig. 2.1, the SDGs represent a global vision of the 17 key sustainable development priorities to be met by 2030. This new approach to development by the international community represented a radical change from the way the MDGs had been formulated, and which had involved a much closer, exclusive circle of international development experts. By contrast, the new sustainable development agenda was the result of a very intensive and extensive consultation, running over a period of more than three years, and involving a large and diverse range of stakeholders. The new approach was intended to be more participative, inclusive and universal, with citizens around the globe being invited to imagine and design the ‘world [they] want[ed]’. From this crucial point in history onwards, development has, therefore, become everyone’s concern, with the Global Goals representing a universal framework for a better future, for people, but also the planet. Whilst the MDGs focused on developing countries, the SDGs are aimed at a global audience, calling for both individual and collective action. The Global Goals, therefore, differ from their predecessors

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Fig. 2.1 The Sustainable Development Goals (Source UN Department of Economic and Social Affairs). https://www.un.org/sustainabledevelopment/sustainable-development-goals/

both in terms of scope and scale. 17 Sustainable Development Goals and 169 related targets replaced 8 Millennium Development Goals and 21 targets, and now cover new areas. ‘Designed to integrate the three key dimensions of sustainable development (social, economic and environmental)’, the SDGs include ‘cross-cutting issues like peace, inequality, sustainable consumption and production patterns, cities and climate change’ (Amato 2017). ‘Ambitious in nature’, they ‘envisage the eradication (not only the significant reduction) of key human development challenges such as hunger, poverty, and preventable child deaths’ (ibid). Businesses have been expected to play a key role in this transformative process. They are particularly invited to contribute significantly to the Global Goals 7 (Affordable and Clean Energy), 8 (Decent Work and Economic Growth), 9 (Industry, Innovation and Infrastructure) and 12 (Responsible Consumption and Production).

2.3

Where Are We on Our Journey of Delivering the SDGs? a Sustained Call for Transformation

Nearly five years following the announcement of the Global Goals for Sustainable Development (or Sustainable Development Goals (‘SDGs’)), an urgent call for transformation has succeeded to an initial and repeated call for action. As per the

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Sustainable Development report 2019 (Sachs et al. 2019), no country (out of the 193 UN Member States who originally adopted and formally committed to the Goals) is on track to meeting all the goals. Indeed, Climate Change and Inequality are widely recognised as being two key stubborn global issues that our humanity as a whole continuously fails to address. In the latest Sustainable Development Goals Report (UN 2019), António Guterres, UN Secretary General, draws a mixed picture of the advancement of the Goals. Whilst certain areas have seen some encouraging and promising progress, (for example, in terms of reduction of extreme poverty and child mortality rate, and overall access of the world’s population to electricity, the UN General Secretary recognises the need to ‘reposition [] the United Nations development system to be better equipped to meet the needs of governments to respond to this integrated and transformative agenda’. The issues requiring ‘urgent collective action’ include the severe and continuing deterioration of our natural environment, human suffering, global hunger, lack of access to essential health services by a majority of the global population, and low literacy and numeracy standards achievement by a majority of children. In its report, the UN invites targeted efforts at key identified solutions such as ‘financing; resilience; sustainable and inclusive economies; more effective institutions; local action; better use of data; and harnessing science, technology and innovation with a greater focus on digital transformation’. Taking a ‘holistic view of the 2030 Agenda’ ‘identify[ing] the highest impact areas’ are considered as critical. Sachs et al. (2019) identify six key transformations required from governments, businesses and other stakeholders to organise and align efforts towards an effective implementation of the Global Goals. These include 1. Education, Gender and Inequality; 2. Health, Well-being and Demography; 3. Energy Decarbonisation and Sustainable Industry; 4. Sustainable Food, Land, Water, Oceans; 5. Sustainable Cities and Communities and 6. Digital Revolution for Sustainable Development. This organisation around distinct but synergistic, regrouped categories reflects both the diverse scope and integrated nature of the Global Goals Agenda, and the necessity to consider individual challenges as interlinked and forming part of a wider system. According to International Institute for Applied Systems Analysis (‘IIASA’), ‘each SDG transformation describes a major change in societal structure (economic, political, technological and social) to achieve long-term sustainable development, while also each contributing to multiple SDGs. Excluding any of them would make it virtually impossible to achieve the SDGs. Pursuing the six transformations will require deep, deliberate, long-term structural changes in resource use, infrastructure, institutions, technologies and social relations, which have to happen in a relatively short time window’ (IIASA, 2019). Recognising and reminding us of the critical role of business in positively contributing to the achievement of the Global Goals, the World Business Council for Sustainable Development (‘WBCSD’) has also organised six work programmes to help businesses translate this transformative agenda into tangible actions and solutions. They are specifically inviting a focus from the private sector on circular

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economy; cities and mobility; climate and energy; food and nature; people and redefining value (Sachs et al. 2019:11). The call is for a strategic alignment of businesses around these areas. This theme of Transformation is also echoed by the World Benchmarking Alliance (an organisation driving the private sector’s engagement in the SDGs through benchmarks) in their July 2019 report, entitled ‘Measuring what matters most: Seven systems transformations for benchmarking companies on the SDGs’ (World Benchmarking Alliance 2019). Whilst these various initiatives advocating for and promoting the action of business around the Global Goals are both commendable and necessary, their very existence and relevance four years after the adoption of the Global Goals demonstrates the difficulties in realising the desired and critically required transformative change. Indeed, the very nature of the SDGs Agenda (being universal, integrated and transformative), but also the current state of our world, both call for new ways of thinking and acting.

2.4

Embracing Complexity, Diversity and Connectivity: The Need for Systems Thinking and Multi-stakeholder Partnerships

Our increasingly complex, uncertain, fast-changing and interconnected world invites us to consider different approaches to thinking and living. As global citizens, we are all facing the same major challenges (albeit to different and varying degrees), wherever we are in the world: inequality, climate change, security, reliable and affordable access to food, water, energy (which increasingly represent scarce resources for a growing population), increasing urbanisation with its impact on health and strain on infrastructure. These challenges are not only complex but interconnected. This means that we can no longer focus on a single area of intervention (e.g. health or education) without thinking of the overall context, system of our actions, but also, on the implications or unintended consequences of a specific action. For example, the global financial and refugee crises have had systemic causes and long-term consequences. They cannot be ring-fenced, they affect us all, wherever we are, and impact multiple (economic, political and social) areas of our lives. Indeed, as suggested by the scientific community, whose views were invited during the wide consultative process leading to the formulation of the new SDGs framework, these challenges (translated into Global Goals) should, therefore, be considered as a complex, interlinked system (as illustrated by the picture below). As represented in Fig. 2.2, links between two goals indicate the number of connections between their individual associated targets (or measures of success).

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Fig. 2.2 The Sustainable Development Goals as a Complex Interlinked System (Source “Global Sustainable Development Report—2015 Edition” (UN 2015))

It is worth noting that SDG 17 (Partnerships for the Goals), is not represented in the picture, as it represents the means of implementation of the other 16 SDGs, and is, therefore, linked to all of them. SDG 1 (No Poverty) is otherwise the most central node for the system, as it is key to and impacted by all other goals, given the multiple dimensions of poverty (in terms of access to essential needs and rights), but also its extreme sensitivity to climate change and war conflicts. This picture, therefore, illustrates the extent to which actions on a specific goal or target are intrinsically linked to other goals and targets. Scientists involved in this review, however, recognised that they did not have a comprehensive ‘map’ of the system underlying the new goals, and that there was a need for a better understanding of the dynamics of the system, which is highly complex, as goals and targets interact differently over time, in both positive and negative ways (UN 2015). This observation of the strong and complex linkages and connections between the Global Goals naturally requires us to revisit our traditional ways of thinking and addressing the key issues and challenges adversely affecting our environment and overall well-being.

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Indeed, in its review of the MDGs (or predecessors to the SDGs), the High-Level Panel appointed by the UN Secretary General had identified the fragmentation nature of the efforts directed at achieving the Millennium Development Goals (set up to run over a period between 2000 and 2015). The panel reported that ‘the MDGs fell short by not integrating the economic, social, and environmental aspects of sustainable development as envisaged in the Millennium Declaration’ and that ‘The result was that environment and development were never properly brought together. People were working hard—but often separately—on interlinked problems’ (UN 2013). This criticism, therefore, influenced the new (integrated) approach to delivering the SDGs, emphasising the need for the multiple stakeholders in a better, more equitable, prosperous and sustainable future, to work closely and effectively in partnerships. Let us, therefore, now turn our attention to SDG 17 (Partnerships for the Goals), as it specifically focuses on creating an enabling environment for transformative change (and, therefore, sustainable development). This includes the mobilisation of and widened access to key resources (specifically through trade, finance and technology). Beyond this, the goal, together with its proposed associated targets, however, also recognise and seek to address capacity-building through international co-operation, and make specific reference to three key systemic issues relating to the means of implementation: Policy and Institutional coherence, Multi-Stakeholder Partnerships and Data, Monitoring and Accountability (UN Sustainable Development Goals—Knowledge Platform 2019). As this is clearly a core means of implementation of the Global Goals Agenda (explicitly through SDG17), and a key condition for realising the integrated ambition of the SDGs, what is meant by ‘Multi-Stakeholder Partnerships’? In a Chapter of a Development Co-operation Report entitled ‘the Promise of partnerships in a post-2015 world’, the OECD (2015) offers the following definition: ‘Multi-stakeholder partnerships’ designate ‘groupings of civil society, the private sector, the public sector, the media and other stakeholders that come together for a common purpose, pooling their diverse resources, expertise and experience to achieve common goals’. If such a cross-boundary collaboration approach is clearly considered as a key to achieving the Global Goals, it, however, raises some important questions on how these actors, stakeholders and partners, driven by they own values and agendas, can come together, to co-design and co-create a better future for people and the planet. In particular, given the complexity of implementing the Global Goals, in view of their scope, scale and strong interlinkages, what are the key skills and competences required to implement this ambitious and transformative agenda? Ahead of the adoption of the SDGs, the author of this Chapter conducted a consultation among existing and potential new stakeholders in a postgraduate global development programme to address this specific question. This involved interviewing 40 leaders from a wide range of organisations, across various sectors (public, private and not-for-profit) and functions, and inviting their own views on this issue.

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According to the research participants, the ability to operate effectively in a complex, interconnected and fast-changing environment required the following: 1. Strategic and critical thinking 2. Capacity-building of local staff and partners 3. Contextualising an issue and defining and understanding it from multiple perspectives 4. Working in partnership with a wide range of stakeholders and across various boundaries (including cultures, disciplines and sectors) 5. Understanding, analysing and using big, complex data 6. Adapting to and embracing change: being agile, creative and innovative 7. Key social and emotional skills (open-mindedness, empathy, listening, influencing, negotiation and brokering). The key insights offered strongly reflect the need to embrace the diversity and complexity characterising the Global Goals transformative and integrated agenda.

2.5

Creating a Shared Vision for Cross-Sector Collaboration Effectiveness: How to Reconcile Conflicting Values and Interests

Bearing these skills and competences in mind, the difficulty of building and maintaining effective Multi-Stakeholder Partnerships through the joined-up efforts of a multitude of partners pooling their resources towards a common vision should not be underestimated. Having conducted some research on NGO-business collaboration effectiveness (to maximise the impact of long-term development action benefiting children), the author would like to share some key findings that (only partially) shed some light on the perceived barriers to multi-stakeholder partnerships, and how these may be overcome. The main challenges of cross-boundary collaboration identified through some literature and field research related to conflicting goals, values and interests on the part of collaborators or partners not speaking the same language and driven by different agendas. The challenge of managing these tensions is particularly acute in the case of NGO-business collaboration. Semi-structured interviews revealed that differences and imbalances could represent key barriers to collaboration. These exist both at the strategic level (with differences in ‘objectives’, ‘agendas’, ‘worldviews’, ‘priorities’ being mentioned), but also at the operational level (with NGOs and businesses perceived to adopt different approaches, ways of working and mechanisms). The focus of the author’s research was to address the How to? question: identifying keyways of overcoming such barriers and achieving effectiveness (in terms of both scale and sustainability).

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As part of the research methodology, the interviewees of organisations representing the two sectors (NGO and business) were also invited to create shared meanings of cross-sector collaboration effectiveness at a workshop. The idea behind this approach was to test this very form of cross-sector collaboration by convening people with different perspectives in the same room, inviting them to generate ideas around a common issue. Creative problem-solving techniques were used to generate new ideas and build a common vision around cross-sector collaboration mechanisms. For the participants, the common issue bringing them together, and which they reframed, was ‘How to capture, create and promote sustainable enabling mechanisms and best practice’. Dialogue, Diversity and Learning emerged as key themes underlying effective cross-sector collaboration. Dialogue should be encouraged and facilitated for the purpose of creating shared meanings and a mutual understanding among actors working across different sectors. The focus of such an encounter and exchange of perspectives should be on a specific issue (to establish some common ground at the outset), and on appreciating and managing the risks and required resources throughout the process of collaboration. Diversity involves embracing differences through open-mindedness (beyond suspicions and prejudices), driven by the willingness to achieve mutual benefits. Learning was identified as a requirement for adopting and sharing best practice and sustainable enabling mechanisms. Last but not least, the role of Trust was considered as key, as being expected to increase with the breadth and depth of the relationship/partnership. It is worth noting the resonance of these themes with those outlined by the Global Partnership for Effective Development Co-operation as being at the ‘core of effective partnerships’ and underpinning the Principle of ‘Inclusive Development Partnerships’: Openness, Trust, Mutual Respect and Learning (Global Partnership for Effective Development Co-operation 2019). However, the absence of a universal model of effective collaboration (as acknowledged by the participants in the author’s own research workshop) can be explained through the complex web of conditions required to maximise impact whilst reconciling cross-sector differences and interests. On this basis, which key lessons can we learn from the various parties (including businesses) that have been committed to and engaged in Multi-Stakeholder Partnerships?

2.6

Working Towards the Global Goals: Multi-stakeholder Partnerships in Practice

Today, as businesses have embarked on a relatively recent journey of partnering for sustainable development, there are still too few examples of best practice that can be shared. For example, as in 2019, 98 initiatives of business engaging with the Global Goals were registered on the dedicated UN-Business Action Hub (https:// business.un.org).

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Systemic change is also quite difficult to deliver and measure in the short-term. As businesses only know too well, one tends to manage (and, therefore, focus attention and deliberate efforts on) what one can measure. Indeed, this is illustrated (and implicitly acknowledged) by the fact that both the Indicators chosen to measure the achievement of Multi-Stakeholder Partnerships (a distinct ‘systemic issue’ identified as such under SDG17 (UN Sustainable Development Goals—Knowledge Platform, 2019)) only relate to quantitative measures. Indicator 17.16.1 refers to the ‘Number of countries reporting progress in multi-stakeholder development effectiveness monitoring frameworks that support the achievement of the sustainable development goals, whilst Indicator 17.17.1 refers to the ‘Amount of United States dollars committed to public-private and civil society partnerships’ (ibid). Whilst we can of course praise the intention to promote the wide adoption of and investment of money and energy in these initiatives, none of these Indicators is particularly helpful in terms of assessing the quality and long-term impact of such Multi-Stakeholder Partnerships (‘MSPs’). Arguably, both the notions of ‘progress’ and ‘effectiveness’ should also be defined, particularly when they apply to complex, systemic issues. The 2018 Progress Report on the former Indicator (ibid) reveals that only 51 of 114 countries reported overall progress towards strengthening multi-stakeholder partnerships and the means of implementation of the Global Goals. Despite the inherent complexity of tracking and reporting on cross-boundary partnerships, inspiration and learning can, however, be taken from some industry-and system-wide initiatives, to demonstrate the intent and impact of collaborative journeys to this date. The following examples of (human and financial) capital mobilisation initiatives have been selected on the basis of their scale, scope and stated ambition to promote the required systemic change envisaged by the actors and institutions advocating for a strengthening of the ‘Global Partnership for Development’ (UN Task Team on the Post 2015 Agenda 2013). European Commission Initiative on Sustainable Finance Contribution to SDGs: ‘Alignment of one of the world’s largest financial systems with global objectives for sustainability’. Scale: At least Euro 170 billion in additional annual investments. Scope: EU policies intended to help sustainable finance at the international level; ‘Sustainable Finance Compacts’ to be developed with other countries (starting with China) to cover specific areas of co-operation.

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Intended Systemic Change: Financial reform (‘transformation of the entire financial system, its culture, and its incentives’) in support of the transformation of Europe’s economy into a greener, more resilient and circular system. Key Stakeholders Involved: Banks (Commercial and Investment), Insurance companies, Asset Managers, Pension Funds, Credit and Sustainability Rating Agencies, Stock Exchanges and Financial Centres, Investment Consultants, Financial Industry Associations, International Institutions, Retail Investors, EU Member States, Civil Society; Recommendations to the European Commission were made by an appointed High-Level Expert Group on Sustainable Finance representing these multiple perspectives. Initial Action Plan: Legislative and non-legislative measures (including harmonised EU-wide classification system—or ‘taxonomy’—on what can be considered an environmentally sustainable economic activity, disclosure obligations on how institutional investors and asset managers integrate Environmental, Social and Governance (ESG) factors in their risk processes, EU Ecolabel for green financial products…). Next Steps Envisaged: All financial entities that manage investments on behalf of their clients or beneficiaries will now have to inform them about how their activities are impacting the planet or their local environment. Source: https://sustainabledevelopment.un.org/partnership/?p=29794; https:// ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainablefinance_en; https://ec.europa.eu/info/sites/info/files/180131-sustainable-financefinal-report_en.pdf

Better Cotton Initiative Contribution to SDGs: SDG1 (No Poverty); SDG2 (Zero Hunger); SDG3 (Good Health and Well-being); SDG4 (Education); SDG5 (Gender Equality); SDG 6 (Clean

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Water and Sanitation); SDG8 (Decent Work and Economic Growth); SDG12 (Responsible Consumption and Production); SDG13 (Climate Action); SDG15 (Life on Land). Scale: Global Cotton Production Eco-system. Scope: Aim is to embed social, environmental and economic sustainability into cotton production around the globe. Intended Systemic Change: ‘BCI’s Theory of Change calls for transformation of the cotton production sector, catalysing movement toward sustainability in two spheres: Farm and Market, with changes amplified and sustained by supportive production and consumption policies’. Vision: Make Better Cotton a mainstream sustainable commodity. Mission: ‘Transform cotton production from the ground up by helping cotton farmers adopt sustainable agricultural practices and produce Better Cotton— better for farmers, the environment and the sector’s future’. Key Stakeholders Involved: 250 million cotton farmers and people supported by cotton production worldwide. 2.2 million licensed cotton farmers in 21 countries in 2018 (19% of Global Cotton). Key implementing partners (National or regional cotton producers’ organisations, Governments and governmental bodies related to cotton production, marketing, processing and trading, Entities created to grow, promote and sell Better Cotton, Initiatives working to promote sustainability in the cotton sector, Different Implementing Partners all over the world, who work with farmers at field level to ensure that they are producing cotton according to the Better Cotton Standard); Retailer and Brand Members; Funding Partners.

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The Sustainable Development Goals: A Framework for Business

Initial Action Plan: Over the first 5 Years (2015–2020), following targets to be met 1. Better Cotton and its equivalents will represent 30% of global cotton production. 2. BCI will reach and train five million cotton farmers on more sustainable practices. 3. 10% of all cotton produced globally will be sourced as Better Cotton. 4. Nine countries will take direct responsibility for funding and implementing the Better Cotton Standard. 5. BCI will cover 100% of its core operational costs with earned income.

Next Steps Envisaged: Next 5 year Plan (2020–2025) to be announced. Source: https://bettercotton.org/get-involved/partnerships/.

Solar Impulse Foundation World Alliance for Efficient Solutions Contribution to SDGs: SDG6 (Clean Water and Sanitation); SDG7 (Affordable and Clean Energy); SDG9 (Industry, Innovation and Infrastructure); SDG11 (Sustainable Cities and Communities). Scale: Worldwide network to source 1000 clean, efficient and profitable solutions (2,060 Alliance Members). Scope: 1,000 solutions to be selected according to three key criteria: 1. Technological Feasibility 2. Environmental And Socio-economic Benefits—‘the solution has a direct positive impact on the environment combined with at least one direct or indirect socio-economic benefit, without any significant negative impact transferred’. 3. Profitability

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Intended Systemic Change: Protecting the environment through clean technologies and efficient solutions. Key Stakeholders Involved: Main actors (Innovators, investors and solution seekers) involved in developing, financing or promoting products, services, processes and technologies that protect the environment in a profitable way; start-ups, companies, institutions, NGOs and investors to create synergies, share knowledge and build relationships that ultimately speed-up the implementation of clean and profitable solutions; governments, businesses and institutions benefiting from these solutions, which encourage them to adopt more ambitious environmental targets and energy policies. Initial Action Plan: ‘Innovative and profitable solutions having been awarded the Solar Impulse Efficient Solutions Label’. SDG6 ðClean Water and SanitationÞ : 64 solutions SDG7 ðAffordable and Clean EnergyÞ : 128 solutions SDG9 ðIndustry; Innovation and InfrastructureÞ : 119 solutions SDG11 ðSustainable Cities and CommunitiesÞ : 143 solutions: Next Steps Envisaged: Those solutions that meet the above criteria will be attributed to the Solar Impulse Efficient Solutions Label, and be included in the portfolio of 1,000 Efficient Solutions to be presented to decision-makers. Source: https://solarimpulse.com.

Mars Sustainable in a Generation Plan Contribution to SDGs: ‘Accelerate sustainable growth in alignment with the UN SDGs’, focusing on three key areas: Healthy Planet (linked to Climate Action, Water Stewardship, Sustainable Packaging and Land Use), Thriving People (focusing on Increasing Income, Respecting Human Rights and Unlocking Opportunities for Women) and Nourishing Well-being.

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Scale: US$ 1 billion investment. Scope: Greenhouse Gas Emissions; Water Use; Land Management; Farmer Income; Human Rights; Opportunities for Women; Healthy nutrition; Transparency. Intended Systemic Change: ‘Transform the entire value chain’. Stakeholders Involved: Buyers and smallholder farmers in global supply chains (including 1 million people in Mars value chain); customers; leading global organisations. Initial Action Plan: Launch of the Farmer Income Lab, ‘an open-source “think-do-tank” that will enable Mars and others to leverage […] unique human, social and financial resources to identify and activate solutions needed to increase farmer income and eradicate smallholder poverty in global supply chains’. Next Steps Envisaged: ‘What Works’ publication, ‘providing an overview of promising models, sourced from academic literature and stakeholder dialogues, that increase incomes and demonstrate what factors are most successful’. Efforts across plastic packaging, renewable thermal and a new Next Generation Supplier program, ‘an enhanced approach to supplier sustainability’. Source: http://www.businessfor2030.org/goal-17-moi; com/sustainability-plan.

https://www.mars.

Whilst the above examples can certainly be considered as examples of best practice, particularly in view of their ambition to deliver positive change at scale and genuine efforts to address the needs of multiple stakeholders, working in close partnership, the real impact of these can only be measured in the long-term. These initiatives, however, share some common features, in terms of their attempt to establish new and bold standards of sustainability, question the status quo, and bring reform and transformation to an existing system (in these particular instances,

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finance, protection of the environment, world cotton production and food supply chain), with positive change and impact intended on a global scale. By their very nature, these Multi-Stakeholder Partnerships do not reveal the true and distinct contribution of business in an isolated manner. They clearly highlight an advanced and sophisticated stage of engagement in the SDGs. They also suggest innovative models and new ways of thinking and working, striking a fine balance between long-term societal impact and short-term financial considerations. Recognising the important role and expected increased contribution of the private sector in the overall sustainable development agenda (as mentioned above), let us now consider the specific shifts required for business to engage meaningfully and effectively in the Global Goals, and drive and accelerate their overall implementation process.

2.7

How Can Business Can Best Contribute to Systems Change: Towards a Strategic Alignment of Business and Social Goals

Purposeful businesses will be essential contributors to solving the global challenges of the 21st century, best expressed in an integrated way by the UN Sustainable Development Goals. (British Academy 2019)

Just under eighteen months following the launch of the Global Goals Agenda, the international development organisation Oxfam published a discussion paper entitled ‘Raising the Bar: Rethinking the role of business in the Sustainable Development Goals’ (Oxfam International 2017), which was already inviting businesses to consider the SDGs as an opportunity to ‘embrace their wider responsibilities to the societies in which they operate[d]’—beyond profit. In particular, Oxfam International (2017) recognised ‘business [as] an important stakeholder on account of its resources, its ability to innovate and its scale and reach’. According to the international NGO, ‘meaningful engagement’ from business had to include three steps: (1) a focus on those goals where a given company could have the ‘greatest potential impact, either positive or negative’, (2) an ‘integration of sustainable development concerns into their core operations’ and (3) ‘transformative ways of thinking about the future role of business in sustainable development’ (ibid). More recently, in an interactive session on ‘Transforming Business for the SDGs’, as part of the 18th Annual Colloquium convened by the Academy of Business in Society (ABIS 2019), insights from the UN Global Compact-Accenture Strategy 2019 CEO Study on the engagement of business with the SDGs were shared. According to the survey, leaders recognised that ‘market constraints and an ever more challenging business environment and set of pressures continue to slow broad-scale transition to sustainable business—and that unless broader business is forced by a shift in economic incentives, action will stall’ (ibid). Key suggestions made by CEOs to accelerate progress included:

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1. ‘An urgent need to raise corporate ambition within their own organisations through ‘threshold’ actions and also lead systems transformation more broadly against the 17 Global Goals’; 2. ‘The need for business, governments, regulators and nongovernmental organisations to come together to shape realistic science-based solutions to the global challenges’; 3. ‘A new definition and emphasis on disruptive responsible leadership, as CEOs pinpoint what is needed from this generation of leaders to drive action and impact’ (ibid) As alluded to and discussed in more details in relevant sections of this Chapter, ambition, scale, strategic alignment, integration, transformation and new ways of thinking are indeed recurrent themes to be considered by any actor envisaging a serious and deep engagement with the Global Goals, due the very nature of the Agenda. In order to gauge and assess the likelihood of a more effective engagement of businesses in the SDGs agenda (in terms of their positive and meaningful contributions becoming mainstream and embedded in their core strategies), it might be worth stepping back and looking at the context in which the corporate world is currently operating. In particular, recent and repeated signs of transformative change seem to apply to businesses themselves, as capitalism under its current form comes under increasing scrutiny, in a renewed momentum. In September 2019, less than a month after the Business Roundtable redefined the Purpose of the Corporation to Promote ‘An Economy That Serves All Americans’, with 181 CEOs of US large corporates committing to ‘lead their companies for the benefit of all stakeholders—customers, employees, suppliers, communities and shareholders’ (Business Roundtable 2019), the Financial Times launched its New Agenda of ‘Resetting Capitalism’, challenging ‘leaders in the boardroom and beyond—to protect the future of free enterprise and wealth creation by pursuing profit with purpose’ (FT 2019). Larry Fink’s 2019 Letter to CEOs (BlackRock 2019a) when continuing to ‘advocate for practices that [BlackRock] believe will drive sustainable, long-term growth and profitability’, states that ‘profits and purpose are inextricably linked’, emphasising a company’s need to ‘serve all of its stakeholders over time—not only shareholders, but also employees, customers, and communities’, and calling on companies’ leadership to commit to ‘issues central to the world’s prosperity’. As the world’s largest asset manager, BlackRock strives for what they define as ‘Investment Stewardship’, advocating for the creation of long-term value, and corporate strategies ‘clearly founded on an articulated purpose’ (BlackRock 2019b). This long-term, purposeful investment and strategy mindset designed to meet the needs of multiple stakeholders is now increasingly presented as a much required alternative to and replacement of the prevailing shareholder supremacy which has driven and influenced corporate decision-making and behaviour since Milton Friedman’s 1970 article entitled ‘The Social Responsibility of Business is to Increase its Profits’.

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Arguably, business organisations, which have traditionally focused on shortterm productivity and financial measures of success, being strongly influenced by the prevailing scientific management approach and under intense pressure to meet short-term quantitative targets, have clearly favoured profit over a higher, socially useful purpose. The two are, however, not incompatible, and should be strategically aligned for legitimacy, sustainability and long-term viability purposes.

2.8

Conclusions

Living successfully in a world of systems requires more of us than our ability to calculate. It requires our full humanity—our rationality, our ability to sort out truth from falsehood, our intuition, our compassion, our vision, and our morality. (Meadows 2008)

500 years after the death of Leonardo da Vinci and 30 years after the fall of the Berlin Wall, we are reminded of the human capacity to transform dreams (be they flying machines or reunification process) into inspiring, history-defining, sustainable achievements. The past architects of human beauty, freedom and progress continue to earn our respect and admiration, through the distinct core values they believed in and embodied. Leonardo’s combined scientific and artistic approaches to innovation should also incite us to question and revisit the boundaries artificially drawn between sciences and humanities in our education systems, so far as these continue to define our working lives, but also our ways of thinking and capacity to tackle challenges characterised by both complexity and scale. Such disciplinary silos are particularly unhelpful when understanding and tackling the interconnectedness defining today’s world. They restrict our imagination and ability to make some vital links between seemingly unrelated issues. In view of the very rapid succession of events and crises, we need to think, act and behave differently—now and together. The Global Goals offer a thinking and living framework for doing so. It is transformative, universal and integrated. It calls for collective responsibility and meaningful and impactful action, inviting new ways of thinking about and organising business and other resources around a shared and aligned purpose.

References ABIS (2019). 18th ABIS Annual Colloquium 2019 - Business in Society: Measuring impact and creating change. https://www.abis-global.org/events/18th-abis-annual-colloquium-2019. Amato, V. (2015). How can the global goals for sustainable development be effectively delivered? Open University International Development Seminar. http://www.open.ac.uk/ikd/podcasts/ how-can-global-goals-sustainable-development-be-effectively-delivered. Amato, V. (2017). The global goals, systems thinking, and innovative partnerships. The Partnering Initiative . https://thepartneringinitiative.org/news-and-views/tpi-blog/the-globalgoals-systems-thinking-and-innovative-partnerships/.

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BlackRock (2019a). Larry Fink’s 2019 letter to CEOs - purpose & profit. https://www.blackrock. com/corporate/investor-relations/larry-fink-ceo-letter. BlackRock (2019b). BlackRock Investment Stewardship’s approach to engagement on long-term strategy, purpose, and culture. https://www.blackrock.com/corporate/literature/publication/blkcommentary-engaging-on-strategy-purpose-culture.pdf. British Academy (2019). Principles for purposeful business. https://www.thebritishacademy.ac.uk/ sites/default/files/future-of-the-corporation-principles-purposeful-business.pdf. Business Roundtable (2019). Business roundtable redefines the purpose of a corporation to promote ‘An Economy That Serves All Americans’. https://www.businessroundtable.org/ business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-servesall-americans. FT (2019). FT sets the agenda with new brand platform. https://aboutus.ft.com/en-gb/announcements/ ft-sets-the-agenda-with-new-brand-platform/. Global Partnership for Effective Development Co-operation (2019). Effective Co-operation principles. http://effectivecooperation.org/about/principles/. International Institute for Applied Systems Analysis (2019). Deep transformations needed to achieve sustainable development goals. Science Daily. www.sciencedaily.com/releases/2019/ 08/190826112705.htm. Meadows, D. H. (2008). Thinking in systems: A primer, sustainability institute. https://wtf.tw/ref/ meadows.pdf. OECD. (2015). Development Co-operation Report 2015: Making partnerships effective coalitions for action. OECD Publishing, Paris.. https://doi.org/10.1787/dcr-2015-en. Oxfam International (2017). Raising the bar: Rethinking the role of business in the Sustainable Development Goals, February 2017. Sachs, J., Schmidt-Traub, G., Kroll, C., Lafortune, G., & Fuller, G. (2019). Sustainable Development Report 2019. New York: Bertelsmann Stiftung and Sustainable Development Solutions Network (SDSN). https://s3.amazonaws.com/sustainabledevelopment.report/2019/ 2019_sustainable_development_report.pdf. Sustainable Development Global Goals Partnerships Platform (2019). European Commission initiative on sustainable finance. https://sustainabledevelopment.un.org/partnership/?p=29794. UN (2013) A new global partnership: eradicate poverty and transform economies through sustainable development - The report of the high-level panel of eminent persons on the post 2015 development agenda. https://sustainabledevelopment.un.org/content/documents/893201305%20-%20HLP%20Report%20-%20A%20New%20Global%20Partnership.pdf UN (2015) Global Sustainable Development Report, 2015 edition. https://www.un.org/en/ development/desa/publications/global-sustainable-development-report-2015-edition.html. UN (2019). The Sustainable Development Goals Report 2019. https://unstats.un.org/sdgs/report/ 2019/The-Sustainable-Development-Goals-Report-2019.pdf. UN Sustainable Development Goals - Knowledge Platform (2019) Sustainable Development Goal 17- Strengthen the means of implementation and revitalize the global partnership for sustainable development. https://sustainabledevelopment.un.org/sdg17. UN Task Team on the Post 2015 Agenda (2013). A renewed global partnership for development. https://sustainabledevelopment.un.org/content/documents/833glob_dev_rep_2013.pdf. World Benchmarking Alliance (2019, July). Measuring what matters most: Seven systems transformations for benchmarking companies on the SDGs Retrieved November 4, 2019 from https://www. worldbenchmarkingalliance.org/wp-content/uploads/2019/10/WBA-sevensystemstransformationsreport.pdf.

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Valérie Amato spent the first fifteen years of her professional career in international finance, where she gained extensive corporate and sovereign client-facing and emerging markets experience with major international banks, including Citibank and HSBC. She subsequently transferred her business skills to the social and international development sectors, both in an advisory and leadership capacity. She was a member of the Steering Committee for the evaluation of the International Finance Facility for Immunisation (IFFIm), and the first CEO of an international NGO focusing on maternal and child health in Afghanistan, Eastern Europe and Central Asia. She has also served on the Board of Trustees of a charity and as Governor of a primary school and a college in West London. As an external consultant, Valérie has been advising academia, businesses and international NGOs on their stakeholder engagement and cross-sector collaboration strategies. Being passionate about education and highly committed to life-long learning, Valérie contributes her international cross-sector expertise to the design and delivery of higher education programmes for business schools and other academia based in Europe, focusing on international business and transformative leadership. Valérie studied and/or worked in four different countries (including in Europe and South Africa), holds a Masters in Management from ESCP Europe (Paris, Oxford, Berlin) and an MSc in Development Management from the Open University.

3

Thinking in Systems: The Long-Term Impacts of Short-Term Business growth Roberto Pasqualino

Abstract

Short-term business growth is the main paradigm governing business activities today. This is important for employing workers, servicing debt and being competitive in a complex world among others. In 1972, the Limits to Growth (LtG) demonstrated how short-term business as usual behaviour could cause long-term global risks, including the possibility of overshoot of the global economy to environmental limits and economic collapse within the twenty-first century. This chapter first gives a definition of complex systems, system thinking and sustainability. Then it explains the nature of financial risk assessment practices and exponential growth. Thus, it reviews the LtG model and compares it to historical data. The major drivers for growth and the state of planetary boundaries are then assessed showing the relationships between risk, economic growth and environmental pressures. Potential leverage solutions to reduce long-term risks and directions for businesses to support a sustainability transition are highlighted. Keywords













Sustainability Limits to growth Planetary boundaries Financial risk Energy transition Climate change Sustainable development goals







R. Pasqualino (&) Global Sustainability Institute, Anglia Ruskin University, 183 East Road, Cambridge CB11PT, UK e-mail: [email protected]; [email protected] Innovation, Exoshock LTD, The Courtyard, High Street, Ascot SL5 7HP, UK Faculty of Science and Engineering, Anglia Ruskin University, 183 East Road, Cambridge CB11PT, UK © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_3

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3.1

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Introduction

Short-term business growth is the main paradigm governing business activities in the indefinite long-term. This is important for paying salaries, employing new entrants in the job market, paying debt, coping with inflation, as well as being competitive in a complex world among others. In 1972, the Limits to Growth explored scenarios of long-term business growth in a finite planet, demonstrating how short-term business as usual growth, could generate long-term risks, including the possibility of overshoot of the global economy to global limits and possibility for economic collapse within the first half of the twenty-first century (Meadows et al. 1972, 2003). These trends are partially confirmed today in the Intergovernmental Panel of Climate Change, exploring how climate change effects are creating difficulties and chaos all over the world (IPCC 2014). Growth is generally planned within businesses as a goal towards the future, often adopting forecasting technology and risk assessment as a means to explore future possibilities. For example, a company might project sales towards the next quarter, and assess possibilities to meet projections. First, they would build expectations for the future (average sales), assess a possible variability from ideal expectations (variance), and consider those factors that have the potential to bring their plans away from expectations (risks). As a result, growth implies risk assessment and management as part of planning for the future. Risk assessment is the core of the business model of financial institutions such as banking and insurance industries. For example, banks’ lending activities need to assess the risk of creditors to repay their debt back over a certain time. The basic metric that summarizes the risk of a debtor is the interest premium calculated as a fraction of the debt that is necessary to service the cost of loans based on the likelihood capabilities to return it. The lower the likelihood to return the debt, the higher the risk, thus the interest rate and the cost of debt. At the same time, the higher the risk the lower the propensity of the bank to provide loans. In so doing, wealthy individuals would be in a better position for receiving liquidity, and will be granted cash for cheaper costs, thus supporting them to grow even further. This implies important dynamics of inequality between those who own capital and those who do not. In addition, the higher the risk, the higher the expected growth of a company to be able to make enough money to pay for their debt, thus creating pressures to boost growth even further. But what are the long-term dynamics of the short-term goals of business leaders and managers? And most importantly, what if growth is the inherent cause of systemic risk increase over time? Is the forecast provided in the Limits to Growth consistent with reality today? These questions are complex and must be addressed using system thinking. In this chapter, we first give a definition of complex systems, system thinking and sustainability, and we demonstrate the most basic business methods employed today to manage future risks, providing a practical example of the dynamic of long-term exponential growth at the level of aggregated global economy. Thus, we briefly review the Limits to Growth model, and recent literature

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that compared such a forecast to today’s data. This is followed by the descriptions of the major drivers for growth, including constraints and opportunities for growth. Ecological limits are then assessed demonstrating how growth can generate risks including resource depletion, pressures on the agricultural system, climate change and planetary boundaries framework. As a basic leverage point for the transition towards sustainability we show the state of the energy transition towards clean tech. Thus, the Sustainable Development Goals and the correct use of those are introduced, concluding with directions for businesses to engage in decision-making towards a sustainable world.

3.2

System Thinking and Complexity

A complex system can be defined as a “set of mutually dependent elements which interact one to another towards a purpose”. “System thinking” is the approach required to understand and analyze complex systems. Whereas mechanistic, reductionist or atomistic views give emphasis to the elements that compose systems, system thinking (or organic, or holistic) gives emphasis to the whole. When systems are complex, their essential properties emerge from the interaction and relationships between parts, that cannot be isolated. In the words of Capra and Luisi (2016) “the nature of the whole is always different from the mere sum of its parts”. We recognize complex systems when we can describe them with the following terms: 1. Feedback loop—a closed path relationship between an element and itself through the other elements of the system 2. Non-linearity—the typical behaviour of changing response to a perturbation that was recorded in the past, but with the unprecedented final outcome 3. Path dependency—the tendency to lock in systems into paths that are dependent on the initial conditions, presenting difficulty to invert the path once taken 4. Emergency—The formation of aggregate system dynamics dependent on the interaction between components and often not intuitive a priori 5. Self-organization—the potential change in system connections dependent on their evolution over time 6. Hierarchy—the tendency to structure systems with particular elements have more importance than others, and generating a dynamic of cascading effects of some elements to the others In such a context, the sustainability challenge requires a mutual synergy between markets and governments to lead the world towards long-term prosperity. In order to approach sustainability with a chance of success, it must be seen as a multidisciplinary challenge involving different systems interconnected through mutual feedbacks. One of the earlier definitions of sustainable development was provided by the Bruntland report in 1987, as: “development that meets the needs of the

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present without compromising the ability of future generations to meet their own needs”. Such a definition remains hard to interpret by policymakers and businesses when they make decisions, and unfortunately, the long-term in the year 1987, has become the short-term in the year 2020. Governments and managers who are interested in creating long-term sustainable economic systems must act now with a long-term perspective while gaining short-term benefits along the way.

3.3

Short-Term and the Long-Term Exponential Dynamics of Growth

When we seek information about the state of a national economy, it is hard to come across the absolute values of metrics that can assess its performance. These include the Gross Domestic Product (GDP) (i.e. total output), the total employed, or total assets within an economy. Most often, we find relative measures of these absolute values, such as GDP growth in the past period (i.e. the relative increase in GDP in a certain period), the yearly increase in sales (i.e. fractional increase in sales in the year), or the value share of a company (i.e. the prices of shares of a company). In fact, when the GDP grows, it shows that an economy is capable of producing more in comparison to that measured by past data. This has benefits such as increased potential for employment, value increase and wealth creation. In fact, if we assume no change in the state of technology, population size, or variation in the pensionable age, the rationale can be made simple. For example, if we assume stagnation (growth equals zero) we could imagine that the retirement of those in old age, will leave space for new entrants in the job market after completing their studies and degrees, whereas negative growth would make us expect that less people than those who retire could find jobs in the economy, generating unemployment. On the other hand, with growth, it could be easier to create new jobs and employ those new graduates to the economy. Increasing the complexity, it is possible to assume that while the population grows, the only way to generate employment for those people is to create more economic growth than the growth rate in the population. The more health services improve and life expectancy increases, the more workers must accumulate their pensions to pay for their entire lifetime at the end of their employment. As a result, those who are already part of the job market will tend to remain employed for longer creating additional friction to those new entrants to the job market. Seen in these terms it appears that persistent, short-term business growth is the answer to all economic problems we will face in the indefinite long-term. But what are the long-term dynamics of short-term growth? The observation that made Limits to Growth (Meadows et al. 2003) such an influential piece of work is that, when projected towards the longer term, short-term growth will have a dynamic of exponential growth. If business and population growth are coupled with the non-sustainable exploitation of ecosystems services, exponential growth can represent a dangerous threat to humanity. The best way to feel the power of exponential growth is to do the calculation. For example, assuming economic

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Table 3.1 Exponential growth at 3.6% per year over 20 years. The calculation is 1.036Years Year

0

1

2

3

…

16

17

18

19

20

Value

1

1.04

1.07

1.11

…

1.76

1.82

1.89

1.96

2.03

Table 3.2 Exponential growth of a doubling economy every 20 years becomes 1024 bigger in two centuries. The calculation is 2Year/20 Year

0

20

40

60

80

100

120

140

160

180

200

Value

1

2

4

8

16

32

64

128

256

512

1024

growth maintains a constant real growth rate at 3.6% per annum (this is the case of the average growth rate of the global economy from the 1960s), it takes about 20 years to double the size of the economy, as shown in Table 3.1. In turn, a continuous doubling up of the size of the economy every twenty years for two centuries would correspond to an economy that is 1024 times bigger than its initial value, as shown in Table 3.2. Another example, to appreciate the power of exponential growth, can be found in Box 3.1. While the population and the economy become bigger, the rate of resource depletion and emissions would rise proportionally. Even relatively small initial values of an economy and population living non-sustainably on the finite planet would become impossible to contain without a fast transition towards a non-material extractive and non-polluting economy. Considering that the global economy has already passed the point of no return, it appears how thinking about a doubling in economic size from today’s state in the next two decades, is no more than an aberration in the name of the environmental limits. In the following section, a comparison between the Limits to Growth and today’s reality is shown, followed by a description of the major elements in our economic and financial system that constrain the system’s growth, a review of the state of environmental resources and global limits, and provides an indication on how business development could evolve to avoid the scenarios of Limits to Growth becoming reality. Box 3.1 Fold a sheet of paper

A typical example that is helpful to appreciate the power of exponential growth is to ask the learner to estimate how thick they think an ordinary sheet of paper can be. It is easy to realize it can be about 0.1 mm thick. As a second step, they are asked to fold it on itself twice and estimate the thickness again. Of course, the result is 0.4 mm. The third and final step is to provide an intuitive answer when asked to fold the piece of paper for another 40 times (42 times in total). No use of calculators is allowed in this exercise. When you feel confident with your answer you might want to check the correct response at the end of this chapter.

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The Exponential Dynamics of Material Growth Is Non-sustainable in a Finite World

The Limits to Growth’s thesis was proposed as a scenario analysis using the ad hoc developed World3 System Dynamics model. The main message of the Limits to Growth is that indefinite exponential growth of the global economy is not possible in a finite planet. If we employ technology and innovation as tools for reducing the impact of growth on ecosystems’ depletion, then the major outcome will be to postpone (not remove) the time of overshoot to global limits, and the thesis of economic downturn (with the potential collapse of global society) will persist in a world governed by the growth paradigm. Most importantly, at the level of socio-political systems, it normally takes about two decades from the time a problem is understood by scientists to the actual implementation of policies and technologies that can potentially solve that problem. This means that we, as human society, will always lag behind the risks caused by growth. The demand for a system change to assure the economy can operate in a safe space in the indefinite long-term is likely to emerge and it is too late to act. While monitoring the state of global systems over the past fifty years, the team re-proposed the same thesis in the years 1991 (Meadows et al. 1992) and 2003 (Meadows et al. 2003), performing small adjustments on the World3 model parameters to calibrate correctly with the historical data from the 1970s onwards. Concerned with the evidence of the Limits to Growth, Pasqualino et al. (2015) implemented a calibration analysis of the World3 using the historical data from 1995 to 2012. The study both confirmed some aspects of truth in the Limits to Growth, as well as revealed some elements of today’s economic system that could not have been predicted in 1972. These include: • Our world population and economy is growing on a finite planet, and the World3 model can be used to assess such a dynamic of growth; • The pattern for economic growth has shifted to a service driven economy rather than mere industrial growth. This compares favourably to what was expected by the Limits to Growth indicating lower pollution emissions and less harm to people and the environment; • Growth still remains the main paradigm the world society relies on, and such growth remains, based on the finite available resources of the planet. Resource scarcity, as well as negative effects of the system, such as pollution, cannot be excluded in shaping the future possibilities of our world; • Additional elements that characterize today’s world were not included in the World3, such as possibilities for energy transitions, and climate change. These would need to be addressed separately. As a result, the thesis of the Limits to Growth could not be rejected, despite the positive differences between today’s world and what was expected by the team of scientists in the 1970s. The next section provides insights on the structure of the

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economic system, and a review of today’s world limits and impacts. Additional details on the Limits to Growth study can be found in Pasqualino and Jones (2020).

3.5

The Drivers of Economic Growth and Constraints to a Non-growing Economy

3.5.1 Debt Money System One of the engines of growth relies on the so-called Debt Money system, that governs the dynamics of money creation and lending in a capitalistic economy. Lending activity comes into play when a business (or whatever economic entity) needs to raise their cash to allow purchase of assets while de-risking uncertain investments. The process consists of a lender who owns liquidity and provides finance to borrowers in the form of a loan at a certain fractional cost (i.e. interest rate) normally calculated at a monthly or annual rate. The resulting contract obliges the borrower to pay back the debt on a periodic fractional basis, while being charged with the interest premium for the service received. The interest rate represents a measure of the risk of the borrower to return their debt and must account for the uncertainty inherent in the market, as well as the historical capabilities of the debtors to redeem their liabilities. The higher the probability of failing to repay the debt, the higher is the interest rate, the cost of financing and the pressure for growth to pay the loan back. In general, a business uses loans as a financial leverage to invest in the expansion of productive assets that are expected to generate revenue over time. In so doing, a loan increases the resiliency of a firm mitigating their risk of failure in the markets they operate in, and has become normal management practice to keep a fraction of financial assets via borrowing to approach new markets without risking the default of their entire business. From the perspective of a lender, the risk of default of the borrower has to be assessed a priori to reduce losses. The default of some producers can increase the interest rate for all participants in the same sector, thus increasing the barrier for new entrants. Larger firms, that have access to financial resources tend to record lower default rates, supporting the dynamic reduction of interest rates over time. This is an important balancing feedback loop used by banks to stabilize the economic system today. Since all business requires debt to operate, then the long-term dynamic at the aggregated system level is the one of exponential growth, where the interest rate imposed to each loan corresponds to the minimum exponential growth rate of the economy. This is the fundamental requirement for the stability of an economy today. When businesses fail in attaining exponential growth rates sufficiently to repay their debt, creditors can renegotiate their contracts for debt return, or apply compound on the financial assets of the borrower. While losses increase interest rates, the job of the financial sector is to avoid such a situation by means of a careful interpretation of risks and supporting exponential growth in financial terms and value created.

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3.5.2 Financial Markets and Pension Funds Require Growth If debt can be considered as an unbalancing force towards growth, financial markets can be seen as the attraction point of such a disequilibrium to sustain growth even further. Financial markets rely on a reinforcing feedback loop which lies at the foundation of most of the economic activities today. In fact, more money provides liquidity for more investments, which, in turn, lead to more profit, supporting the accumulation of more money and so on. Their role is to distribute funding from the investor to corporations and to the public sector, which must grow to honour their investments. Financial markets operate based on different products, including the trading of government and household debt (bond or credit market), corporate equity (stock market), primary commodities such as coffee, wheat or oil (commodity market), and, since the abandonment of gold standard in 1970s, currency (foreign exchange market). The use of information technology to operate financial transactions supported its detachment from the real economy, operating at a much higher speed without the inertia of real systems. In so doing, speculative behaviour in trading platforms and short-termism to gain high return as fast as possible took dominance in the system, often with no concern about the possible effects on the real economy (Capra and Luisi 2016). An interesting case for the use of financial instruments for long-term sustainable transitions is represented by the pension funds (or household long-term savings) managed within risk assessment firms. A pension fund represents the withdrawal of a small portion of a household’s income to be returned to their owners after they retire. As a result, a pension fund represents the perfect pot of money that can be invested in the time frame of a sustainable transition due to the long-term investment return. As explained in Silver (2017), pension funds tend to be invested in low-risk stable growth opportunities, often represented by large private firms and government bonds. Interestingly, the main principle that underpins a successful pension fund is also the ability to grow exponentially. An economy with zero growth would be able to return to workers as much money as that which was withdrawn, and most likely be insufficient to provide subsistence spending capabilities as enjoyed during working life. Thus, slow growth would imply lower returns to pension funds. In fact, a major concern for the sustainability transition is in relation to what is called stranded assets, that is valuable assets that might not be usable due to the sustainable transition. In the past forty years, a vast majority of pension funds were invested in large energy companies, based on coal, oil and gas, which could promise sustainable growth. As explained in the following section, a transition away from fossil fuels is a necessary requirement for a sustainable world, implying disinvesting from those resources, and risking a low return of pension funds for the future generations.

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3.5.3 Productivity and Technology Growth One of the main arguments against the thesis of the Limits to Growth was in the underestimation of the potential of technology and productivity growth when assessing the power of growth in the global economy (Nordhaus 1973). Economists long established the importance of productivity growth as the most important determinant of long-term economic growth and rising living standards for all (Schwab 2017; Maxton and Randers 2016; Jackson 2016). Productivity growth can be defined as incremental changes in the ability of one person to produce a certain unit of economic output over time. The relation between productivity growth and economic growth was first proposed by Adam Smith in the Wealth of Nations (1776). Smith observed that international trade could support the specialization of firms and cost reduction of output, with the potential to make goods and services affordable for the vast majority of people. At that time, widespread poverty could be found in every corner of the world, mainly because it was not possible to produce enough output for all. Such a thinking could take off thanks to the invention of the steam engine by James Watt in 1781. Its main benefit gradually allowed the substitution of human and animal muscles with machine systems powered by coal, increasing the productivity of workers over time, and giving birth to today’s capitalistic economy led by growth (Pasqualino and Jones 2020). The first and second industrial revolution is characterized by the widespread diffusion of technologies in every field, including metallurgy, mechanics, and cement. The second industrial revolution was heavily impacted by the discovery of crude oil in 1859, which found applicability due to its cheap price and versatility in comparison to coal. The discovery of crude oil is probably the most important factor explaining the well-being and wealth generated in our global economy to date. This was followed by the electrification of machines and the development of telecommunication technologies, with the expansion of transportation systems including train, airplanes and the automobile. An important innovation in agriculture is represented by the Haber-Bosch process in the early 1900s, that allows fertilisers to be obtained with the use of natural gas, supporting land productivity growth. Starting in the 1950s, the advent of internet, transistors and computers allowed for the gradual digitalization of human society leading to the cusp of the fourth industrial revolution which is characterized by the use of disruptive technologies. These include artificial intelligence, robotics, 3D printing, cloud services, internet of things and many more. These allowed an industrial era to move into a services era, transforming both human lives, as well as the financial sector. The overall effect of these innovations was a general reduction in the cost of production while employing the same amount of people, or, in other words, the ability of producing more output employing the same people. For example, the resources extraction industry has seen a gradual cost reduction in extraction of resources despite depleting in the past fifty years. As we will see in the following section, this trend might not last forever.

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Alongside productivity growth, innovation has always brought concerns in relation to the transformation of labour, systemic inequality and the possibility of reducing employment in the long-term. In fact, a capitalistic economic system must rely on consumption to support growth. But without the assurance of high employment demand may fall, generating a downturn on the global supply side (Jackson 2016). According to Capra and Luisi (2016), financial networks conserve the power on the real economy today, with unskilled labour remaining locally constrained. On the other hand, in an economy that is driven by information processing, knowledge creation and innovation, the skilled workers are often involved in share option schemes as an incentive to retain their loyalty and assure that their tacit knowledge is passed along the organization. Despite the innovation of the last 70 years, historical data shows that labour productivity growth has been falling globally (Jackson 2016). The term secular stagnation has emerged once more.

3.5.4 Projections for Population Growth by Region Figure 3.1 shows the historical data and projections of the global population from 1950 to 2100, divided into six world macro-regions (Asia, Africa, Europe, North America, Latin America and the Caribbean, Oceania). Today’s global population is approximately 7.7 billion people, expected to reach between 9.4 and 10.3 billion people by 2050, and between 9.6 and 13.2 billion by 2100 (UNPD 2018). Approximately 800 million people are undernourished mostly concentrating in Sub-Saharan Africa and Southern and Eastern Asia (FAO 2015). Population growth Population Projections by Region Thousands of People

6 000 000 5 000 000 4 000 000 3 000 000 2 000 000 1 000 000

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Fig. 3.1 Population projections by region over time (Source United Nations Population Division, 2018)

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increases global demand for food and commodities, even though the distribution of growth and income is uneven between world regions. In fact, approximately 1.8 billion people live in the most developed regions where the population is expected to remain stable or decrease. This is due to the expectations that highly educated women, involved in professional careers and living in urban areas would find it more difficult to have large families. A large portion of population growth is expected to be recorded in Asia, that today accounts for approximately 4.5 billion people. It is expected that the Asian population will surpass 5.2 billion people by 2050, and then slowly decrease until 2100. The most populous countries in Asia are China and India, at approximately 1.4 and 1.3 billion people, respectively, today. While China’s per capita consumption is way lower than the one in most developed economies, it is expected that it will find benefit from the economic transition, economic growth and wealth creation. The result will be to bring approximately 300 million people to the threshold of high income which is experienced in the most developed parts of the world. This will most likely generate pressures to demand growth (for example, via the substitution of rice consumption with meat) and determine a slow-down in population growth leading to a similar dynamic experienced in the western world (IIASTD 2009). On the other hand, India, that will not benefit from the same positive trend as China, is expected to remain mostly poor with continuous expansion in population growth, becoming the most populous country in the world with about 1.6 billion people by 2050. African countries will register the largest increase in the human population, moving from today’s 1.2 billion people to 2.8 billion in 2050, and above 4 billion by the end of the century. Among those, Nigeria is expected to record exponential growth over several decades, becoming the third most populous country with above 400 million people by 2050.

3.6

Ecosystem Negative Feedback on Economic Growth

3.6.1 Energy While the economy grows, energy and food systems will face additional pressures to supply enough output to feed people and the economy. The energy system is today dominated by fossil fuels, represented by coal, oil and gas. IEA (2017a, b) shows that total primary energy supply increased two-fold between the 1970s and 2015, whereas the dependency on fossil fuels just changed from 86 to 82%. A peculiarity of the fossil fuel industry is that resources that can be extracted more cheaply have priority over those that are harder to extract. When the cheaper options get depleted, prices will start to increase, justifying investments to develop the technology necessary to extract the more expensive ones. The era of cheap oil and coal have found great benefit from these dynamics over history. While an oil well could shoot out from the ground in the 1860s, these reserves are long depleted. A major technology in use today for oil extraction is fracking. It consists of

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injecting liquid into subterranean rocks and extracting oil with the help of a long pipeline and systems of pressures. Of course, the capital intensity of the second method is more expensive to that people enjoyed a century ago. Today, geologists have found most of the reserves, and no major oil wells have been found since the 1970s (Wijkman and Rockstrom 2013), thus assuming that the only dynamic going forward will be the one of resource depletion and increasing cost of energy. Two common indicators used to measure the availability of resources in the ground are the RP ratio (resources to production ratio) and the EROEI (energy return on energy invested). The RP ratio is well established but not very good when interested in the dynamics of depletion. It consists of calculating the ratio between total economic known reserves in the ground and present yearly production. The ratio is an intuitive measure that expresses the number of years that it is possible to assume we would not run out of a resource while keeping the same extraction rate. Figure 3.2 shows the actual historical data of coal production in the UK between 1880 and 2000, and aligns it with the relative RP ratio calculated at each year by the author. For simplicity in the calculation, it is assumed that geologists would have known the total amount of reserves since 1880. As Fig. 3.2 shows, the shape of coal production followed a bell shape curve, growing during the nineteenth century, slowing growth and peaking around the 1930s, and then declining all the way towards the end of the twentieth century. The reserves to production ratio indicated 160 years of available reserves in the year 1880. However, while production grows, and reserves deplete, the RP ratio decreased to about 40 years worth of production left by 1930 (50 years later). On the other hand, after the peak is reached, the production declines because cheaper ores are depleted, and it requires more effort and cost to dig in the ground to extract other coal. As a result, the RP ratio would

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Fig. 3.2 RP ratio and Coal Production in the UK (Source Adapted from the UK Government Department of Business, Energy and Industrial Strategy 2018)

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provide a distorted metric to assess the time an industry can keep operating both during the growth and decline of the industry. A better indicator than the RP is the EROEI, which allows to assess how many units of energy can be obtained by employing every single one of them. Following the same perspective of depleting resources, higher EROEI sources would be extracted before the low EROEI resources. In general, a source is economical for production as long as EROEI is higher than 5. When EROEI is between 5 and 1, sources are marginally economic, and below 1 not economic. In this latter case, resources should never be spent for extraction since it is more energy intensive to extract than the energy obtained. For example, in the case of crude oil, EROEI had been between 50 and 100 for the most of the twentieth century, decreasing to 15 to 20 during the last decades due to depletion (Bardi 2014; Wijkman and Rockstrom 2013).

3.6.2 Agriculture Similarly, to fossil fuels, population and economic growth require more food to be produced. Most importantly, the relationships between fossil fuels and food output describe a physical dependency mostly due to the technology adopted today to increase land productivity while injecting fertilisers into the land. In fact, it is estimated that 30% of the cost of production of crops is linked to oil and gas, which are fundamental to extract nitrogen from ammonia and subsequently produce fertilisers (IIASD 2009). In other words, it is possible to say that every calorie of energy contained in our daily food requires seven to eight calories of energy from fossil fuels to be produced (Wijkman and Rockstrom 2013). As a result of all the above, a decrease in EROEI of oil will increase the cost of energy extraction, and this will impact the price of food directly. Agriculture consumes approximately 70% of all freshwater we use for food production as well. When analyzed from the sustainability perspective, agriculture remains the most complex sector of our economy. When accounting for deforestation linked to agricultural land expansion, agriculture is the first sector of anthropogenic emissions, and thus, the first cause of climate change. Together with fossil fuel production, they account for 50% of total emissions globally (IPCC 2014). On the other hand, agriculture is the major source of employment and wealth creation in developing countries, employing 40% of the worlds labour force and bringing hope for poverty reduction. The next section reveals the relationship between agricultural production, demographics and climate change.

3.6.3 Climate Climate change (or global warming) consists in the overall increase in global average temperature, that is correlated with the accumulation of anthropogenic greenhouse gas emissions in the atmosphere (IPCC 2014) (Fig. 3.3), and thus is a

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Fig. 3.3 Correlation between CO2 concentration and global average temperature (Source NASA 2019)

direct consequence of growth. Global concern with climate change today relates to the variety of systemic risks linked with the imbalance in the climate system stability, as well as the distribution of its effects all over the planet. One of the most unjust consequences of climate change is that its impact will be uneven across the world, impacting more, those countries that influenced it the least. In particular, agriculture represents both the first cause, as well as the most vulnerable sector to climate change. Temperate regions are expected to be less impacted, with short-term increase in crop yield due to the increase in carbon in the topsoil and a more humid climate. However, medium to long-term projections expect a productivity fall due to increased diseases and infestation (Wijkman and Rockstrom 2013; IPCC 2014). In addition, short-term shocks such as shifts in weather patterns, extreme weather events and rising sea levels will have negative consequences for food output over the medium to long period. IPCC (2014), predicts a reduction in available freshwater in several regions including southern Europe, northern Africa, parts of western Africa, southern Africa, southern Australia, the north-eastern parts of Latin America and parts of western North America. Extreme weather events, such as hurricanes, floods, or heat waves (Wijkman and Rockstrom 2013), are becoming more frequent and violent in the Tropics than in the past decades, increasing food loss and land erosion which ultimately will impact on food availability and international prices (Stern 2006; IPCC 2014; Lloyd, 2015).

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Aware of these issues, 196 country representatives met in Paris, in 2015, at the 21st Conference of Parties (COP21), as part of the United Nations Framework Convention on Climate Change (UNFCCC) to set a climate target at +2 degrees Celsius of global temperature increase, and commit to implementing policies to achieve this goal. Such a target could be met by keeping the average carbon concentration in the atmosphere below 450 ppm (parts per million) of carbon. It is worth noting that such an objective would imply an 80% reduction in greenhouse gas emissions from their current level by 2050. Recent studies from Steffen et al. (2018), demonstrated that +2 degrees might not suffice to keep global warming in a stable condition. Rather ecological feedback loops could be activated leading the world systems towards the path of +5 degrees (the so-called Hothouse effect) without the requirement of any human additional emission, causing irreversible damages to ecosystems and economy. Global scenarios addressing the impact of Hot House effect on agriculture can be found in Pasqualino and Jones (2020). As Fig. 3.1, has shown the increase in population is expected to be registered in the areas of the world that will be most impacted by climate change, and characterized by food poverty and undernourishment. This will create pressures from migration from poor to rich countries, and the potential cause for conflicts and populist sentiment across the borders. On the other hand, it is worth noting that the problem of food security today is not a matter of producing enough food for all the people, but rather a matter of economic systems and supply chain inefficiency in distributing food output. Today’s supply chains waste approximately 30% of the entire food product from land, one-third of which could suffice to satisfy the food demand of the poorest in the world (FAO 2015; Kummu et al. 2012).

3.6.4 Planetary Boundaries In line with the Limits to Growth study and the complex system sciences, the planetary boundaries framework (Fig. 3.4), shows that climate change represents only one of the nine thresholds that, as humanity, we are supposed to not overpass to keep operating in a safe space (Steffen et al. 2015). According to this framework, all thresholds are interconnected systems, and should be managed not in isolation but looking at the full picture. The global challenge of climate change is in an uncertain risk zone. However, thresholds that are far beyond safety relate to agriculture. These include the continuous increase of production via the use of fertilisers and genetic biodiversity. The first has already unbalanced the phosphorus and nitrogen cycles (both standard fertilisers), and started to negatively impact ocean ecosystems and fisheries through eutrophication of poisonous algae, whereas the second was mostly led by the use of pesticides to protect the food we eat and decrease food production loss. Among the thresholds, climate change, ocean acidification and stratospheric ozone depletion are all global in nature. Biosphere integrity, land-system change, freshwater use, biochemical flows, and atmospheric aerosol loading remain regional in nature and solutions must be approached within countries or specific areas of the world.

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Fig. 3.4 Planetary boundaries framework (Source Steffen et al. 2015)

3.7

Current State of the Energy Transition

Given the above picture, it appears how the transition towards sustainability must account for constraints in the ecological sphere and rely on system thinking to be successful. Whereas each of the planetary boundaries might require specific skills and know-how, in this chapter, we focus on just one of the elements that can be considered a fundamental leverage point for the sustainability transition. That is the energy transition towards clean tech and green finance economy. In so doing, in this section, we provide an overview of the state of global green energy. Table 3.3 shows the current energy mix of fossil fuels, renewables and nuclear energy divided between electricity generation, heating and transportation at the global level (REN21 2018). As it is possible to see, the green energy sector is way behind the fossil fuel sector in relation to the issue at stake. The electricity sector accounts for approximately 18% of total energy supply, 23.1% of which is supplied with renewable energy. Today’s renewable electricity is 70% supplied via hydroelectric, that is a mature technology. Wind energy represents 15%, bioenergy 8.4%, solar photovoltaic 5% and geothermal 1.6% of total green energy (IRENA 2018). Most of the hope for green energy transition relies on the exponential growth of solar and wind energy technology to supply the electricity necessary to also sustain the global transportation and heating energy supply.

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Table 3.3 Global energy mix in 2016 Resource\Sector

Electricity (%)

Heating (%)

Transportation (%)

Global fraction of energy mix by source (%)

Fossil fuels Renewables Nuclear Fraction of final consumption by sector

66.30 23.10 10.60 18

72.70 26.20 1.10 53

97 3 – 29

78.60 18.90 2.50 100

As these data show, these two sectors represented 0.8% of the total energy supply in 2016. In fact, 26.2% of total heating energy consumption is represented by renewable energy. However, 90% of this latter comes from the combustion of traditional biomass and of timber in developing and underdeveloped countries (IEA 2017a, b). The sustainable development goals (UN 2019), show that indoor air pollution in low-income countries is the second largest cause of death after HIV due to the inadequate ventilation for cooking and heating. The rest of heating supply from renewables is represented with 2.1% coming from solar finding applications in household heating at low temperatures, 0.5% from geothermal, and 6.1% from modern biomass plants (REN21 2018). The transportation sector is mostly run with oil, and a tiny 3% divided between 2.85% in modern biofuels and 0.15% in electric vehicles (IEA 2017a, b). The transportation sector can be further divided into 76% represented by road vehicles, 12% marine, 11% avionic and 2% rail sector. (REN21 2018). The transportation sector being responsible for approximately one-third of total emissions from energy, it is possible to say that today’s avionic correspond to approximately 3.2%, marine 3.5% and road transport is 22% of carbon emissions from energy. While exponential growth of the global economy appears to be a challenge to economic sustainability, the exponential growth of the green energy sector seems to be a major hope on the way to sustainability. Of course, exponential growth will always find limits, coming both from the social and the environmental sphere, making it an unprecedented challenge to be faced by businesses seeking profit while addressing environmental sustainability.

3.8

Sustainable Development Goals and Growth

The definition of the +2 degrees climate target at COP21, and the update of the Millennium Development Goals to the seventeen Sustainable Development Goals (SDGs) (UN 2019), make the year 2015, an important one for sustainability. The SDGs are a complex set of indicators that, if used correctly, can support the

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transition towards a sustainable economy. The aim of the SDGs is to provide balance in the world society, demanding governments, businesses and citizens to act in synergy toward the best performance of all of them. Ideally, each organization should target the larger number of SDGs simultaneously, since targeting single indicators might result in under-performance on the others. For example, if an organization should decide to target the indicator 8 only (sustainable and inclusive growth and decent jobs), this might result in no impact to sustainability at all. In fact, targeting growth without considering the others would correspond to act in business as usual condition along the way. While, on the other hand, approaching simultaneously indicators 13, 14 and 15 (climate action, life below water and life of land respectively), this would require thinking carefully about the maximum synergy possible between the planetary boundaries framework and economic growth, leading towards a more meaningful use of the indicators.

3.9

What Should a Corporate Do for Running a Sustainable Business Today?

Short-term focused business as usual growth of the past fifty years has gradually created wealth in the global economy, while causing concern for the future generations that must deal with sustainable challenge as a short-term issue today. The way of thinking of the past must be changed to perform well in this challenge, and must be approached in synergy between managers, policymakers and scientists along the way. System thinking and appreciation of complex systems science to approach these problems is a way to change the mindset required to deal with such a set of issues. Pasqualino et al. (2015) has shown that the concern of the Limits to Growth with exponential growth in a finite planet could still hold true today. However, Pasqualino et al. (2015), also showed that the overall economic system has developed better than expected creating more wealth with the services sector rather than just material industrial growth. This is a positive trend of growth, and businesses should aim to outperform on this activity in the future. On the other hand, constraints to the limits to growth mission are also presented as elements that form the foundation of our economic and financial system. These include the debt money system, the use of interest rates as risk assessment metric, the functioning of financial markets and the importance of pension funds in shaping long-term investment towards global sustainability. Productivity growth and technology development in the past fifty years have partially helped in dealing with world limits, and still remain an engine for wealth creation, despite not being sufficient to stop damaging ecosystems to date. While the population grows in the areas of the world that will be most impacted by the negative consequences of approaching global environmental limits, concerns emerge around the areas of food security and mobility of people in the safe areas of the planet. These include the rise of social response with a likely increase in populism and conflicts worldwide.

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The limits of fossil fuels and agriculture have been proposed in light of recent literature, together with the climate problem, and the overall frame of the planetary boundaries report. These show how the challenge ahead is a complex issue, that requires an important synergy between the public and private sectors. The Sustainable Development Goals have been presented as a good complex system tool to approach this transition, and corporate biases to support the correct use of these indicators have been highlighted. In sum, what should a corporate do for running sustainable businesses today? This is a complex question that only the practice of management and collaboration between businesses and government can provide. It is worth noting that if you cannot measure it, you will never be able to improve it. A great challenge of the sustainable transition is that problems are hard to measure, and thus are most difficult to approach with clarity. The SDGs help in this context, even though each organization should develop and create indicators that fit to them, linking, for example, their balance scorecard or accounting metrics with complex system metrics such as planetary boundaries and SDGs. Implementation of practices that support this transition at the micro scale could provide benefits as well, while aligning business objectives with the larger sustainability frameworks as provided in this chapter. Over the long run, continuous development of novel technologies that improve productivity will be an important factor, in particular, when they can generate more jobs throughout the supply chain than the ones they directly substitute. This trend is important for reshaping the entire economic system, in particular, where the exponential growth of the green sector should be supported and incentivized as possible. Alternatives to the standard energy framework might include the decentralized approach of creating local solutions of green energy rather than employing large energy plants. Transportation sector could be improved by giving more emphasis to rail when distance allows, and substituting air travel with video conferencing tools when possible. Food security can be supported with novel technology that aims at improving the match between supply and demand and targeted to the reduction of food waste in the global supply chains. A service economy should take a dominant role, creating value beyond the mere material consumption going forward. Short-term business as usual growth, while creating wealth and eradicating poverty along the way, has also caused concerns for environmental limits. The size of the challenge appears not to be a simple solution to be tackled by the free market alone, and the constant and persistent collaboration between governments and businesses will be an important element for the success of this transition going forward. Solution to Box 3.1 problem The answer is 439.804 km, that is in proximity of the distance between the Earth and the Moon.

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References Bardi, U. (2014). Extracted: How the quest for mineral wealth is plundering the planet. Vermont, US: Chelsea Green Publishing. Capra, F., & Luisi, P. (2016). The systems way of life: An unifying vision. Cambridge, UK: Cambridge University Press. Food and Agriculture Organization (FAO). (2015). The state of food insecurity in the world – meeting the 2015 international hunger targets: Taking stock of uneven progress. Rome, Italy: FAO. International Assessment of Agricultural knowledge, Science and Technology for Development (IAASTD). (2009). Agriculture at the cross road – global report. Washington, DC: IAASTD. International Energy Agency (IEA). (2017a). Statistics – renewables information 2017. Paris: IEA. International Energy Agency (IEA) (2017b). Data and statistics. www.iea.org/data-and-statistics. Accessed Sept 2017. International Renewable Energy Agency (IRENA) (2018). Data and statistics. www.irena.org/ Statistics. Accessed June 2018. IPCC (2014). Climate change 2014: Synthesis report. In R. Pachauri & L. Meyer (eds.), Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. IPCC, Geneva, Switzerland, 151. ISBN: 978-92- 9169- 143- 2. Jackson, T. (2016). Prosperity without growth: Foundations for the economy of tomorrow. Oxford, UK: Routledge. Kummu, M., De Moel, H., Porkka, M., Siebert, S., Varis, O., & Ward, P. J. (2012). Lost food, wasted resources: Global food supply chain losses and their impacts on freshwater, cropland, and fertiliser use. Science of the Total Environment, 438, 477–489. Lloyd’s Report (2015). Food system shock – the insurance impacts of acute disruption to global food supply. Lloyd’s Emerging Risk Report 2015, London. Maxton, G., & Randers, J. (2016). Reinventing prosperity: Managing economic growth to reduce unemployment, inequality and climate change. Vancouver, Canada: Greystone Books. Meadows, D. H., Meadows, D. L., & Randers, J. (1992). Beyond the limits: global collapse or a sustainable future. London, UK: Earthscan Publications Ltd. Meadows, D. H., Meadows, D. L., & Randers, J. (2003). The limits to growth: The 30-year update. Oxford, UK: Routledge. Meadows, D. H., Meadows, D. L., Randers, J., & Behrens, J. (1972). The limits to growth. New York, NY, USA: Universe Books. NASA (2019). Data on carbon dioxide and temperature anomaly. https://climate.nasa.gov/vitalsigns/carbon-dioxide/. Accessed June 2019. Nordhaus, W. D. (1973). World dynamics: Measurement without data. The Economic Journal, 83(332), 1156–1183. Pasqualino, R., & Jones, A. (2020). Resources, financial risk and the dynamics of growth – systems and global society. Oxford, UK: Routledge. Pasqualino, R., Jones, A., Monasterolo, I., & Phillips, A. (2015). Understanding global systems today – a calibration of the world3–03 model between 1995 and 2012. Sustainability, 7(8), 9864–9889. REN21 (2018). Renewables 2018 global status report. UNEP, Paris, France. Schwab, K. (2017). The fourth industrial revolution. Currency Penguin, UK: Currency. Silver, N. (2017). Finance, society and sustainability: How to make the financial system work for the economy, people and planet. Berlin, Germany: Springer. Smith A. (1776). An inquiry into the nature and causes of the wealth of nations. In S. M. Soares (Ed.), Metalibri Digital Library. https://www.ibiblio.org/ml/libri/s/SmithA_WealthNations_p. pdf. Steffen, W., Richardson, K., Rockström, J., Cornell, S. E., Fetzer, I., Bennett, E. M., et al. (2015). Planetary boundaries: Guiding human development on a changing planet. Science, 347(6223), 1259855.

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Steffen, W., Rockström, J., Richardson, K., Lenton, T. M., Folke, C., Liverman, D., et al. (2018). Trajectories of the earth system in the anthropocene. Proceedings of the National Academy of Sciences, 115(33), 8252–8259. Stern, N. (2006). Stern review on the economics of climate change, 2006. London: Government of the United Kingdom. United Nations Population Division Report. United Nations, department of economic and social affairs. http://esa.un.org/unpd/wpp/unpp/panel_population.htm. Accessed May 2018. United Nations. (2019). The sustainable development goals report 2019. Geneva, Switzerland: United Nations. Wijkman, A., & Rockström, J. (2013). Bankrupting nature: Denying our planetary boundaries. Oxford, UK: Routledge.

Roberto Pasqualino is Visiting Researcher of the Global Sustainability Institute at Anglia Ruskin University, UK and Chief Innovation Officer of Exoshock Ltd, a global risk analysis company based on Roberto’s research. With background and culture in industrial engineering, Roberto’s research interest is in system dynamics modelling of industrial policies for the analysis of financial risk and sustainability. Roberto developed his own Economic Risk Resources and Environment system model to quantitatively capture the financial risks emerging from the interaction between the dynamics of growth and global ecological constraints during his Research Fellowship, under the Economic and Social Research Council CUSP project. This allowed him to create his own company Exoshock Ltd to help businesses to deal with those environmental and economic shocks that have the potential to disrupt their markets in a complex world thus reducing future risks. Roberto is one of the maximum experts on the Limits to Growth in the UK and author of the book “Resources, Financial Risk and Dynamics of Growth—Systems and Global Society, Routledge Oxford” co-authored with Professor Aled Jones. Roberto’s expertise encompasses sustainable supply chain management, business practices, risk assessment, circular economy, energy transitions, climate change, food security, behavioural and evolutionary economics, and strategy. ods adopted include system dynamics, econometrics, game theory, complex networks, statistics, and simulation techniques in general. Roberto has been teaching university lectures at BSc, MSc and MBA levels since 2013.

Part II

The Business Case for Corporate Sustainability

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A Modern Definition of Corporate Sustainability Paolo Taticchi and Melissa Demartini

Abstract

In the last 70 years, the topic of sustainability in business has been defined in many different ways. This chapter provides a review of the relevant concepts and frameworks, with the goal of describing the building blocks of ‘modern’ corporate sustainability and providing a comprehensive definition. Keywords













CSR Triple bottom line Creating shared value Purpose Modern corporate Sustainable value

4.1




Introduction

The role business could and should play in society and how firms could and should contribute to a ‘sustainable development’ has been debated for decades. As a consequence, the definition of sustainability and managerial practices associated P. Taticchi (&) UCL School of Management, University College London, Level 38 One Canada Square, Canary Wharf, London E14 5AA, UK e-mail: [email protected] M. Demartini Adjunct Professor of Operations Management and Sustainability, University of Genoa, Via all’Opera Pia 15, 16145 Genoa, Italy e-mail: [email protected] SDU Centre for Sustainable Supply Chain Engineering, Dept. of Technology and Innovation, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_4

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with it have shifted over the years. In order to provide an overview of ‘modern’ Corporate Sustainability, this chapter summarises the evolution of the relevant literature and practice in the twentieth and twenty-first centuries. To do so, three key periods are identified and discussed in the following paragraphs: – 1950–1990, which identifies the rise of Corporate Social Responsibility (CSR) – 1990–2005, which identifies a remarkable evolution of CSR and the rise of the Triple Bottom Line (TBL concept) – 2005–2020, which characterises the emerging of Modern Corporate Sustainability as a result of a number of new concepts becoming popular such as ESG (Environmental, Social and Governance ) in the financial world, Shared-Value (to re-think business models and capitalism) and Purpose (to remark the important role played by business in society). Based on the above, the concept of ‘sustainable value’ is debated and an updated definition of Corporate Sustainability provided at the end.

4.1.1 The Rise of Corporate Social Responsibility (1950–1990) At the time when large corporations were emerging in the US, the concept of Corporate Social Responsibility (CSR) was forged in 1953 by American economist Howard Bowen in his publication ‘Social Responsibilities of the Businessman’. In his book, Bowen remarks the importance of a fundamental morality in the way a company behaves towards society and the relevance of ethical behaviour towards stakeholders. Moreover, he highlights the importance for business executives and academics to consider CSR as a subject part of strategic planning and managerial decision-making. However, it wasn’t until the 1970s that CSR truly became widespread. This development was favoured by economist and Nobel Prize winner Milton Friedman, who is famous for his ‘Social Responsibility of Business’ theory elaborated in 1970. This theory is one of the most debated still today. Friedman argues that ‘In a free-enterprise, private-property-system, a corporate executive is an employee of the owners of the business and as such has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom’. Friedman claims that companies should not have social responsibilities per se and if individual managers follow the principle of social responsibility then, by following this principle the company does not have the interest of stockholders at heart. For example, if a manager decides not to increase product prices for the good of society (i.e. not increase inflation), this could have a negative impact on the company’s profits and employee wealth. Or a company that works towards reducing pollution beyond what is necessary for the corporation, is not

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acting in the interest of stockholders, as this could have an impact on costs and productivity. Friedman asserts that in these cases, corporate executives are spending someone else’s money for a societal interest, in fact these actions have a negative impact on stockholders. Stockholders should decide by themselves how to spend their money. Friedman’s view, which was built on the principles of popular Agency Theory (Eisenhardt 1989), was reflecting a view of business and society which is today outdated. In fact, it mainly relied on the assumption that – Stockholders are the most important stakeholder of a business; – Environmental and social problems should be addressed only/mainly by Governments; – Business should play a limited role in society.

4.1.2 Corporate Social Responsibility in the 1990s and the Triple Bottom Line Concept As a general statement, it should be observed that very few unique contributions to the definition of CSR occurred in the 1990s, but in spite of that, the topic received great attention in this decade due to a number of corporate scandals that raised the attention of business practices, such as the one faced by NIKE in 1996. Carroll in 1979 developed a popular CSR model which is based on four categories of business performance: economic, legal, ethical and discretionary. Carroll argues that economic responsibility is first and foremost, as companies have the responsibility to produce goods and create profits. Legal responsibility relies on the concept that companies have to create profits by fulfilling society rules. While ethical responsibility represents additional behaviours that are not necessarily codified into law but that companies are supposed to fulfil. Finally, discretionary responsibilities ‘are those about which society has no clear-cut message for business […] they are left to individual judgment and choice’ (Carroll 1979). In 1991, Carroll reviewed his CSR model, adjusting the definition of the discretionary element as ‘philanthropic’ and suggesting that it embraced ‘corporate citizenship’. Therefore, the model became composed of these responsibilities: economic, legal, ethical and philanthropic (Fig. 4.1). Caroll’s work has made an impact in this field as firms in different industries in the 1990s started engaging with philanthropic activities and CSR initiatives with the goal of being recognised as ‘good corporate citizens’. Firms and a variety of industry stakeholders also started valuing the importance of ethical approaches in business and the positive role firms can play. However, very often, the driver of this commitment was the desire to improve the reputation of the business (hence no surprise that this approach led to many scandals and cases of greenwashing), and not the real objective of minimising the negative impacts of business activities on society and/or the environment. The main limitations of Caroll’s CSR framework can be today identified as

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Fig. 4.1 Caroll’s CSR pyramid (Source Carroll 1979)

– The logic of ‘giving back’ is not enough. For large corporations that are highly profitable, it is relatively easy to engage in philanthropic actions (e.g. by supporting social and/or environmental projects with a percentage of revenue or profit). While this type of CSR creates a positive impact on the environment/society, it doesn’t help organisations to change their mindset and to re-think their business strategies and value creation processes. This explains why, still today, many firms look at CSR/sustainability as ‘another cost’ of doing business or a ‘another tax’. The framework is not explicit in that the CSR initiatives developed by corporations should be fully aligned with their business strategies. As a result of this, many corporations engaged for years with CSR projects that were small scale, focused on specific activities and often disconnected from the strategy of the business. In 1994, the concept of ‘triple bottom line’ (TBL) coined by John Elkington started changing the narrative on CSR. In fact, at the core of his thinking was the idea that ‘A sustainable development involves the simultaneous pursuit of economic prosperity, environmental quality, and social equity’ (Elkington 1998). The triple bottom line approach argues that a company has to take simultaneous account of profit, planet and people which represent the economic, environmental and social dimensions of responsibility. Only, if a company truly manages all these dimensions of performance can it be considered sustainable. First and foremost, profit is the precondition for a healthy company and, therefore, an enabler of the positive impact a business can have on society and the environment. Secondly, the social dimension of the TBL covers the health and safety of customers, the well-being of employees and the protection of society at large. Finally, the third dimension of

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TBL, the environment, is related to the protection of the planet. The planet is host to both people and companies. If companies do not learn to focus their attention more on the planet and prevent the pollution of the environment, they will damage not merely the earth, but also themselves. The environmental dimension of TBL addresses not only the problem of pollution, but additionally the consumption of materials, limited natural resources and energy. The TBL framework undoubtedly represents the foundation of what we describe as ‘Modern Corporate in this chapter. In fact, Elkington’s work made a dent in the business world, changing the narrative on sustainability, emphasising the importance of long-term economic, environmental and societal goals rather than a short-term view of business. Moreover, the TBL framework created an important stimulus for the practice of sustainability reporting that started emerging in those years (Fig. 4.2). However, the TBL received criticism too, the main limitation being that the three dimensions are very broadly defined, hard to measure and perceived as disconnected dimensions of performance rather than the result of an integrated approach. Moreover, the TBL framework wasn’t clearly connecting or disconnecting from the CSR theories previously developed, therefore, creating confusion in terms of positioning and taxonomy.

4.1.3 The Building Blocks of Corporate Sustainability What we define in this book as ‘modern’ Corporate Sustainability is the result of a number of concepts/practices that have emerged since the early 2000s and dominate the latest thinking today. In particular, we refer to three concepts: the ‘ESG’ (Environmental, Social and Governance) concept, largely popular in the financial world; the ‘Shared-Value’ concept proposed by Porter and Kramer and the concept of ‘Purpose’ lately promoted by several leaders in business and society. Fig. 4.2 Elkington’s triple bottom line framework

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4.1.3.1 Environmental, Social and Governance (ESG) The concept of ESG refers to the integration of environmental, social and governance factors into investment processes and more widely into decision-making. This might include how corporations respond to climate change, how efficient they are with water management, how effective their health and safety policies are in the protection against accidents, how they manage their supply chains, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation (Kell 2018). The ESG concept was heavily promoted by the late UN secretary general Kofi Annan, who pushed environmental, social and governance issues to the forefront of the investment industry with the publication of the UN study ‘Who Cares Wins’ (Brigandi et al. 2018) back in 2004 and, soon after, the launch of the UN Principles for Responsible Investment (PRI). The PRI is today, the world’s leading proponent of responsible investment, with over 2000 members representing over $80 trillion assets under management (Fig. 4.3). The ESG framework and the PRI movement has transformed the world of finance. Today, more and more evidence indicates that asset owners who integrate ESG considerations into investment decisions, not only promote environmental protection, healthier societies and good governance, but have a positive and recognisable impact on their beneficiaries’ bottom lines too (Brigandi et al. 2018). Indeed, the popularity of the ESG framework is built on the Socially Responsible Investment (SRI) movement that has been around much longer. But unlike SRI, which is based on ethical and moral criteria and uses mostly negative screens, such as not investing in alcohol, tobacco or firearms, ESG investing is based on the assumption that ESG factors have financial relevance and, therefore, should be integrated in all investment decisions, used in the design of strategies and a quality criterion to assess the management of a company.

Fig. 4.3 PRI signatory growth (Source PRI)

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The growth of ESG has resulted in the creation of specific ESG rating indexes such as the Dow Jones Sustainability Index, the FTSE4Good Index, Bloomberg ESG data, the MSCI ESG Indices and the GRESB benchmarks. All this has pushed corporations to integrate sustainability and ESG factors into their decision-making processes, business strategies and business models.

4.1.3.2 The Concept of Creating Shared Value Still in the 2000s, the concept of ‘Creating Shared Value’ (CSV) introduced by Porter and Kramer (Porter and Kramer 2006, 2011) gained credibility, legitimacy and momentum as a new way of doing business. The two academics argue that companies should look at sustainability based on the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. (Porter and Kramer 2011). Shared value is not social responsibility, philanthropy or even TBL sustainability, but a new way to achieve economic success by reconnecting business to social progress. Hence, the difference with CSR is clear: while CSR initiatives focus mainly on ‘giving back’ to society and reputation, CSV pushes organisations to re-think managerial practices and business models so as to create a competitive advantage and ultimately profitability. CSR is usually felt as a cost, not as a value, while, CSV lies at the core of new business opportunities (e.g. establishing new markets, improving profitability, increasing brand reputation and enhancing competitive positioning). With the concept of CSV, sustainability is fully integrated into business strategy as companies aim to create economic value by creating social value. Moreover, Porter and Kramer (2011) also argue that capitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs and building wealth, but a narrow conception of capitalism has prevented business from harnessing its full potential to meet society’s broader challenges. 4.1.3.3 A Sense of Purpose in Business The need for purpose is one of the defining characteristics of human beings and today there is a movement towards employees seeking a job that gives them a sense of purpose and customers looking to buy from companies whose brands are based on values they can identify with. Whether viewed from the employee or consumer perspective, purpose has become a powerful force giving companies a competitive advantage (Castrillon 2019): – Purpose attracts, motivates and retains employees; – Purpose-led brands have the potential to forge stronger customer relationships which translates into more sales and greater customer loyalty; – Purpose-led companies have a superior financial performance. Indeed, in the last five years, a sense of urgent purpose related to sustainability has emerged both in companies and people. In this context, a particular loud voice is the one of millennials (or Generation Y—which identifies people born approximately between the years 1981–1996) often referred to by the media as the

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‘purpose generation’. A recent survey by Deloitte highlights that 63 % of millennial workers believe that the primary purpose of businesses should be improving society as opposed to generating profit (Lazarus 2018). Regarding the context of business leaders, a note of reference should be made to the letter sent to Global CEOs by Larry Fink, CEO of BlackRock in 2018. In this letter, Fink remarks that companies should focus on making a positive contribution to society as well as on generating financial profitability: ‘to benefit all stakeholders, which includes shareholders, employees, clients and the communities in which the company operates’. Among other issues, he maintains that they should be working on a new corporate governance model based on interaction between the company and its stakeholders and, specifically, between shareholders and investors. A model in which company directors focus on the long term rather than just the quick wins, without losing their focus on social ends. On this issue, Fink reflects on the role of BlackRock and, in general, on that of investors to move this conversation forward and prevent governance bodies from returning to the short-term approach; he offers to help companies re-think their role in society and to build a long-term vision.

4.1.4 Defining Sustainable Value and ‘Modern’ Corporate Sustainability As highlighted in 4.1.3, our ‘modern’ understanding of ‘Corporate Sustainability’ is the result of the diffusion and acceptance of a number of principles that describe sustainability in business and the role played by companies in society. Indeed, the need for a better definition of ‘value’ in the modern world is becoming increasingly critical (Freeman et al. 2018). Today, attention has turned towards sustainable value creation, or co-creation with stakeholders over a longer period of time (Chandler 2016). In a recent literature review, Cardoni et al. (2020) identify the most popular definitions of ‘sustainable value’. The one from Hart and Milstein (2003) stands out in the list: ‘The global challenge associated with sustainable development, viewed through the appropriate set of business lenses, can help to identify strategies and practices that contribute to a more sustainable world while simultaneously driving shareholder value: this we define as the creation of sustainable value for the firm’. Also, relevant is the work of Bocken et al. (2014) who developed a popular framework to link the topic of sustainable value creation to business models and proposed the so-called ‘‘value mapping tool’’, which aims at supporting companies in the exercise of creating sustainable value. Building on the latest thinking of corporate sustainability, and the emerging literature on sustainable value creation, we propose, therefore, the following definition of Corporate Sustainability.

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Corporate Sustainability

Corporate sustainability is an integral approach to business aimed at enhancing competitive positioning and profitability through the sustained creation of shared value, co-creation practices with stakeholders and the integration of ESG factors in decision-making. © Taticchi and Demartini (2020).

4.2

Conclusions

This chapter has provided a review of the relevant sustainability concepts and frameworks developed in the last 70 years, with the goal of describing the building blocks of ‘modern’ corporate sustainability and providing a comprehensive definition. Indeed, a clear understanding of Corporate Sustainability is essential to discuss practice and the integration into business strategy.

References Bocken, N. M., Short, S. W., Rana, P., & Evans, S. (2014). A literature and practice review to develop sustainable business model archetypes. Journal of Cleaner Production, 65, 42–56. Brigandi, T., McCaffery, P., & Kovarsky, P. (2018). Who cares (about ESG) wins. Retrieved April 17, 2020, from https://fncs.fnlondon.com/cfa-institute/who-cares-about-esg-wins/. Cardoni, A., Kiseleva, E., & Taticchi, P. (2020). In search of sustainable value: A structured literature review. Sustainability, 12(2), 615. https://doi.org/10.3390/su12020615. Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. Academy of Management Review, 4(4), 497–505. Castrillon, C. (2019). Why purpose is the new competitive advantage. Forbes. Retrieved April 17, 2020, from https://www.forbes.com/sites/carolinecastrillon/2019/04/28/why-purpose-is-thenew-competitive-advantage/#4c27c027711f. Chandler, D. (2016). Strategic corporate social responsibility: Sustainable value creation (4th ed.). Los Angeles, CA, USA: Sage. ISBN 978-1-5063-1099-2. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57–74. Elkington, J. (1998). Partnerships from cannibals with forks: The triple bottom line of 21st-century business. Environmental Quality Management, 8(1), 37–51. Freeman, R. E., Phillips, R., & Sisodia, R. (2018). Tensions in stakeholder theory. Business and Society, 59(2), 213–231. Hart, S. L., & Milstein, M. B. (2003). Creating sustainable value. Academy of Management Perspectives, 17(2), 56–67. Kell, G. (2018). The remarkable rise of ESG. Forbes. Retrieved April 17, 2020, from https://www. forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/#608db4241695.

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Lazarus, S. (2018). Deloitte’s 2018 Millennial survey: Industry 4.0, employer loyalty and business ethics. Deloitte. Retrieved April 17, 2020, from https://spendmatters.com/2018/07/16/deloittes2018-millennial-survey-industry-4-0-employer-loyalty-and-business-ethics/. Porter, M. E., & Kramer, M. R. (2006). The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12), 78–92. Porter, M. E., & Kramer, E. J. (2011). Creating shared value. Harvard Business Review, 89(1/2), 62–77.

Paolo Taticchi (Editor and Author) is Professor (Education) in Strategy and Sustainability & Deputy Director (MBA and International at UCL School of Management. He teaches modules on sustainability and competitive advantage, strategy, consulting, and the future of cities. Before UCL, Paolo spent six years at Imperial College London where he led top-ranked programmes such as the MScManagement and the Global Online MBA. Alongside his work at UCL, Paolo is regularly invited to teach on international MBA and EMBA programs in Europe, Africa, Asia, and the Americas. In the recent years he has visited and hold teaching appointments in top universities like EADA, ESAN, and NYU. Paolo’s research on performance measurement and management, business networks, and corporate sustainability is internationally recognised. He has authored over 50 published academic journal articles, and edited and co-authored three books. Outside of the academy, Paolo has significant consultancy experience in the fields of strategy, operations, and sustainability and today he serves in the advisory board of influential organisations in the UK, US, Canada, Italy and India. Paolo is also active in the entrepreneurial space, co-founding three firms in the fields of engineering and consultancy. His projects, quotes and opinions have been featured over 200 times in media outlets like The Financial Times, Forbes, The Telegraph, Semana Sostenible, La Republica, Inspire, Sole 24 Ore, La Nazione, Corriere della Sera, La Stampa, RAI, Sky News, Sky News Radio, Mediaset, and CNN. In 2018, Paolo was chosen as one of Poets & Quants’ top 40 business school professors under the age of 40. In the same year, Paolo received the title of Knight of the Order of Merit of the Italian Republic. In 2019, Paolo received the “Talented Young Italian Award” from the Italian Chamber of Commerce and Industry in the UK. Melissa Demartini is an Adjunct Professor of Operations Management and Sustainability at the University of Genoa and Visiting researcher at Imperial College Business School. Her research interests are mainly in the areas of corporate sustainability, operations management and modelling. She has co-authored nearly 20 papers published in international indexed journals. She currently teaches undergraduate, graduate and MBA students, with teaching activity covering general management, operations management and sustainability. So far, she has taught in universities in Italy and the UK. She has worked as a project manager for the EU’s Advanced Manufacturing in Central Europe (AMiCE) project since 2017. She is also industrial sustainability coordinator for the Intelligent Factory Cluster’s Roadmap Project—an Italian government initiative which aims to develop a national strategy to improve the international competitiveness of manufacturing companies. Outside of the academy, Melissa has significant consultancy experience, she is a consultant for Ansaldo Energia’s ‘Lighthouse Plant’ project. She has also worked as a consultant for Siemens, gaining experience in strategy, operations, internationalisation and business planning.

5

Sustainability Facts Melissa Demartini and Paolo Taticchi

Abstract

This chapter provides a picture of sustainability in business today by sharing the latest trends and facts. Three of the most recent surveys are analysed and critically discussed in order to understand the reason why companies engage with sustainability and the key sustainability challenges in different industries. Keywords

Sustainability facts

5.1


Sustainability challenges
Engagement challenges

Introduction

This chapter provides insights into the world of sustainable business and aims to identify common perceptions and practices of corporate sustainability professionals. As recently reported in large surveys, realized by Globescan in collaboration with BSR in 2018 and 2019 (Gitman and Morris 2018; GlobeScan and BSR 2019)

M. Demartini (&) Adjunct Professor of Operations Management and Sustainability, University of Genoa, Via all’Opera Pia 15, 16145 Genoa, Italy e-mail: [email protected]; [email protected] SDU Centre for Sustainable Supply Chain Engineering, Dept. of Technology and Innovation, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark P. Taticchi London, UK e-mail: [email protected] UCL School of Management, University College London, Level 38 One Canada Square, Canary Wharf, London E14 5AA, UK © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_5

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or The United Nations Global Compact—Accenture Strategy CEO Study on Sustainability 2019 (Kingo and Lacy 2019) or the Sustainability’s deepening imprint 2017—McKinsey & Company (Bové et al. 2017), the challenge for companies lies in their ability to capture opportunities and transform them into value for their shareholders and stakeholders. The following is an overview of the main facts which describe how and why companies today are engaging with sustainability.

5.2

The State of Sustainable Business 2018, 2019—Globescan

The State of Sustainable Business survey was developed by Globescan in 2018 and 2019, they present insight into the world of corporate sustainability and provide different points of view from sustainability professionals by including observations of the changes in the social landscape. The survey included participants from different companies, they were fully carried out online, with data gathered between March and May 2018 and between June and September 2019. Different sectors and regions have been considered: (i) sectors, companies are in the field of Consumer Products, Retail, Information and Communications Technology (ICT), Healthcare, Energy and Extractives, Transport and Logistics, Food, Beverage, and Agriculture, Financial Services, Professional Services, Media and Entertainment, Heavy Manufacturing, Power and Utilities, Infrastructure, and Travel and Tourism; (ii) regions, the majority of companies belong to North America and Europe; (iii) interviewees’ profiles are classified as “Vice president”, “Director”, “Manager or below”, and Others. The survey key findings are summarized as follows: 1. Companies are working towards a new sustainability agenda: • Corporate integrity, diversity and inclusion are considered top priorities for corporate. This reflects political, technological, and social transformations. • Climate change and human rights persist as top priority issues. • Priority issues are mainly led by risk management rather than value creation. 2. The importance of integrating sustainability into the business strategy: sustainability professionals highlighted the importance and the necessity to work towards organizational integration and introduce new approaches to strategy and governance. More than half of companies say that sustainability is among the top five priorities for their CEO, with a quarter reporting that it is among the top three priorities. 3. The frontrunner role of Sustainable Development Goals (SDGs), which are driving companies in redesigning their strategies and goals. 4. Companies still have a limited view of the value chain impact. However, across a range of areas including human rights, climate, inclusive growth, and women’s

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Fig. 5.1 Corporate sustainability priorities (Source Globescan The State of Sustainable Business 2019)

5. 6.

2.

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empowerment, company efforts have intensified within their own operations and to some extent in their Tier 1 supply chain. Sustainability, due to its nature, demands cross-functional collaboration. Need to improve sustainability communications to consumers. Figure 5.1 highlights the main priorities which are fuelling the strive towards sustainability on behalf of companies. Particular emphasis is placed on three of these: Climate change. With public demands for climate action at an all-time high, and with the scope and speed with which transformation must happen, it is crucial that companies, when building their corporate sustainability strategy, place climate mitigation at the forefront (as highlighted in Chap. 1). Ethics. Ethical principles serve as the basis for modern concepts for work, business, and organizations pushing the priorities of both the individual and the corporate beyond more traditional aims of profit and shareholder enrichment. The key to good business is sustainable and inclusive growth. Companies which align their business growth strategies to their ethics are a step ahead in future-proofing their business. Diversity and Inclusion. Companies have realized that there is more to diversity and inclusion (D&I) than just a “feel good” factor, though most still have a long way to go to achieve their goals. Employees are becoming more vocal and they are, to a greater extent, challenging their employers when it comes to diversity issues. For investors, diversity is a signal of a company’s potential for long-term success. It demonstrates their ability to attract the best talent, be more innovative and competitive, and use their influence to push with determination for gender and racial/ethnic diversity. D&I has never been in the limelight within the workplace in the way it is today. The most successful strategies are sustainable:

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Fig. 5.2 Most important actions to address global mega trends (Source Globescan The State of Sustainable Business 2018)

they are supported by the entire organization, measurable overtime, and embedded into existing processes. Harmonizing sustainability and business means redesigning and redefining strategy and operative processes to deal with the changes and meet the needs and expectations of both the market and society. The ultimate goal being that of increasing competitiveness and supporting lasting profitability. Today, more than ever, it is necessary to integrate sustainability into business practices in order to futureproof business (Fig. 5.2). Organizations are becoming ever more aware of the need to plan for and address global megatrends (Chap. 1)—drivers which can radically change how they operate in the future. It is imperative for businesses to go beyond their own challenges and take into account wider global pressures that are changing the way the world works. Another key finding from the survey realized by Globescan (Fig. 5.3), is that companies are pushed to engage with sustainability mainly for three reasons: • Reputational risk: this type of risk is often considered as a result of other risks, however, in the last few years this concept has evolved, highlighting the relevance of reputation and, more in general, of intangible value. These activities, such as reputation, trust, and goodwill, need to be managed in order to create value, but the evidence is that their management is more complicated than physical management. Therefore, today, the value of a company is strictly connected to the value of its intangible assets. In the last few years, there were many cases of losses related to reputation because of the power of social media and the internet, such news can go viral and reach global proportions in minutes.

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Fig. 5.3 Drivers of Sustainability efforts (Source Globescan The State of Sustainable Business 2019)

Examples of recent cases include: (1) Uber that in 2018, was hit by huge reputational damage due to claims of sexual harassment resulting in a $1.9 million settlement. (2) Wells Fargo that in 2016, created fake customer accounts to modify mortgages without customer authorization and charged customers for insurance they didn’t need. (3) The Cambridge Analytica scandal in 2018, involving Facebook, which caused the violation of privacy of 87 million Facebook users and the unethical use of data to influence political elections in several countries. Reputational risk is the result of different malpractices directly linked to the topics of ethics, integrity, and sustainability. This explains why companies and investors are paying greater attention to Environmental, Sustainable, and Governance (ESG) factors. Companies with a strong ESG performance are less risky to invest in and subject to less reputational risks and scandals that could affect financial performance. • Customer demand: the demand for more sustainable products and services is a clear trend in recent years. Companies are subject to the pressure of customers, among other stakeholders. In this regard, the millennial generation has demonstrated great interest in environmental and societal problems, pushing many businesses around the world to address the challenge of corporate sustainability in a serious and meaningful way. This had led companies to rethink their products and services, and very often the entire business model, up to the point that now “Sustainability Oriented Innovation (SOI) (Jay at al. 2015), is identified as a clear trend in scientific literature. Philips has developed a sustainable business model based on the principle of circular economy, in which product materials are kept in play for as long as productively possible, then recovered, and reused at the end of life. Dell adopts alternative, recycled and recyclable materials in its product and packaging design,

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improvements in energy efficiency, and design for end-of-life and recyclability. Rolls-Royce has moved from a traditional business model to a sustainable one which is based on offering a service package whereby customers pay by the hour according to the amount of time an airplane’s engine is used. • Investor interest: in the last few years, investors are pursuing strategies that are based on ESG factors. According to Bloomberg, in 2017, assets management towards sustainability has been increased by 37%. Companies start to understand the fact that integrating sustainability into their business strategies can provide a competitive advantage in operational performance, stock price, and costs. This topic will be deeply analysed in Chaps. 6 and 7. • Operational risks: as highlighted in Chap. 1, environmental and social problems can lead to the disruption of operations and supply chain activities. Accordingly, companies who invest in sustainability and improve their operations from an ESG perspective, become more resilient, and therefore, less risky. What has been emerging is that companies mainly work towards sustainability due to risk purposes. However, they should also put more effort into the creation of dynamic synergies between internal functions and stakeholders, and external stakeholders and the whole supply chain. This greater focus on risks is because many economic and business risks are strictly related to environmental and social issues. This is clearly related to reputation, but innovation capability related to the design and manufacture of new products and services including legislative changes have resulted as equally important. Additionally, companies need to understand that sustainability is not only a vehicle to reduce risks but also a means to generate new forms of value and competitive advantage. Figures 5.4 and 5.5 show the importance of integrating sustainability into the core functions. It is interesting to note that if we look at the first top 5 positions, the two surveys agree with two main functions: strategic planning and operations. Additionally, the role of supply chain management is particularly relevant (ranked first in the Globescan survey 2018), this will be discussed in detail in Chap. 12. Figure 5.6 presents which functions display a high level of engagement in sustainability issues: • Communications; • Supply chain procurement; • Public affairs. Communications Transparency is a requirement for good corporate governance and should represent the dominant quality of all the firm’s activities. In external relationships, transparency should find expression in communication processes. For a long time, corporate governance has aimed at satisfying shareholder expectations concerning profit maximization, sometimes with differences among sub-categories of

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Fig. 5.4 Function that needs to work closest with sustainability to make substantial progress (Source Globescan The State of Sustainable Business 2018)

Fig. 5.5 Function that needs to work closest with sustainability to make substantial progress (Source McKinsey & Company Sustainability’s deepening imprint 2017)

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Fig. 5.6 Perceptions of functions engagement with sustainability (Source Globescan The State of Sustainable Business 2018)

stockholders according to their importance. In this regard, the financial communication consisting of the financial statements, and if necessary, the consolidated ones used to be considered essential. In the last quarter of the twentieth century, firms started to recognize the value of interacting with all major stakeholders. Since then, they have adopted a broader concept of responsibility, which stresses the strong interdependencies among economic, social, and environmental goals. Such a change has taken place slowly and differently in diverse countries and firms and it has involved modifications in the governance approach. Moreover, it has also emphasized the importance of corporate communication and it has promoted the most adequate contents and ways of dissemination to meet stakeholders’ needs for information and evaluation (Fig. 5.7). To this purpose, the firm’s communication—traditionally based on the financial disclosure—has been enriched over the years, in order to improve transparency on corporate governance by means of new types of documents, such as the corporate governance statement, the directors and chief officers’ remuneration report, the social report, the environmental report, the sustainability report, and the report on intangible assets. Furthermore, the information contained in these documents has become more and more detailed, and sometimes abounding and overlapping. The increase of information required for a more transparent governance has been accompanied by new methods for content dissemination, connected to the use of more and more appropriate tools to facilitate both the access to the information and the timeliness of it. ICT development has made communication more effective, thanks to the reduction of costs and time for preparing and disseminating information; moreover, ICT has knocked down space barriers, accelerating the fulfilment of information symmetry and international uniformity. The transformations in the

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Fig. 5.7 Effectiveness of communicating Sustainability to customers (Source Globescan The State of Sustainable Business 2019)

socioeconomic background during this century (progressive diffusion of ICT, globalization, social inequality, climate change, corruption, etc.) have inspired an increasing interest in an advanced concept of sustainable development as a guiding condition for all the players operating in the economic system. Global markets call for new and complex processes of corporate governance, aimed at a generalized recovery of effectiveness in relation to the growing dynamism and the progressively rising complexity of the firm-environment relationships. In this regard, sustainable development is a prominent issue, whose implementation involves a proper orientation of governance policies, the sharing of ethical principles and values within the corporate network and the adoption of effective processes of corporate communication. Active participation in a more efficient, environment-oriented, and competitive economy determines huge modifications in the complexity of the relations between the firm and its significant stakeholders. Meanwhile, the diffusion of knowledge stresses the possibility for the latter to be informed and to carry out comparisons. Nowadays, successful firms are expected to adopt, maintain, and strengthen governance systems that should comply with the international best practices to manage the complexity of the business and the major conditions for sustainable development (Perrini and Vurro 2014). In this sense, the effectiveness of governance is mainly influenced by the adoption of policies that aim to emphasize the principles of global responsibility, positive and equitable interaction with the stakeholders, and environmental protection. Supply chain procurement

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Sustainable Supply Chain can be described as complex network systems that involve diverse entities that manage the products from suppliers to customers and their associated returns, accounting for social, environmental, and economic impacts (Barbosa-Póvoa 2014). The engagement of such systems has recently gained noticeable importance, as companies face the challenge of dealing with sustainability issues caused by society’s growing awareness towards environmental and social problems. In recent years, a rising number of multinational corporations have pledged to work only with suppliers that adhere to social and environmental standards. Typically, these companies expect their first-tier suppliers to comply with those standards, and they ask that those suppliers, in turn, ask for compliance from their suppliers—who ideally ask the same from their suppliers. And so on. The aim is to create a cascade of sustainable practices that flow smoothly throughout the supply chain; however, it’s been hard to realize in practice. Consider the embarrassing scrutiny that Apple, Dell, and HP endured not long ago for sourcing electronics from overseas companies that required employees to work in hazardous conditions, and the fallout that Nike and Adidas suffered for using suppliers that were dumping toxins into rivers in China. All those scandals involved first-tier suppliers, what’s more, the practices of lower-tier suppliers are almost always worse, increasing companies’ exposure to serious financial, social, and environmental risks. Public affairs As previously stated, companies face growing external pressures to address an array of environmental issues from their greenhouse gas emissions and energy use to their impact on the water supply. NGOs, the media, civil society and increasingly shareholders demand transparency and commitments, which are often communicated as part of a company’s overall public relations program. The uncertain legislative and regulatory environment, however, suggests the opportunity for closer integration of sustainability programs with a corporation’s public affairs activities. Corporate public affairs teams have long been engaged in helping companies fend off legislation or regulation they deem both anti-business or anti-competitive. But the sustainability movement offers an opportunity for some proactive repositioning. Given that corporate sustainability programs are usually voluntary efforts taken on behalf of the company to serve community interest, public relations, and financial goals, these programs can be a valuable tool in the public affairs toolkit. Companies that engage constructively in policymaking with regard to environmental management and energy efficiency issues stand to enhance their reputation among lawmakers and decision-makers. Finally, Fig. 5.8, depicts the evolution in the corporate adoption of SDGs. The SDGs explicitly call on all businesses to apply their creativity and innovation to solve sustainable development challenges. Figure 5.8 represents an increasing trend in the number of companies using or intending to use SDGs. According to this survey—this is also confirmed by the Accenture survey—the top SDGs used by companies are 58% Goal 13—climate action, 53% Goal 8—decent work and

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Fig. 5.8 Corporate adoption of SDGs (Source Globescan The State of Sustainable Business 2019)

economic growth, 49% Goal 12—responsible production and consumption, 47% Goal 5—gender equality, and 45% Goal 3—good health and well-being. Given the interconnectedness of the SDGs (as highlighted in Chap. 2), these actions have the potential to impact multiple Goals. For instance, if a company chose to impose a living wage throughout its supply chain, this would directly aid the attainment of Goal 8 on decent work, but it would also have a knock-on effect on the advancement of other Goals. Such as Goal 1 to end poverty, Goal 2 to reduce hunger, Goal 3 to improve health and well-being, Goal 4 on quality education for workers and their families, and Goal 10 to reduce inequality.

5.3

CEO Study on Sustainability 2019—Accenture

In 2019, Accenture developed the CEO study on Sustainability. The CEO Study utilized data gathered through two principal strands of research. First, through an online survey translated into 9 languages, it conducted a quantitative assessment of over 1,000 CEOs. In parallel, additional insights of more than 1,500 business executives were taken from the annual UN Global Compact implementation survey. Second, the study conducted more than 100 in-depth one-to-one interviews. Interviewees were selected from around the world, they included CEOs, chairpersons, and presidents of UN Global Compact companies, with the aim of understanding the wider strategic context—from geopolitics to investment in technologies to challenges and opportunities on sustainability—for business.

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In the study, interviewees describe how they face a progressively more competitive and challenging business environment and set of pressures. These pressures vary from global trade uncertainties to activist investors, to the pace and scale of the technology revolutions taking place in digital, biological, and physical innovation, and their intensity is unlikely to change in the decade ahead. The survey key findings are summarized as follows: • In 2016: – 49% said the business would be the most important factor in the delivery of the SDGS – 78% saw opportunities to contribute to the SDGs through their core business – 90% said they were personally committed to ensuring that their companies lead on the sustainable development agenda. • In 2019: – 48% are implementing sustainability into their operations according to the UN Global Compact Progress Report – 21% feel the business is currently playing a critical role in contributing to the SDGs – 71% of CEOs believe that—with increased commitment and action—business can play a critical role in contributing to the SDGs. • For the first time, leaders in 2019, are calling for their sectors and peers to step up action and course-correct the private sector contribution to the SDGs. To accelerate progress, CEOs identify three critical requirements: – An urgent need to raise corporate ambition within their own organizations through “threshold” actions and also lead systems transformation more broadly against the 17 SDGs, mindful that not all Goals will apply to all businesses in the same way. – The need for business, governments, regulators, and non-governmental organizations to come together to shape realistic, science-based solutions to global challenges. – A new definition and emphasis on disruptive responsible leadership, as CEOs pinpoint what is needed from this generation of leaders to drive action and impact. These facts are confirmed by Fig. 5.9, nearly all (99%) of the CEOs of the world’s largest companies believe sustainability issues to be important when it comes to the future success of their businesses. Over the past six years, a rise in concern for sustainability has been observed in North American and Asian companies: • In 2019, 68% of CEOs of North American businesses ranked sustainability as “very important”, up from 57% in 2013. • Similarly, a comparable number of business leaders from Asian companies increased from 52% in 2013 to 63% in 2019.

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Fig. 5.9 99% of CEOs believe that sustainability will be important to the future success of their business (Source Accenture—CEO study on sustainability 2019)

It is clear that CEOs who are serious about sustainability have brought it into the mainstream of their businesses, as sustainability continues to become embedded in overall corporate strategy. Stakeholders play an essential part in leading companies to be more sustainable. Particularly, the role of consumer and employees (as depicted in Fig. 5.10). They represent the key groups when it comes to pushing companies towards a more efficient economic and productive system. Customers prompt companies to implement sustainable strategies in order to provide sustainable products and services. This occurs particularly in the case of business to consumer (B2C) and direct to consumer (D2C) (Fig. 5.11), for example, retail, and personal and household goods. There is no doubt sustainability has become a must-have. Consumers today are significantly more conscious of global issues in a way they were not in the recent past. If consumers are to become aware that a company or brand cannot be trusted, those brands will be heavily damaged. Employees, especially the younger ones, are guiding and influencing companies to adopt standards in sustainability norms, moreover, they strive for purpose-driven careers. Investors represent another important class of stakeholders (20%). It is critical for companies to be aware of their investors’ top priorities in order to lead the company in that direction. So, if executives were to believe that their investors prioritized short-term profits, they would likely organize sales, cost management, and research and development activities which maximized near-term gains rather than long-term investments.

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Fig. 5.10 The stakeholders’ role in driving sustainability (Source Accenture—CEO study on sustainability 2019)

With the numbers of investors making investment decisions based on sustainability performance rising, corporate leaders have to acknowledge that an increasing number of shareholders are invested in whether a company’s ESG activities connect with its financial success. Though improving board engagement on sustainability issues is no easy task and they face several hurdles, these include the unclear financial impact of developing sustainable business practices, competing priorities, a lack of knowledge regarding sustainability among board members, and short-termism. For business leaders, the link between business value and sustainability has progressed, and companies that are ahead, display better results in their core business. The percentage of CEOs citing “no clear link to business value” as a barrier to sustainability has steadily fallen from 37% in 2013 to 31% in 2016 to 26% in 2019. CEOs recognize that sustainability stimulates competitive advantage (see Fig. 5.12). When asked to what extent sustainability and trust are currently creating business value, 58% of CEOs responded brand increase, 40% revenue growth, 37% risk mitigation, and 35% cost reduction. When asked the same question but in relation to the future, there is a rise in the numbers of CEOs claiming sustainability will drive revenue growth over the next five to ten years (from 40 to 57%). Just over half (51% compared to 35%) expect to see cost reductions in the same time period. Over the next five to ten years, when compared to B2B companies, D2C companies foresee sustainability delivering greater value: 58% of CEOs from D2C companies think sustainability will drive revenue growth compared to 53% of CEOs from B2B companies (see Fig. 5.11). From the survey,

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Fig. 5.11 Stakeholder groups influencing sustainability (Source Accenture—CEO study on sustainability 2019)

it becomes apparent that, as interest in sustainability makes its way upstream in the value chain, the sustainability demands on B2B companies will intensify. However, sustainability seems to be an unreachable prospect, exception made for a small group of advanced companies. For instance, many leaders continue to look towards the future for an “unlocking” of mainstream value as market forces align in favour of sustainability.

5.4

Sustainability’s Deepening Imprint 2017—McKinsey & Company

“Sustainability’s deepening imprint” was developed by McKinsey & Company in 2017. It was based on data gathered through an online survey in May 2017. A total number of 2,711 participants responded to it and they represented the full range of regions, industries, positions, company sizes, and functional specialities. Almost 90% (2,422) of them responded that their companies were pursuing sustainability programs and answered the full survey. To adjust for differences in response rates, the data was weighted by the contribution of each respondent’s nation to global GDP. The key findings of the survey are summarized as follows:

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Fig. 5.12 The potential value of sustainability (Source Accenture—CEO study on sustainability 2019)

• Environmental, social, and governance matters are of increasing concern to customers and employees, organizations have to a greater extent taken on sustainability programs that address these issues. • The governance of sustainability programs is being increasingly formalized. Companies are also promoting the importance of diversity and inclusion. • Compared to the past, a larger share of respondents cite better alignment between an organization’s practices and its goals, missions, or values as a top reason for implementing a sustainability agenda. • The results elucidate how company sustainability agendas are managed and supported through various technologies. • Many organizations still struggle to capture financial value from their sustainability efforts. Integrating sustainability into one or more core business functions, for instance, is a practice that can help. The integration of sustainability into functional work doubles the likelihood that a company will report financial value from these efforts. When asked what are the top reasons for their companies to address sustainability, respondents most often cite alignment with the organization’s own goals, mission, and values (Fig. 5.13). From the results, it is also apparent that some stakeholders are becoming more important. Meeting consumer expectations is now ranked in the top five reasons. And the share citing the attraction, motivation, or retention of employees has also grown since 2014. This fact was also confirmed in the CEO study on sustainability 2019 (Fig. 5.10). The sustainability topics that matter most to businesses vary across industries (Fig. 5.14). Diversity and inclusion are cited among the top five most important topics, and it is a top three issue in financial services and high tech. When five years

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Fig. 5.13 Top reasons for their companies to address sustainability (Source McKinsey & Company Sustainability’s deepening imprint 2017)

ago respondents were asked what the most important issues would be today waste management and renewable energy were rated as top priorities. Though renewable energy, in relation to other topics, has fallen in importance over the same period— during which installations of renewable energy sources also increased. Nor is waste management still among the top five topics that matter most to respondents’ organizations. Companies which present a high level of sustainability engagement belong to the chemical, energy and utilities, industrial goods and services, and machinery sectors. The reason for this match lies at the core nature of these industries which are highly regulated with substantial environmental and health and safety concerns, as well as significant resource needs or constraints. Therefore, these companies must work towards sustainability as its involvement is practically mandatory. A clear example of these constraints can be found in the energy sector, where oil and gas companies need to take into account environmental and social issues. Indeed, this sector is seen as one of the most culpable in the profound crisis related to climatic change and environmental global issues. Furthermore, some additional challenges for the oil and gas industries in moving towards sustainability are as follows: • Price fluctuation; • Complexity of drilling and production process;

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Fig. 5.14 Sustainability topics vary by industrial sector (Source McKinsey & Company Sustainability’s deepening imprint 2017)

• Increasing demand for oil and gas in most regions; • Protection of the social license of operation and corporate social responsibilities; • R&D and innovation. Therefore, the oil and gas industries have redesigned their strategies to include the concept of sustainable development, particularly they have adopted the technological leverage to implement it by using solutions such as Performance Assurance and Operation Risk Management, Contaminated Site Management and Air Quality and Climate Change.

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Figure 5.15 displays that 82% of respondents in the retail sector perceive the potential of modest or significant value creation by managing the sustainability impact of their supply chains, compared to 60% of other respondents. Even within industries, there are varying perceptions. The results indicate that there are differences in the activities which are pursued by the organization and those which executives believe have the most potential for value creation. Close to two-thirds of respondents in the metals and mining sectors claim significant value can be generated by bringing existing sustainability-related products—such as conflict-free minerals—to new markets or customers; though, only 7% of these say that their organizations are doing so. In the financial services close to 65% of respondents see

Fig. 5.15 Top value creation opportunities from sustainability (Source McKinsey & Company Sustainability’s deepening imprint 2017)

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value potential in managing the business portfolio to capitalize on trends in sustainability, but in only 28% of the cases organizations actually do so. Not only do companies struggle to pursue sustainability activities with the highest potential value but they also find measuring the financial implications accurately a challenge. 20% of respondents do not know the financial impact of sustainability programs on their organization. And those whose companies have measured the financial impact are just as likely to say that sustainability is a cost as they are to say it creates value. Furthermore, about 25% of respondents do not know how much, if anything, is spent on sustainability-related initiatives by their organizations. A similar share claims that the benefits of sustainability are clearly understood throughout the organizations. The results suggest that a starting point may be integrating sustainability into core business functions—especially in finance. The survey asked how integrated sustainability is into 11 core business functions, and respondents indicate that integration into finance is the least common. Yet, along with R&D and

Fig. 5.16 Core functions in which sustainability is integrated (Source McKinsey & Company Sustainability’s deepening imprint 2017)

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strategic planning, integration with the finance function appears to yield the greatest value (Fig. 5.16). Positive financial impact is twice as likely to be reported by respondents when sustainability is integrated into at least one of the business functions—regardless of which. Finance isn’t the only function where integration can be improved: less than 25% of respondents stated that sustainability is formally integrated into the sales and marketing function. What’s more, only 18% say that employee compensation is linked to sustainability performance at their organizations. And despite respondents considering both customers and employees to be powerful players for acting on sustainability, only one-third report that employees across the organization understand how sustainability efforts align with the overall strategy. With technology, we see similar results. Despite respondents identifying technological advances as a key reason for the growing commitment to sustainability, only 25% report the formal integration of sustainability into IT. The most cited technologies which support sustainability work are digital platforms and energy-efficient equipment. But stronger integration with IT could foster stronger stakeholder engagement with customers, employees, and suppliers.

5.5

Conclusions

This chapter has presented insights into the world of sustainable business and identified common perceptions and practices of corporate sustainability professionals. A picture of sustainability in business today has been provided by analysing three of the most recent surveys to understand the reason why companies engage with sustainability and the key sustainability challenges in different industries.

References Barbosa-Póvoa, A. P. (2014). Process supply chains management–where are we? Where to go next? Frontiers in Energy Research, 2, 23. Bové, A. T., D’Herde, D., & Swartz, S. (2017). Sustainability’s deepening imprint. McKinsey & Company. Gitman, L., & Morris, J. (2018). The State of Sustainable Business 2018. GlobeScan and BSR. Jay, J., Gonzalez, S., & Swible, M., (2015). Sustainability-oriented innovation: a bridge to breakthroughs. MITSloan Management Review. Retrieved from https://sloanreview.mit.edu/ article/sustainability-oriented-innovation-a-bridge-to-breakthroughs/. Kingo, L., & Lacy, P. (2019). The United Nations global compact—Accenture strategy CEO study on sustainability 2019. United Nations Global Compact and Accenture Strategy. Perrini, F., & Vurro, C. (2014). Stakeholder orientation and corporate reputation: A quantitative study on US companies. Symphonya Emerging Issues in Management, 1, 53–65. The State of Sustainable Business 2018. GlobeScan and BSR. Available at https://www.bsr.org/ reports/BSR_Globescan_State_of_Sustainable_Business_2018.pdf The State of Sustainable Business 2019. GlobeScan and BSR. Available at https://globescan.com/ wp-content/uploads/2019/11/BSR-GlobeScan-State-of-Sustainable-BusinessSurveyFinalReport-12Nov2019.pdf

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Melissa Demartini is an Adjunct Professor of Operations Management and Sustainability at the University of Genoa and Visiting researcher at Imperial College Business School. Her research interests are mainly in the areas of corporate sustainability, operations management, and modelling. She has co-authored nearly 20 papers published in international indexed journals. She currently teaches undergraduate, graduate, and MBA students, with teaching activity covering general management, operations management, and sustainability. So far, she has taught in universities in Italy and the UK. She has worked as a project manager for the EU’s Advanced Manufacturing in Central Europe (AMiCE) project since 2017. She is also industrial sustainability coordinator for the Intelligent Factory Cluster’s Roadmap Project – an Italian government initiative which aims to develop a national strategy to improve the international competitiveness of manufacturing companies. Outside of the academy, Melissa has significant consultancy experience, she is a consultant for Ansaldo Energia’s ‘Lighthouse Plant’ project. This project aims to introduce Industry 4.0 technologies to all production lines in this prominent Italian power engineering organisation. She has also worked as a consultant for Siemens, gaining experience in strategy, operations, internationalization, and business planning. Paolo Taticchi (Editor and Author) is Professor (Education) in Strategy and Sustainability & Deputy Director (MBA and International at UCL School of Management. He teaches modules on sustainability and competitive advantage, strategy, consulting, and the future of cities. Before UCL, Paolo spent six years at Imperial College London where he led top-ranked programmes such as the MScManagement and the Global Online MBA. Alongside his work at UCL, Paolo is regularly invited to teach on international MBA and EMBA programs in Europe, Africa, Asia, and the Americas. In the recent years he has visited and hold teaching appointments in top universities like EADA, ESAN, and NYU. Paolo’s research on performance measurement and management, business networks, and corporate sustainability is internationally recognised. He has authored over 50 published academic journal articles, and edited and co-authored three books. Outside of the academy, Paolo has significant consultancy experience in the fields of strategy, operations, and sustainability and today he serves in the advisory board of influential organisations in the UK, US, Canada, Italy and India. Paolo is also active in the entrepreneurial space, co-founding three firms in the fields of engineering and consultancy. His projects, quotes and opinions have been featured over 200 times in media outlets like The Financial Times, Forbes, The Telegraph, Semana Sostenible, La Republica, Inspire, Sole 24 Ore, La Nazione, Corriere della Sera, La Stampa, RAI, Sky News, Sky News Radio, Mediaset, and CNN. In 2018, Paolo was chosen as one of Poets & Quants’ top 40 business school professors under the age of 40. In the same year, Paolo received the title of Knight of the Order of Merit of the Italian Republic. In 2019, Paolo received the “Talented Young Italian Award” from the Italian Chamber of Commerce and Industry in the UK.

6

The Link Between Sustainability Investing and Financial Returns: An Asset Management’s Perspective Daniel Ung

Abstract

In this chapter, the investment industry’s latest perspective on sustainability (ESG) investing and financial returns is examined. The traditional view is that sustainability investing, and financial returns are fundamentally incompatible with each other and investors have to cede financial return potential in order to invest sustainably. However, before examining the merit of this view, it is important to clarify the definition of ESG investing, which encompasses a diversity of investment styles; and each style is likely to lead to distinct investment outcomes. Of similar importance is the quality of ESG data, especially in light of the many different ESG data providers in the marketplace, each using its own approach to compile sustainability scores. The chapter starts by reviewing the reasons for which there is an increased adoption of ESG investing in the asset management industry, given that this investment style is not new. Keywords










Sustainability ESG integration Impact investing Values investing Financial return Sustainability Accounting Standards Board (SASB) Financial risk








The views herein represent those of the author. D. Ung (&) Head of Quantitative Research and Analysis, ETF Division of a Global Asset Manager, 65 Troy Court, Kensington High Street, London W8 7RB, UK e-mail: [email protected] © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_6

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Introduction

Ever since the launch of the first ethical investment fund by Friends Provident in 1984, socially responsible investing has continued to grow in popularity around the world, particularly in Europe. According to the Global Sustainable Alliance, sustainable investment assets have surged worldwide by more than a third since 2016, reaching assets of more than $30 trillion in 2018.1 Over time, we have also witnessed a shift in how this category of investing is viewed, from a fringe concept to a mainstream approach that expressly recognises the importance of environment, social and governance factors for the investor as well as for the long-term stability and welfare of the market as a whole. Historically, socially responsible investing was analogous with ethical investing, which had to do with excluding sectors that do not accord with the investors’ values. For instance, the Friends Provident fund removed specific undesirable sectors (e.g. pornography, tobacco and arms trade). However, as interest in this investment style continued to gather pace, the nature of socially responsible investment also broadened, and investors have moved from a purely social motivation to a financial objective when considering ESG in portfolio allocations. This widening of scope in sustainable (ESG) investing, coupled with a lack of standardisation in the lexicon used in this area, means that there is often confusion, even among experts in the field. For this reason, before embarking on a discussion of the relationship between sustainability and financial performance, it is important to clarify a few important topics. First, ESG investing is a broad term and encompasses a diverse number of approaches. Second, the existence of a wide variety of ESG data providers and a lack of a standardised framework mean that data quality is likely to be an issue. These two aspects play an important part when it comes to evaluating whether there is a link between sustainability and financial performance. Before turning to this evaluation, the reasons why ESG investing has become more widespread in the investment management industry are reviewed.

6.2

Drivers of ESG Adoption in the Asset Management Industry

• Broadened definition of fiduciary duty: Some investors still hold the mistaken belief that sustainable investing inevitably means sacrificing returns, and that fiduciary duty dictates that the overwhelming focus should be on financial returns. However, more recent regulatory guidelines make it clear that it is in fact a violation of fiduciary duty not to consider ESG.

1

Global Sustainable Investment Review 2018, Global Sustainable Investment Alliance

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For example, the Swedish parliament approved reforms that mandate the main government-run pension funds to be ‘exemplary’ in the area of sustainable investment. In the UK, the government updated its definition of fiduciary duty for trust-based pension funds to include ESG issues and not view them as matters of personal ethics2. An example of this is climate change, which is increasingly seen as an important driver of portfolio risk and return, and a scientific advisory committee to the European Systemic Risk Board recommended that future stress tests of the pensions sector should include climate-related risks. • Managing negative externalities: Given the amount of money that institutional investors manage, they effectively own a slice of both the global economy and capital markets through their holdings. The size of the holdings may mean that these investors cannot mitigate system-level risks through just investing in ‘quality’ assets (such as gold). Related to this, asset owners often have to take longer term views because of the long-term nature of their liabilities. They must be more attentive to situations where their investments generate uncompensated collateral costs for unrelated third parties. Briand et al. (2011) posit that most universal owners have a fiduciary duty to ensure the multigenerational sustainability of their investments. These ‘universal owners’ should therefore encourage the protection3 of the natural capital necessary to maintain the economy and investment returns over the long term (UNEP Finance Initiative 2011). • Increased investor activism: In the past, investors have been reluctant to actively intervene in the managements of the companies in which they invest. But investors who intend to hold an investment for a long time are incentivised to make sure that material ESG issues, which can improve financial performance, are fully addressed. In 2018, shareholder activist campaigns increased to a record number with about 250 campaigns initiated; and activists won 50% more board seats than in 2017. • Growing investor demand: Institutional investors’ demand for integration of long-term investment issues is driving sustainable-investing growth. Nowadays, asset owners do not need to be convinced on the benefits of sustainability as they focus on both financial, as well as nonfinancial outcomes, rather than just financial ones (Eccles and Klimenko 2019). Research also shows that millennials are also expected to drive much of the growth of the ESG investing market. According to a Morgan Stanley study, when compared with non-millennial investors, millennials are nearly twice as likely to invest in companies or funds that target social or environmental outcomes and twice as likely to invest in companies that use high quality ESG practices.

2

Swedish Parliament Oks sustainable investment reforms for AP funds, November 2018 Universal Ownership: Why environmental externalities matter to institutional investors? UNEP Finance Initiative (2011).

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What is ESG Investing? It is all in the Definition

Under the auspices of the United Nations, the Principles of Responsible Investment (UNPRI) were born. UNPRI established six principles for incorporating ESG into the management of financial assets, which signatories agreed to implement. Among the most important principles for the asset management industry are the commitment to incorporate ESG considerations in their financial analysis and decision-making processes, and to incorporate ESG issues in their ownership policies. However, although the UNPRI has provided guidance on how institutional investors can integrate ESG into their asset management processes, the industry still lacks best practice standards and, as a result, there is often inconsistency and incoherence in both the terminology used by market participants as well as how ESG integration is being implemented. ESG investing is an evolving field, and it is challenging to condense all the different approaches in one chapter. That said, there are currently three general ESG investment approaches that market participants adopt, each of which is linked to a different investment objective (see Fig. 6.1). Differences in investment objectives mean that the investment outcomes are also likely to be different.

6.3.1 Align with Personal Beliefs (Values Investing) Some investors believe that their investments should reflect their personal values and have sought to avoid companies that do not align with their ethical, religious or political beliefs. These investors typically use ESG research to weed out from the

Fig. 6.1 Objectives and focus of different types of ESG investing (Some investors consider the carbon footprint as financially material, while others believe that removing high-carbon intensity companies align with their beliefs)

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investment universe companies that engage in certain activities such as fossil fuels, controversial weapons and alcohol, among others. In that respect, values-based investing focuses mainly on achieving positive effects for society.

6.3.2 Using ESG to Improve Financial Performance (ESG Integration) An increasing body of research suggests that ESG factors can be used to identify companies that are well managed as well as those whose business models are likely to face headwinds through shifting regulatory, environmental and technological trends. Institutional investors increasingly employ ESG factors to both minimise these risks and achieve sustainable financial performance over the long run. The aim of ESG integration, along with active ownership, is primarily financial.

6.3.3 Creating a Positive Social Impact (Impact Investing) Some investors strive to have a positive social impact on the world by directing their investment capital towards companies that provide solutions to environmental or social challenges. These investors also monitor the extent to which their investments generate positive social or environmental impacts alongside their financial returns, using frameworks such as the UN Sustainable Development Goals (SDGs).

6.4

Importance of ESG Data––Data Quality and Materiality

6.4.1 Data Quality High quality data is the mainstay of investment analysis. While ‘quality’ can be defined in numerous ways, most investors would agree that data consistency and comparability are part and parcel of a sound data set. However, because there is so far no uniformity in the regulations on the amount as well as the type of ESG information that companies have to report on, companies are left to decide for themselves what ESG information is relevant to their business performance and what should be disclosed to investors. In the meantime, investors increasingly consider ESG factors as critical drivers of a company’s ability to generate sustainable performance over the long term. To this end, investors rely on ESG data providers to assess information about companies’ ESG practices. As of the end of 2016, more than 125 ESG data providers were in operation, according to the Global Initiative for Sustainability Ratings. This collection includes both well-established global data providers like MSCI,

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Fig. 6.2 Correlation of ESG scores of MSCI World Constituents across different providers (Source What a difference an ESG Ratings Provider Makes! Research Affiliates, January 2020)

Bloomberg and FTSE as well as ESG specialists like Sustainalytics, Vigeo Eiris and TruValue Labs. There are also even more focused specialists within the ESG world, such as Trucost, which focuses mainly on carbon emissions data. Each provider uses its own methodology to compile company ESG scores. This means that the rating for any given company can vary significantly depending on the data provider. Figure 6.2 shows the correlation of ESG scores across two different providers. Kumar et al. (2019) assert that the divergence of ESG scores can be attributed to three main causes: differences in how data is gathered and estimated, which issues are considered as material and how different ESG issues are aggregated to provide summary ESG scores. According to the authors, when choosing a provider, investors are effectively aligning themselves with that ESG rating agency’s investment philosophy in terms of data acquisition, materiality and aggregation methods.

6.4.2 Data Materiality The notion of data materiality emanates from financial accounting and relates to information that would be ‘considered relevant to an investor’. In evaluating the relationship between a company’s ESG performance and financial performance, not all ESG issues matter equally. Much work in this area has been carried out by the Sustainability Accounting Standards Board (SASB), one of the agencies that has led the way in devising standards for sustainability reporting. SASB adopts the US Supreme Court’s definition of information materiality and aims to establish ‘industry-specific disclosure standards across environmental, social and governance topics that facilitate communication between companies and investors about financially material, decision-useful information’.4 instance, product quality and safety can have a substantial impact on the bottom line for the consumer goods sector, whereas selling practices and product labelling is a far more important criterion for the financial sector. Research, such as Khan et al. (2015), shows that firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability can enhance 4

www.sasb.org/governance.

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shareholder value. On the other hand, investments in immaterial sustainability issues have limited value implications (Steinbarth 2016). The first generation ESG scores, which do not take into account the materiality of information, contain a huge amount of non-material ESG information, and this may be one of the reasons why there is conflicting evidence on whether ESG scores can lead to financial outperformance.

6.5

The Link Between ESG and Financial Performance

A common perception among investors is that investing in ESG inevitably means sacrificing financial returns. The increased focus in this field has also brought a significant rise in the number of research articles that examine the relationship between the ESG profile of companies and their financial performance and risk characteristics. Indeed, the high volume of studies has led to meta studies seeking to summarise the findings of different analyses (for example, Friede et al. (2015)). Overall, the results were not conclusive, with the existing literature finding positive, negative and, indeed, non-existent correlation between ESG and financial performance. That said, most researchers did find an overall positive relationship between the two. There are several explanations for the inconclusiveness of the results. For one, some studies do not appreciate the different approaches to sustainable investing, such as values investing, ESG integration or impact investing. These different investment styles are likely to produce vastly different financial outcomes, as they can have very different objectives. Therefore, drawing conclusions between these different approaches is an issue. Even when focusing solely on ESG integration, the vast differences in the way rating agencies score a company’s ESG profile can lead to different conclusions on whether a better company ESG profile is associated with improved financial performance. In addition, researchers studying the link between ESG and financial returns do not make clear distinctions between correlation and causality. As Krueger (2015) points out, the observation of a positive correlation can either be because higher ESG firms tend to be more profitable or that more profitable firms tend to expend more resources into projects that increase the welfare of stakeholders. For this reason, a discussion on whether there is a link between ESG and financial performance is meaningless without acknowledging the existence of different approaches to ESG investing and the issues surrounding ESG data quality and data materiality.

6.5.1 Values Investing: A Word on ‘Sin Stocks’ Values investing is about aligning investments to beliefs. These beliefs can range from religious to environmental and ethical beliefs. Here, ‘sin stocks’ are examined,

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which is the most common grouping that investors exclude. Sin stocks are typically companies that make money from human vice, such as those in the alcohol, tobacco, gambling and weapons industries. Various research studies have examined the historical performance of sin stocks and found significantly positive abnormal returns. In the meantime, an increasing number of investors exclude these stocks from their investment portfolios, as they would not want to be associated with the controversial activities of these firms. On the other hand, there are also investment vehicles that specifically target particular types of sin stocks, such as gaming and cannabis-manufacturing stocks, to name a few. To explain the apparent abnormal returns of sin stocks, some researchers (such as Hong and Kacperzyk (2009)) affirm that institutions that shun these stocks pay a financial cost in abstaining from them; moreover, investors who are disposed to defy social norms earn a risk premium for doing so. Other explanations for why sin stocks outperform can be found in the research of authors such as Fabozzi, Ma and Oliphant (2008). In this instance, the researchers provide various explanations for this apparently paradoxical phenomenon. First, they suggest that those industries tend to have significant barriers to entry. They are effectively monopolies, and because of this, they should be compensated with excess ‘rent’ in their returns. Second, they propose that there is often a ‘cost’ associated with having principles. One of these costs involves foregoing returns because applying any level of exclusions or constraints, which is what investors often do with sin stocks, means that investment portfolios are likely to underperform those that are unconstrained (Adler and Krietzman 2008). Using the latest insights in asset pricing theory, research by Blitz and Fabozzi (2017) suggests that there is in fact no alpha, or abnormally positive return, in sin stocks. In other words, there is no premium associated with these stocks. The apparent levels of ‘abnormal positive return’ vanish when the classic factors5 that drive equity returns are fully accounted for. Indeed, the performance of sin stocks matches fully with their exposures to factors included in the latest asset pricing models. From a financial perspective, Blitz and Fabozzi explain that sin stocks often have high exposure to the financial quality factor as such companies are often highly profitable, cash-generative companies. Excluding them from the universe would have a negative impact on expected return; however, this issue can be addressed by increasing exposure to companies of high financial quality outside of the companies that have been excluded. Obviously, the specific financial impact of abstaining from an entire category of stocks is likely to vary, depending on the financial characteristics of the excluded stocks. The main purpose behind ‘values investing’ is that investors do not want to be connected to certain types of business activity that conflict with their values. Particularly where the values are widely accepted, such as the harmful effects of tobacco, there may be risks, in the form of litigation risks, associated with

5

These factors are size, value, momentum and quality (which comprise profitability and investment).

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investments in the companies in these sectors. These risks may only play out over the longer term.

6.5.2 ESG Integration 6.5.2.1 Targeting Companies with a Good ESG Profile The principal aim of integrating ESG into financial analysis is to achieve financial objectives in investment portfolios. This approach should incorporate information that is material and germane to both the company in question as well as the wider industry. Whereas older studies have often examined the potential connection between ESG and future financial returns, more recent studies have widened their scope and investigated the financial characteristics of strong ESG companies. They suggest that companies with robust ESG practices often displayed a lower cost of capital, lower volatility and fewer instances of bribery (Oikonomou et al. 2012). Conversely, companies with weak ESG practices have had high costs of capital, higher volatility owing to controversies and other incidences as well as other governance irregularities. In a recent study, Giese et al. (2017) discussed how information embedded within stocks is transmitted to the equity market. The authors examined the difference in financial characteristics between highly and lowly rated ESG companies and suggest that ESG information is imparted to equity markets by means of ‘transmission channels’. More specifically, they posited there were three transmission channels through which ESG information can be spread to the equity markets within a standard Discounted Cash Flow (DCF) model, a standard valuation model that is often used to determine the fair value of equities (1.1). DCF ¼

CF ð1 þ r Þ

1

þ

CF 2

ð1 þ r Þ

þ

CF ð1 þ r Þ

3

þ...þ

CF ð1 þ r Þn

ð1:1Þ

where CF = cash flow; r = interest (or discount) rate; n = period number. The idea behind this approach is that a company’s ESG profile can affect its market valuation because of information specific only to the company (the so-called ‘idiosyncratic transmission channel’) and/or because of information that applies to the entire market (the so-called ‘systematic transmission channel’). In regard to the idiosyncratic transmission channel, ESG information can be spread in two ways: via cash flow generation ability or via the degree of tail risk. As the information is linked solely to the company, the risk associated with the cash flow can be diversified away, which is consistent with the principle behind the Capital Asset Pricing Model (CAPM). In respect to cash flows, companies with a strong ESG profile are more competitive than their peers and, as a result, they generate higher profits. By extension, these companies also offer a higher dividend pay-out to shareholders.

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An increase in a company’s ability to generate cash flow and profits can lead to a higher equity valuation. Separately, strong ESG companies typically have above-average risk control and compliance standards. For this reason, they are less likely to suffer from severe incidents such as fraud, corruption or other scandals that can seriously undermine the value of the company. Fewer scandals will ultimately result in lower stock-specific risk and lower downside tail risk. As for the systematic transmission channel, ESG information can also manifest itself through the discount rate. Given that the information is related not just to the company itself but also to the wider market, the associated risk cannot be avoided or diversified away. This means that strong ESG companies can be expected to have lower discount rates (and costs of capital) than poor ESG companies. Lower costs of capital can also translate into higher equity valuations when viewed through a discounted cash flow framework. In addition, strong ESG companies can also be expected to have a lower sensitivity to market (beta) risk as they are less vulnerable to systematic market shocks, such as commodity price shocks, because they are more efficient in managing their businesses. In sum, empirical evidence shows that strong ESG companies seem to suffer less from lower idiosyncratic and systematic risks than poor ESG companies. Therefore, information from ESG may be used as a risk management tool, alongside other traditional financial risk management tools. As for whether strong ESG characteristics have led to stronger stock returns, the jury is still out.

6.5.2.2 Targeting Companies with an Improving ESG Profile Another aspect of ESG integration involves looking at companies that managed to improve their ESG profile over time. From a conceptual point of view, Gregory et al. (2014) argue that since ESG characteristics can affect a company’s valuation through systematic risk, a change in a company’s ESG profile should predict a change in the valuation and return of that company. This thesis was supported by empirical research conducted by Khan et al. (2015). The researchers performed a regression analysis of the year-ahead stock returns to changes in ESG scores, neutralised with respect to changes in classic equity factors (such as firm size, market-to-book ratio, leverage, profitability) as well as sector membership. They found that there was statistically significant predictive power of changes in ESG scores for stock returns. 6.5.2.3 Corporate Engagement and Shareholder Activism Shareholder activism and direct institutional investor engagement on environmental, social and governance issues has become increasingly prevalent in financial markets (Weinstein et al. 2019). For majority shareholders with controlling stakes, effecting change is simple as they can threaten to replace the entire management. But even for minority shareholders, there are measures at their disposal to challenge management decisions. Shareholder activism can take various forms (Bekjarovski and Briere 2018) and these generally encompass (1) divestment of the company shares, (2) expressing dissent through voting, (3) engaging behind the scenes with

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the management and the board and (4) making shareholder proposals or (5) initiating takeovers through acquiring a sizeable amount of equities. According to a survey conducted by McCachery et al. (2016), engagement behind the scenes and voting are the preferred methods by which institutional investors deal with companies. In the study, some 63% of the participants in the survey had held direct discussions with company management over the past five years while 53% had voted against management in shareholder proposals. Besides this, it was also common for institutional investors to express disapproval of company management through divesting company shares and there was evidence that long-term investors were more disposed to intervene than short-term investors on matters of corporate governance or strategy. A wealth of literature assessing the impact of shareholder engagement on company financial performance exists. Generally speaking, whether company engagement leads to positive outcomes depends largely on the execution strategy as well as the costs associated with that engagement. More recent research shows that voting on specific issues, such as the adoption of governance proposals, can be effective and has improved shareholder value by an average of 2.8% (Cuñat et al. 2012). Other forms of exercising influence on management, either through engagement behind the scenes or hedge fund activism, have also led to the target companies generating higher overall financial returns as well as improving ESG scores. In respect of the financial risk profile of the companies with which there is shareholder engagement, Hoepner et al. (2018) show that engagement can reduce a company’s downside risk. Although risk reduction effects of ESG engagement vary across engagement themes and, where governance or strategy topics are addressed, the risk reduction effects tended to be magnified. In all, there appears to be evidence to show that market reaction to shareholder activism is positive on the whole.

6.5.3 Impact Investing Finally, impact investing focusses on having a positive influence by allocating capital to specific companies or sectors that offer solutions to pressing issues facing the world. Alongside making a positive social impact, this type of sustainable investing also seeks to make a material financial return. What sets impact investing apart from other sustainable investing styles is that it unambiguously targets tangible beneficial outcomes. However, which motive is more important is likely to vary among investors. Impact investing encompasses a wide variety of asset types and strategies. It can incorporate investments in a variety of sectors, from renewable energy and microfinance to more traditional areas such as housing, education and healthcare. While the Global Impact Investing Network talks of the wide range of return profiles and asset types available in this segment, it also stresses the importance of being able to objectively assess and measure environmental and social impacts. Because this diverse segment covers a wide array of strategies and investments, it would be difficult to make general remarks about the performance of impact

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investing overall. That said, there is some evidence to suggest that certain categories of impact investing, such as gender diversity, can be advantageous. For example, companies that embrace workplace gender diversity may perform better than those that reject it. One expression of this view is the SPDR SSGA Gender Diversity Index ETF, a fund that seeks to promote gender-diverse senior leadership. Empirical research shows that the return on equity of companies with strong female leadership was 36% higher than those without a critical mass of women at the top (see Lee (2015)).

6.6

ESG Investing in an Asset Allocation Context

The ESG investment styles discussed above do not have to be mutually exclusive. In fact, institutional investors often blend several approaches to achieve their objectives. One way for investors to begin ESG investing is to ensure that their investments do not conflict with their beliefs. For example, investors could remove all the companies engaged in producing tobacco products or controversial weapons. They may then opt for an approach that selects the companies with both healthy financial metrics as well as a robust ESG profile. According to data collected by the Global Sustainable Investment Alliance (see Fig. 6.3), the largest sustainable strategy globally, between 2016 to 2018, was negative (or exclusionary) screening. This was followed by ESG integration, which has risen by 69% over the same period. Applying negative screening has frequently been the first step into ESG investing for many investors. The impressive growth in the adoption of ESG integration may signal that investors have grown more

Fig. 6.3 Global ESG Investment Strategies (Source Global Sustainable Investment Review 2018, Global Sustainable Investment Alliance)

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comfortable with ESG, as they are moving from a purely social to a financial objective when blending ESG with other parts of their investment portfolios. Yet, while there are more investors integrating ESG into their portfolios, many have done so inconsistently, incorporating ESG in some but not all areas of their portfolios. The result of this haphazard approach means that investors may not yet be reaping the full benefits of ESG investing. For example, an asset owner who integrated ESG criteria into only some allocations may take advantage of the risk mitigation benefits associated with removing poor ESG companies. However, the excluded companies may reappear elsewhere in the investment portfolio where the same type of exclusion has not been applied. In other words, ad hoc approaches to ESG integration––using incoherent approaches or only in select portfolios––are likely to achieve below par results. Therefore, investors should move to an ESG policy benchmark to ensure consistent application across the whole investment portfolio. In closing, the relationship between sustainability investing and financial returns is a fairly nascent field of research. Sure enough, there were past attempts that examined this link, but they did not distinguish the different styles of ESG investing and focussed nearly exclusively on values investing, which involves ridding of ‘undesirable’ sectors, such as stocks in ‘sin’ sectors. Moreover, they also failed to address issues, such as the financial materiality of data, and ignored the fact that different ESG issues are relevant for different sectors. Even with the availability of ESG information more readily available now, it is important to appreciate that there is still much subjectivity in the compilation of ESG scores, and by selecting for a ESG data provider, investors are effectively aligning themselves to the ‘investment philosophy’ of that provider. Whether investing in stronger ESG companies produces stronger investment returns remains a bone of contention. To start, it is important to appreciate there are different types of ESG investing styles: values investing, ESG integration and impact investing. These investment styles follow distinct investment approaches, and for this reason, they are likely to yield very distinct investment return and risk outcomes. Among the different approaches, an increasingly popular approach is ESG integration, whose principal aim is to achieve financial objectives in investment portfolios through integrating financially relevant ESG data. The latest research on this topic shows that stronger ESG companies often incur lower risk, pay higher dividends and have lower costs of capital than weaker ESG companies.

References Adler, & Kritzman. (2008). The cost of socially responsible investing. Journal of Portfolio Management Bekjarovski, & Briere. (2018). Shareholder Activism: Why should Investors Care? Discussion Paper: Cross Asset Strategy, Amundi Blitz, & Fabozzi. (2017). Sin stocks revisited: resolving the sin stock anomaly. Journal of Portfolio Management Briand et al. (2011). Integrating ESG into the Investment Process, MSCI Research Insight.

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Cuñat, Gine, & Guadalupe. (2012). The vote is cast: the effect of corporate governance on shareholder value. Journal of Finance Eccles and Klimenko (2019), The Investor Revolution, The Havard Business Review, May-June edition. Fride, et al. (2015). ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance and Investments. Giese et al. (2017). Foundations of ESG Investing: How ESG affects equity valuation, risk and performance. MSCI. Gregory et al. (2014). Corporate Social Responsibility and Firm Value: Disaggregating the effects on cash flow, risk and growth. Journal of Business Ethics. Hoepner et al. (2018). ESG shareholder engagement and downside risk. The Q Group Hong & Kacperczyk. (2009). The price of sin: The effects of social norms on markets. Journal of Financial Economics Khan et al. (2015). Corporate sustainability: First evidence on materiality. The Accounting Review Krueger. (2015). Corporate goodness and shareholder wealth. Journal of Financial Economics Kumar et al. (2019). The ESG Data Challenge, State Street Global Advisors. Lee. (2015). Women on boards: Global trends in gender diversity on corporate boards. MSCI McCahery, Sautner, & Starks. (2016). Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance. Oikonomou et al. (2012). The impact of corporate social performance on financial risk and utility: A longitudinal analysis. Financial Management Steinbarth. (2016). Materiality Matters. Russell Investments UNEP Financial Initiative. (2011). Universal Ownership: Why environmental externalities matter to institutional investors, PRI. Weinstein et al. (2019). The road ahead for shareholder activism. Harvard Law School Forum on Corporate Governance.

Daniel Ung CFA, CAIA, FRM is the head of quantitative research and analysis of the ETF division of one of the largest global asset managers and has conducted and written research on the impact of environmental, social and governance considerations in the performance of financial assets. Prior to this, Daniel was a director of the research department of S&P Dow Jones Indices and held posts at Barclays Wealth and Asset Management as well as Fortis Bank and BNP Paribas. Daniel is CFA, CAIA and FRM charter-holder and holds an M.A. in European Business from the Ecole Supérieure de Commerce de Paris in France.

7

Sustainable Finance––Integrating Sustainability into Corporate Banking Laura Maida

Abstract

This chapter describes how financial institutions are integrating sustainability into their financing processes, presenting different strategies applied. First, there is a mention to the “excluding policies” that limit activities on sensitive sectors, and to specific initiatives, banks are launching to promote financial inclusion. More focus is dedicated to the risk management perspective, as additional regulation is expected to come soon in this field. Afterwards, there is a remark to some overarching approaches to sustainable lending, i.e. embedding ESG lens into the whole credit value chain. In conclusion, three enabling factors are stated: (i) availability of data, (ii) training and divulgation, (iii) governance and CEOs commitment. The chapter includes also a brief account of the Intesa Sanpaolo case. Keywords




Sustainability Impact banking lending Sustainable finance




7.1


Climate change risks
ESG
Sustainable

Introduction

“Sustainable finance” can be broadly defined as integrating environment, social and governance (ESG) considerations into financing and business decisions, supporting directly or indirectly the framework of the United Nations’ Sustainable L. Maida (&) Intesa Sanpaolo, via Monte di Pietà 8, 20121 Milano, Italy e-mail: [email protected] © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_7

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Development Goals (SDGs). Financial institutions are nowadays going through a process of translating their commitment on sustainability into business practices. While in some financial business lines (e.g. in the asset management), ESG standards are getting consolidated, as new lexicon and metrics have been discussed and applied for long; in other banking lines––and in particular in corporate banking–– much still is yet to be done, although several major initiatives have been implemented already, especially by the larger international groups. Such actions are aimed at promoting specific projects and companies that embrace higher sustainability standards or at reducing negative impact on the environment and on the society, reorienting the Bank’s balance sheet accordingly. There is a general consensus that sustainability will further take a central role in shaping the business strategy of financial institutions, at least as a response to pressure coming from all the stakeholders, employees, customers, shareholders, regulators, communities, and to rebuild trust, deeply affected by the 2008 crisis and by the current Covid 19 pandemic emergency. In translating sustainability into their financing process, banks pursue two main objectives: • to manage risks stemming from social and environmental externalities, especially those deriving from the climate change, in order to ensure a solid and resilient financial system; • to reorient capital flows and banks’ financing towards sustainable investments, to achieve inclusive growth and promote environmental or social aims. In the last years, there has been more activity around the former objective, driven also by the current and expected regulation. Different approaches have been undertaken to integrate sustainability into the core corporate banking processes: some are very specific, e.g. setting exclusion on certain activities or launching dedicated initiatives to promote specific customer segments; other approaches are more ambitious and overarching, embedding the ESG criteria into the whole credit value chain (see, among others, Accenture and UN Global Compact 2019).

7.2

The “Do not” Paradigm––“Excluding” Specific Types of Activities

Historically, financial institutions have considered to exclude specific sectors or type of activities in their financing schemes. That is a set of rules and policies often discussed and approved at Board level, inspired by the Code of Ethics of each corporation. A Code of Ethics is adopted by a company as a self-regulation document, for the integration of social and environmental considerations into company processes, practices and decisions, beyond those required by the national

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legislation. It contains voluntary commitments in the management of relations with all the internal and external stakeholders, setting out the core values and principles of a company. Typical examples of “excluded” activities are • Ammunition/weapons, military or police equipment or infrastructure, although with several differences. For example, controversial weapons, such as Anti-Personnel Landmines (APLs) and cluster bombs prohibited by the Ottawa and Oslo treaties signed by numerous countries, are generally excluded; military equipment might be approved, with restrictions on trade finance (e.g. if the transaction implies the export to a non-OECD country); • Gambling and related equipment; • Tobacco production, manufacturing and distribution.

7.2.1 A New Stream of “Excluding” Policies, to Act Against Climate Change In the aftermath of the Paris Agreement of 2015, which aims at limiting global warming below 2 °C, the attention of policy makers, regulators, investors and civil society on climate change increased dramatically. Under this new sensibility on climate change, and in an effort to introduce ESG principles into practice, several banks started to develop financing (and investment) policies that pose additional “exclusion” or “limitations” to specific sectors, recognized as sensitive, i.e. those carrying significant risks. The sensitive sectors are generally identified by the means of an in-depth assessment of their potential negative impact on the environment (impacts on biodiversity, natural and critical habitats and ecosystem services) and on the society (such as physical or economic displacements of people and community health and safety). The most sensitive one is coal-fuelled power, and that is why many financial institutions have already established––or are in the process of developing––new coal policies. In fact, coal is still playing a key role in the world economy as one of the most accessible fossil fuel resources for large-scale electricity generation and will continue to be part of the energy mix of many countries in the foreseeable future. Power generation from coal, with currently deployed technologies, is however the most CO2 intensive of power sources and significantly contributes to climate change, through massive emissions of Greenhouse Gases (GHG). Some financial institutions have also introduced further specific policies, regarding other energy sources (e.g. oil and gas, nuclear power), mining, construction and real estate, agriculture and forestry. All these policies––that may include a multi-year timeframe for a full adoption––are intended to set stricter standards on new activities (i.e. new lending or

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new project finance), with generally no implications on pre-existing activities (and no consequent dismissal of current lending lines). Any request of operations that is not fully compliant to these policies could be either rejected or it could activate an escalation process through established governance mechanisms (e.g. approval only by the CEO or by the Board Committee) and it might require transparency obligations both for the borrower and the bank.

7.3

Solutions to Promote Financial Inclusion

Banks have recognized that there are individuals, corporates and organizations in general that tend to have limited access to credit and that are not adequately financially supported when adopting the standard (risk and credit) business practices. Nevertheless, they might be worth investing in, as they bring environmental or social benefits. From a bank’s standpoint, the opportunity space to grant credit is determined by many factors, among which there are the requirements set by the regulator (that aims at ensuring a solid and resilient banking system) and the expected return (that should pay off implied risks and remunerate capital). Consequently, a set of frameworks, models, policies and methodologies is applied to define whether a specific corporate or individual customer, project or proposal, is “bankable” at a reasonable interest rate. A growing number of retail banks have developed an offer of products or solutions for unserved or under-serviced customer segments. Typical examples are microcredits or small business loans for women to promote female entrepreneurship (sometimes aimed at encouraging back to work from maternity). These products’ features may include reduced interest rates, simplified paper requirements, dedicated marketing and comms. In some cases, banks have designed an integrated value proposition to the third sector organizations, which covers also • specific rating models developed to better suit the characteristics of customers from the non-profit sectors (e.g. with expanded qualitative criteria and weights), leading to moderated rates; • broader set of products/services offered (e.g. fiscal advisory), and streamlined underwriting process; • dedicated Relationship Managers (RMs) that can help to raise the financial literacy of non-profit organizations; • public affairs and institutional relations to advocate for the non-profit needs and interests.

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The Risk Management Perspective

7.4.1 Climate Change Risks and the TCFD There is a new awareness that climate change represents a main issue at global level, with clear implications on the economic systems (with differences across sectors and asset classes), and consequently on the financial system. Since 2015 and the Climate Change Conference in Paris (COP21), the financial sector has been subject to special attention from the legislator. It was only more recently and because of an increasing pressure of Central Banks, regulators and supervisory bodies that the financial institutions started to work on ways to take these new types of risks into account, from a risk management perspective. In December 2015, the Financial Stability Board established a Task Force for Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg, to develop guidelines for voluntary climate-related financial risk disclosures. The TCFD recommendations’ final report, presented at the G20 Summit in 2017, represents a milestone for companies in dealing with climate change (TCFD 2017). The TCFD has divided climate-related risks into two major categories: • transition risks, as transitioning to a lower carbon economy may entail extensive policy, legal, technology and market changes to address mitigation and adaptation requirements related to climate change; • physical risks resulting from climate change that can be “acute” (event driven–– e.g. extreme weather events, such as floods or hurricanes) or “chronic” (longer term shifts in climate patterns––e.g. water availability or temperature increase). As several models and scenario analysis are pointing out, although the climate change is a global phenomenon that will impact all countries, its negative effect will disproportionately affect sectors and geographies in a material way. Larger and more international financial groups are considering how to include climate change risks into their risk management paradigm: • Risk governance and Risk Appetite statement: very few players have already embedded considerations on climate change into their Group-level risk appetite framework, despite an increased awareness and pressure at Board level around climate change and its implications on financial institutions. • Rating models, which pose one of the main challenges to risk managers, as traditionally risk models are backward looking, and require long historical trends to be assessed as reliable. The inclusion of climate change factors may imply the development of forward-looking approaches grounded in scenario-based analysis. However, that might not be enough, as Bolton et al. say scenario-based analysis will not suffice to preserve financial stability in the age of climate change: the deep uncertainty at stake and the need for a structural transformation of the global socio-economic system means that no single model or scenario can

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provide sufficient information to private and public decision makers; forward-looking approaches remain highly sensitive to a broad set of uncertain parameters (“The green swan” Bolton et al. 2020). • Risk policies. As mentioned earlier, many financial institutions are developing policies with limits and sector exclusions to appraise for climate change implications; often those policies address concerns on reputational risk rather than actual climate risk management. That is a new and rapidly evolving field, so we are far from coalescing around best practices or industry standards (Stiroh 2020). Some financial institutions have recently activated internal climate-related working groups to develop a consistent approach, but only a few have already thoroughly redesigned their risk management practices, in a quantitative manner. As a matter of fact, in a global survey run by Oliver Wyman in November 2018 (Colas et al. 2019), only 2 out of 30 leading financial firms affirmed that they consolidate climate risks into their credit rating process (Fig. 7.1). The starting point is to develop a comprehensive and quantitative approach for the identification and measurement of climate risk embedded in the credit portfolios. Following the TCFD recommendations, a financial institution starts identifying the business sectors in the loan book that are potentially most affected by climate risk, both in terms of transition and physical risks. Then, there is an assessment of the Group’s exposure to these risks, adopting the logic of financial materiality (impact of climate change on the value of the counterparty and consequently on credit risk). The potential impacts, the related time horizon (short, medium, long) and the consequent mitigation actions taken for each potential risk observed should be reviewed regularly. That is a challenging process, as there are no established common standards to apply. There are several industry-led initiatives to share best practices and to develop a common understanding across financial institutions. In particular, it is relevant to mention the work done by the United Nations Environment Programme Finance Initiative (UNEP FI), a partnership between UNEP and the global financial sector on a number of projects: (i) definition of the Principles for Responsible Banking; (ii) pilot project on implementing the TCFD recommendations for banks; (iii) assessment of the usability of the taxonomy for banks, together with the European Banking Federation (EBF); (iv) scenario analysis methodologies and tools reconciling environmental and financial data. At the core, there is still a need to outline clearly how the climate change will affect credit, market, operational risks, i.e. the primary financial risks traditionally managed in banking. Additionally, many financial players have concerns on potential reputational damage, and they put in place specific actions to identify, monitor and manage climate-related reputational risks (Buranatrakul and Swierczek 2017).

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Fig. 7.1 How are climate risks captured in the credit rating process?

7.4.2 Beyond Climate Change, the ESG Framework When moving from a pure climate change focus to a broader concept of ESG, complexity increases and there is even less literature on how financial institutions are practically implementing those factors. As the European Commission––with its Technical Expert Group on sustainable finance (TEG)––clarified on December 2019, although climate change is definitely one of the most alarming factors affecting the environment, the “E”––within the famous ESG acronym––goes beyond that. In fact, in an effort to define the classification system, reducing fragmentation of market-based initiatives and limiting “greenwashing”,1 the Commission defined (among other criteria) that an “environmentally sustainable economic activity” should provide substantial contribution to at least one of these six environmental objectives: (1) (2) (3) (4) (5) (6)

Climate Change Mitigation Climate Change Adaptation Sustainable Use and Protection of Water and Marine Resources Transition to a Circular Economy Pollution Prevention and Control Protection and Restoration of Biodiversity and Ecosystems.

The supervisory bodies are undertaking significant initiatives to establish a new taxonomy and to reinforce sustainability considerations into the current regulatory framework. In particular, the European Banking Authority is expected to deliver a significant amount of work between 2019 and 2025 (EBA 2019). 1

Any practice aimed to convey a false impression that a company’s products or services are environmentally sound, making use of misleading claims or information.

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7.4.3 The Equator Principles for Project Finance The Equator Principles (EPs) is a risk management voluntary framework aimed at supporting financial institutions in determining, assessing and managing environmental and social risks in projects. The Framework is grounded on the Performance Standard (PS) of the World Bank’s International Finance Corporation (IFC) as well as on the Environment, Health and Safety Guidelines (EHS Guidelines). It focuses on four financial products (Project Finance Advisory Services, Project Finance, Project-Related Corporate Loans and Bridge Loans) and provides a minimum standard for due diligence and monitoring to support responsible risk decision-making. The EPs framework identifies ten actual principles whose relevant requirements must be fully embraced by adopters intending to commit to a new project. Variables such as the socio-environmental characteristics of the country, the industrial sector and the characteristics of the project in question are considered, when assigning a different risk category (A is high, B medium and C low) to the projects to be financed. The EPs framework was launched in 2003 by ten international Banking Groups and is now actively employed by 105 financial institutions in 38 countries. The EP Association released the new EP IV in 2019: it will come into force in July 2020.

7.5

Embedding ESG and Impact Lens into the Credit Value Chain––A Positive Approach to Sustainable Lending

A few financial institutions are actively integrating sustainability into their business strategy, beyond adopting only a pure risk management perspective. That comes from the awareness of the essential role finance can play in promoting a healthier and more inclusive economy. Leading the way on this route can also represent a distinctive factor towards corporate customers, bearing business opportunities (and not only risks). This approach is inspired by the principles of Positive Impact Finance, released by the UNEP FI in 2017, to mobilize financial players around the need to provide a direct response to the challenge of financing the Sustainable Development Goals (SDGs), delivering a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated (UNEP FI 2016, 2018). Such an approach thoroughly affects the lending value chain, from credit strategies and capital allocation decisions to origination, underwriting, servicing and monitoring and collection. Some examples include:

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• Setting targets on portfolio steering: a few players are defining a strategy to shift their book loan towards the below two-degree goal of the Paris Agreement, grounding their approach upon PACTA (Paris Agreement Capital Transition Assessment) methodology for corporate lending (provided by the 2° Investing Initiative). Such approach takes into account materiality, focusing on the most carbon-intense sectors (i.e. coal, oil and gas, power, automotive, cement, steel and shipping), and it requires engaging with companies, rather than simply excluding them. Finance players will actively support clients in their transition, looking at their future investments to shift to low-carbon assets, in line with science-based scenarios. With an established taxonomy on the other aspects of the ESG framework, a similar commitment and approach could be oriented towards a broader concept of sustainability. • Including impact factors into credit assessment. In addition to the usual economic and financial assessments, new models are developed to give an easier access to credit, with more favourable financial terms, by highlighting the intangible qualities of the business and positive impact to environment and society. Inputs of the model could vary a lot, covering both environmental and social aspects, such as trademarks, patents, quality and environmental certifications, research and development activities, innovation and digitalisation, although the list differs significantly from player to player, and it will expand considerably once taxonomy around sustainability is established. • Launching innovative finance solutions: in the last year, there has been an acceleration of the launch of Green and Sustainable Loans, i.e. loan instruments made available exclusively to finance new or existing projects with environmental/social objectives (or a mix of both), recognized by specialized third-party providers. In EMEA, in 2019, green and sustainable loan volumes reached €103 Bn, 3  more than 2018 volumes (in a corporate lending market that has decreased by −6% from 2018 to 2019). Similarly, there is a high demand also for Green bonds, with € 27 Bn issued in EMEA in 2019, which represents a  2.2 versus 2018, while the overall DCM Euro corporate has increased by +35% in the last year. Some financial institutions have also recently activated credit plafond at preferred conditions for specific initiatives, e.g. to support innovative and transformative projects for SMEs and large companies to (re)design their business model in line with the principles of the circular economy. • Undertaking special measures against crisis: in case of emergencies and crisis (e.g. catastrophic events or the recent Covid 19 pandemic), impact considerations might be crucial to support distressed companies, and to limit economic severe consequences. Typical examples of initiatives adopted by financial institutions are corporate loan payment pause or deferral, or fee waivers. The case of Intesa Sanpaolo Intesa Sanpaolo is one of the top five banking groups in the Euro Area by market cap and the leading bank in Italy, serving 11.8 M clients domestically and 7.2 M

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clients internationally. The Bank has always held a strong commitment on sustainability, and to the economic, social and cultural development of Italy. In this matter, Intesa Sanpaolo dedicates a remarkable focus on Arts and Culture, as it holds one of the largest bank art collections globally, with more than 30 K artworks, and three private museums (a fourth to be open in the coming years) and contributes to safeguard the Italian historical and artistic heritage and to the dissemination and promotion of culture in any field. The Bank’s commitment to sustainability is evidenced by its positioning among the top in many sustainability indexes (e.g. in the Corporate Knights Global 100 ranking, CDP Climate A list, MSCI AAA ESG rating, among others), and by its active participation to all the UN initiatives on sustainable finance. Under the 2018–2021 Business Plan, the Bank reinforced the centrality of sustainability in its business strategy, including several dedicated initiatives and specific measures and targets on impact, within the set of Business Plan KPIs regularly accounted and communicated to the financial community. In fact, the CEO provides periodic updates on those, during his quarterly calls on results to financial investors, and, on a yearly basis––a few days before the announcement of the yearly financial results––he holds a conference with external parties and stakeholders to present the Banks’ results of the impact actions, and to share with the community the need of a collective effort in promoting inclusion and sustainability. The ability to act as the engine of sustainable and inclusive development is also substantiated by the Group’s disbursements for social and environmental purposes. In 2019, the Bank issued new loans for high social impact for about €3.8 Bn, equal to approximately 6.6% of total granted. Those impact loans include microfinance, anti-usury loans, products and services for associations and entities in the Third Sector, loan products for the most vulnerable social groups to promote their financial inclusion (e.g. of young people, female entrepreneurs, start-ups) and loans to support people affected by disasters. Similarly, as part of the Bank’s response to the economic consequences of the Covid 19 emergency, Intesa Sanpaolo launched new impact loans, which offer extended repayment terms, highly advantageous rates and a component of non-repayable grants, to support some of the most affected hospitals or municipalities. Moreover, in 2019, following the guidelines contained in Business Plan, the Bank launched a “Fund for Impact” to promote new credit access opportunities to groups usually unserved, with funds of €250 M to support the disbursement of around €1.25 Bn within the three years plan. On the environmental side, Intesa Sanpaolo disbursed in 2019 additional €2.2 Bn for Green and Circular economy. The Bank has designed specific products to support the corporate clients’ development of efficient energy production plants and a diversification/optimization of their energy sources (e.g. Green Revolving Credit Facilities, Green Syndicated Loans, Green/Sustainable Bonds and Project Finance dedicated to the world of renewable energy). Moreover, in the corporate banking area, there is a strengthening of internal Relationship Managers’ skills and competences on green (and ESG in general), with the activation of specialist advisory

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services. Recently, Banca IMI (part of the Intesa Sanpaolo Group) signed with Italo (high-speed railway player) a loan worth €1.1 Bn with an ESG Hedging mechanism, i.e. the Bank will reward the virtuous conduct of the transport company, improving the conditions of the derivative if certain ESG (Environment, Social, Governance) sustainability indicators are complied with. Lastly, the commitment of Intesa Sanpaolo on circular economy is proven by its close partnership with the Ellen MacArthur Foundation, of which the Bank has been the Financial Services Global Partner since 2016, and by the creation of a €5 Bn dedicated circular economy credit plafond within the Business Plan timeframe. The Bank also established in 2018 a partnership with Fondazione Cariplo, to launch a Circular Economy Lab, with the mission to disseminate the circular economy principles and support the transition of the Group’s client companies through partnerships with academies and specialized firms, and through an open innovation programme (Intesa Sanpaolo 2020).

7.6

Conclusions––Three Enabling Factors

As leading financial institutions are deploying a strategy to pursue sustainability, three enablers prove to be crucial to move forward on this path.

7.6.1 Data Availability A financial institution is at the heart of a network of corporate relations; with any customer, there is generally a consolidated knowledge and mutual understanding. The concept of “client intimacy” gets a different and new meaning, as the financial institution needs to know what the positive impact is, that a counterparty or a specific project brings to the environment or to the society. It might also require an in-depth understanding of the technologies adopted for that specific industry. Moreover, such a new set of information and knowledge must come through the “information system” and through data, which can be collected and elaborated by the banking models and systems. In this matter, two elements are key: • The size of the customer counterparty: larger companies (and especially, public companies) provide a greater deal of transparency on how they operate and their potential benefits. Moreover, for larger companies, there is a dedicated service level with accounted Relationship Managers (RMs); moving towards small/medium enterprises; the degree of knowledge available to the lender is more limited, with also a higher ratio of# of customers per RM. Therefore, a scarcity of data on the counterparty for the appraisal of credit worthiness carries a higher potential risk to penalize SMEs, with a clear downturn on society.

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• The granularity and flexibility of the banking info system: including impact factors into the credit underwriting process might imply an extension of the set of information requested to the corporate customers (e.g. additional data required, expanded qualitative questionnaire for the rating models). Financial institutions with more granular client data collection or with a higher degree of flexibility in their info system might be advantaged. On the contrary, since there is not yet a consolidated taxonomy on what are all the ESG elements to be factored in, some banks might postpone changes on their info systems, as they require significant capital budget investments and long time to deliver. To partially overcome constraints on data availability, banks partner with ESG data providers to complement their customers knowledge. There are several players in this business, each with its own methodology, scope and focus of analysis. Broadly speaking, ESG data providers could represent a convenient way to get a quick, outside-in ESG assessment of a counterparty; nevertheless, few considerations should be made: • As a recent MIT paper demonstrated, ESG ratings have a limited correlation (calculated as 0.61 in a sample of 823 companies), while traditional credit ratings are correlated at 0.99, due to the differences in the criteria composition and the number of qualitative elements factored in. In particular, on Social and Governance, correlation is significantly low (Poh 2019; Li and Polychronopoulos 2020). • ESG scorings usually cover only the larger and more international companies, and therefore, a different solution is required for SMEs. Only recently a more domestic market for ESG scoring has been developing, focusing on lower size corporates. • Finally, as ESG data providers are not regulated yet, the use of unreliable information could represent a further source of litigation with companies.

7.6.2 Training and Divulgation Financial institutions can exert an influence on activities and behaviours beyond their direct control, in particular on customers and suppliers. In promoting a more sustainable development, they might take the opportunity to partner up with their corporate clients to support their transition to sustainability. That would need an extensive deployment of ESG trainings to ensure full appropriation of new approaches, metrics and language by all the RMs and corporate clients as well. For specific sectors, that might also require partnerships with technical consultancy or engineering firms/academic institutions, to be able to assess the impact of new technologies and industrial applications adopted. Some financial players are also taking the lead in the divulgation and spreading of a new economic culture, more sensitive to environmental and social impacts,

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towards the corporate community. Beyond a reputational standing, that might generate tangible business opportunities with like-minded companies, or with corporates pressured by coming stricter regulations or by raised expectations from consumers and employees. In this perspective, some financial players have launched “ESG” or “sustainable finance” advisory teams, which bring to corporate customers sector-specific sustainability related knowledge, coupled with finance structuring expertise.

7.6.3 Governance and CEO Commitment An acceleration towards a more sustainable finance would derive from a stronger commitment of CEOs. The latest edition of the “CEO Study on Sustainability” from UN Global Compact and Accenture shows that personal motivation of the top management is a key driver in pushing a company towards a more sustainable approach, and leaders who are genuine in their concerns are most effective in driving sustainability and business performance. That is also an expectation coming from the market, as proven by Larry Fink’s (Founder, Chairman and CEO of Blackrock) yearly letters to CEOs, i.e. in 2020 “A Fundamental Reshaping of Finance”. To reinforce that, some financial institutions have translated sustainability objectives into the variable compensation scheme. The stewardship on sustainability from Chief Executives gets crucial to • Raise the level of ambition in prioritizing actions against sustainable goals, mobilizing internal cross-function working groups; • Set clear impact indicators and targets and define a multi-year roadmap to implement; • Stimulate not only to make incremental improvements, but also to rethink business models towards sustainability, eventually orchestrating ecosystems, partnering with public and private institutions; • Be the spokesperson, including sustainability and positive impact in her/his communication to all stakeholders.

References Accenture and United Nations Global Compact. (2019). The decade to deliver—A call to business action. Retrieved from https://www.accenture.com/_acnmedia/PDF-109/Accenture-UNGCCEO-Study.pdf#zoom=40. Bolton, P., Despress, M., da Silva, L. A. P., Samama, F., & Svartzman, R. (2020). The Green Swan—Central Banking and Financial Stability in the age of climate change. Bank for International Settlements. Retrieved from https://www.bis.org/publ/othp31.htm. Buranatrakul, T., & Swierczek, F. W. (2017). Climate Change Strategic Actions in the International Banking Industry. Retrieved from https://doi.org/10.1177/0972150917713371.

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Colas, J., Khaykin, I., & Pyanet, A. (2019). Climate change—Managing a new financial risk, Oliver Wyman. Retrieved from https://www.oliverwyman.com/content/dam/oliver-wyman/v2/ publications/2019/feb/Oliver_Wyman_Climate_Change_Managing_a_New_Financial_Risk1. pdf. European Banking Authority. (2019). EBA Action Plan on sustainable finance. Retrieved from https://eba.europa.eu/file/376050/download?token=oMDnkR18. Fink, L. (2020). A fundamental reshaping of finance. Retrieved from https://www.blackrock.com/ corporate/investor-relations/larry-fink-ceo-letter. Intesa Sanpaolo. (2020). 2019 consolidated non-financial statement. Retrieved from 2019 https:// group.intesasanpaolo.com/content/dam/portalgroup/repository-documenti/sostenibilt%C3%A0/ dcnf-2019/eng/DCNF%202019_en.pdf. Li, F., & Polychronopoulos, A. (2020), What a difference an ESG ratings provider makes! Research Affiliates. Retrieved from https://www.researchaffiliates.com/documents/770-what-adifference-an-esg-ratings-provider-makes.pdf. Poh, J. (2019). Conflicting ESG ratings are confusing sustainable investors. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2019-12-11/conflicting-esg-ratings-are-confusingsustainable-investors. Stiroh, K. (2020). Climate change and risk management in bank supervision. Remarks at the Conference on Risks, Opportunities, and Investment in the Era of Climate Change, Harvard Business School. Retrieved from https://www.bis.org/review/r200309b.htm. TCFD. (2017). Recommendations of the task force on climate-related financial disclosures. Retrieved from https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report062817.pdf. UNEP FI. (2016). Positive impact Manifesto. Retrieved from https://www.unepfi.org/fileadmin/ documents/PositiveImpactManifesto.pdf. UNEP FI. (2018). Rethinking impact to finance the SDGs. Retrieved from https://www.unepfi.org/ wordpress/wp-content/uploads/2018/11/Rethinking-Impact-to-Finance-the-SDGs.pdf.

Laura Maida is the Head of Strategic Initiatives in Intesa Sanpaolo and part of the leading team of the ISP4ESG project. Previously, she has been in Google as Industry Head of Finance for four years, covering the top Italian Banking and Insurance groups and, prior to that, she has been ten years in McKinsey & Company, that she left as Associate Principal. She holds an MBA from Insead (July 07 class) and a degree in Economics from Bocconi University.

Part III

Definition and Execution of Sustainable Strategies

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Business’ Role in a Changing Society. Key Steps to Deliver a Purpose-Led Strategy that Responds to Climate Change and Social Inequality Charlotte Wolff-Bye

Abstract

Climate change and inequality are rearing their ugly heads, and the purpose of business is under question. Business seeks meaning in delivering sustainability ambitions. Climate change and inequality, further exacerbated by the COVID-19 pandemic, create seemingly unsurmountable challenges to business. At the same time, public sentiment and consumers call for a more sustainable world. The Paris Agreement and United Nations Sustainable Development Goals set out time-bound ambitions to prepare and deliver a better future by 2030. Expectations on business have never been greater. The purpose of this chapter is to examine changes in societal norms and how this contributes to a new strategic context for business. Examples are drawn from leading business practice on how an organisation can navigate the “new normal” of great societal need, inform strategy, prepare and deliver the needed change. Consideration is also given to the growing acknowledgment of the merits for business to adopt a social purpose and commitment to serve broader sets of stakeholders, in addition to shareholders. Keywords
















Sustainability Leadership Strategy Climate change Paris agreement United Nations sustainable development goals Social purpose Stakeholder capitalism







C. Wolff-Bye (&) Surbiton, UK © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_8

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Introduction

“Nobody will want to work for us, work with us or invest in us.” These were the stark words aired at a recent roundtable discussion on the demise of conventional business. The year is 2020. Wildfires and floods are interchangeably making the headlines while public discord is disrupting daily lives in many nations, including Hong Kong, Iran and Chile. All while the COVID-19, or more commonly known coronavirus, is embracing the world in crisis. This new context is far from the realms of standard business management literature. Society is changing and somehow it seems even more profound for business. What do the perils of society mean for business and responsible leadership? The Paris Climate Agreement and the United Nations Sustainable Development Goals provide frameworks for what success would look like in 2030—bringing an end to poverty and global warming and ensuring that all people enjoy peace and prosperity. To have a remote chance of achieving these ambitions, decisive action over the next decade is critical. With only ten years left, how can business be trusted and assert leadership in delivering the future we want?

8.2

An Explosion of Challenges

Industrialisation has enabled some of the greatest advances over the past century, bringing hundreds of millions of people out of poverty. Yet society is stretched with a growing sense of despair and inequality, with the added concern of climate change, giving rise to calls for a “just transition”.1

8.2.1 The Prominent Challenge of Climate Change Climate change is affecting daily life through more extreme weather and irreversible effects on nature and wildlife. Scientific bodies, such as the Intergovernmental Panel on Climate Change and the Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services, report how our current economic systems disturb and degrade the Earth’s processes and deplete natural resources that life depends on, with potentially irreversible effects (IPCC 2018; IPBES 2019). In November 2019, a statement declaring “unequivocally that planet Earth is facing a climate emergency”, signed by some 11,000 scientists, raised the alarm of how inaction would lead to untold human suffering (Ripple et al. 2020). The World “The ILO Guidelines for a just transition towards environmentally sustainable economies and societies for all … highlight the need to secure the livelihoods of those who might be negatively affected by the green transition and also stress the need for societies to be inclusive, provide opportunities for decent work for all, reduce inequalities and effectively eliminate poverty.” International Labour Organisation (2015).

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Economic Forum’s 2020 Global Risk Report features for the first time climate change related issues in each of the top five likely long-term risks (WEF 2020a). These risks represent disruptive forces with the potential to undermine all other efforts that are aimed at achieving long-term sustainable development. Going forward, economic growth must be decoupled from our dependence on energy sources that contribute to the concentration of greenhouse gas emissions in the atmosphere. Energy efficiency, renewable energy, electrification of transport and protecting and increasing forests are important measures to combat the prominent challenge of climate change. Adaptation and resilience to the effects of climate change will be equally critical for the global economy as it will be for local communities.

8.2.2 Leaving no One Behind Alongside climate change, we have social, environmental and governance challenges—as depicted by the United Nations Sustainable Development Goals—that have the potential to exacerbate the global risk picture. Owing to the uneven development and recovery from the 2008 global financial crisis, further aggravated by the COVID-19 pandemic, real and perceived inequality continues to grow with parts of society becoming disenfranchised or disaffected. All while the adoption of Artificial Intelligence is changing industries with direct implications for the future of work. The founder of the World Economic Forum, Professor Klaus Schwab, uses the term Fourth Industrial Revolution to describe how the rapid advancement in areas such as Artificial Intelligence, the Internet of Things, Biotechnology and Materials Science will fundamentally change how we live, work, consume and engage. Big data will transform every part of society including healthcare, education and global supply chains while driving economic growth (Schwab 2016). The onslaught of disruption has already displaced many traditional jobs and contributed to stagnating or decreased income, with the financial benefits concentrated among technology innovators, shareholders and investors. Schwab lists inequality as the greatest societal concern, with the potential for “democratic malaise and dereliction”, as middle classes around the world are increasingly feeling left out, with a sense of injustice (Schwab 2016).

8.2.3 Changes in Societal Norms “There are no jobs on a dead planet—the alternative is to build good jobs on a living planet.” This poignant statement by the International Trade Union Confederation calls for action on climate change and demands a just transition (ITUC 2020). Adding to the chorus is an unprecedented level of public concern about climate change and the effects it may have on nature and society. Throughout 2019, millions of schoolchildren staged protests under the banner “Friday for Future”. A global movement started by teenager Greta Thunberg,

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urging immediate action to address climate change. Extinction Rebellion, another grassroots movement, using tactics of civil disobedience, has been mobilising the young as well as senior citizens in protests. Employees, most notably at Amazon, organised a walkout of work to voice critique on their employer’s environmental credentials. In 2017, #MeToo grew into a global social media movement, when several known Hollywood actresses made sexual abuse allegations against the film producer Harvey Weinstein. In the following year, Oxfam, the international charity, was reported to have covered up serious sexual exploitation when assigned to relief work after the 2010 earthquake in Haiti. The ripple effects of both cases include more victims of sexual abuse being empowered to seek justice. Campaigns, protests and movements as those mentioned above depict an evolution in societal norms, while at the same time the public is increasingly more concerned about the future. The widely reported Edelman 2020 Global Trust Barometer reports a growing sense of inequity in the majority of 34,000 respondents across 28 surveyed markets. People fear about the future, and their role in it. Overall confidence is low, with only scientists, community leaders and citizens trusted by the majority to either do the right thing or deliver on promised improvements for society (Edelman 2020). Business leaders are trusted by around half the respondents. Business is the only entity in society that is seen as competent in generating wealth, innovation and economic prosperity, yet regarded as only serving the interests of the few. Ethical drivers of integrity, purpose and dependability are seen three times more important to company trust than competence. Non-governmental organisations are the only listed entity considered ethical (Edelman 2020). This changing public sentiment is delivering a political response. As of February 2020, over 30 countries had declared climate emergency leading to new priorities and regulatory changes. In March 2020, the European Commission proposed a climate law, designed to make it the world’s first climate neutral region by 2050 (EC 2020). Another example includes proposed mandatory disclosures on climate risks for companies listed on the UK stock market, in accordance with recommendations of the Taskforce on Climate-related Financial Disclosures (FCA 2020). New laws and regulations are being instituted widely to protect workers’ and victims’ rights to restitution, including safeguarding policies, aiming to protect individuals from abuse, harm and neglect. Investors are also increasingly concerned about the resilience of companies affected by climate change, the growing green economy and broader social and governance practices. Dedicated groups such as The Institutional Investor Group on Climate Change, Climate Action 100+ and Global Sustainable Investment Alliance promote strengthened practices in so-called ESG—social, environmental and governance—criteria.

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8.2.4 Expectations on Business Have Never Been Greater Addressing climate change will directly impact communities and job markets, and business models will be tested. The needed change in our economies and unsustainable resource use will require extraordinary levels of innovation, capital reallocation and transformation. Companies that can adapt to these new circumstances have the potential to reap substantial rewards. The business opportunity in delivering towards the United Nations Sustainable Development Goals is valued at $12 trillion, equivalent to around 10% of global GDP, adding almost 380 million jobs by 2030 (Business and Sustainable Development Commission 2017). In response to regulatory pressures and growing environmental and social consciousness, leading companies have developed sophisticated approaches to manage risk and adopted novel approaches to embed sustainability. Such may include advanced reporting, resource efficiency, research and development, stakeholder engagement, local enterprise and workforce development, revenue transparency and human rights. Nonetheless, decades of major corporate scandals, including claims of accounting irregularities by Enron, Parmalat and Shell, tax avoidance by Starbucks and the BP oil spill in the Gulf of Mexico have eroded society’s trust in business (Grayson et al. 2018). The financial crisis that started in 2008 affected millions of people, and progressive companies began to re-evaluate the role of business in society. GE, Walmart, Unilever and M&S all launched major activities to develop a competitive edge by addressing sustainability issues. This meant setting public targets, supported by internal mechanisms to aid decision-making and delivery. Still, current mainstream business practices are not effectively addressing global challenges, such as lack of economic opportunity, poor health and education, and environmental degradation at the speed and scale required (Grayson et al. 2018). Business does not own the responsibilities of government; however, it has an essential role in contributing to progress for society, which in turn is fundamental to business resilience and success in any given location (Porter and Kramer 2011).

8.3

Preparing for Change

The 2020s must be the decade of demonstrable action to reverse the trend of global warming, erosion of nature and social fragmentation. For business, this means getting to the habit of leading in constant change. But changing organisations is difficult, often unwanted and has many risks. It is also counter-intuitive, as companies tend to thrive in consistent and stable operating environments with clear line of sight of regulatory and fiscal conditions. But there is a strong argument that securing future success can only be achieved by anticipating and being well prepared for change. This means taking selective risks, anticipating barriers and acting decisively towards the end goal of progress for society.

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Neste (petroleum refineries), Novo Nordisk (pharmaceuticals) and IKEA (furniture) are examples of leading multinational companies that are evolving their business models to deliver goods and services that better respond to the needs of society. Aspirational targets stretch from substantial greenhouse gas emission reductions to preventative healthcare and circular business models that eliminate waste. Unilever has implied its intention to divest brands that do not match or meet the company’s sustainability goals. It is taking its commitment a step further by building specific sustainability-themed communities, supplier and innovation strategies around key brands, (Wood 2019). Microsoft has announced that by 2050 it will remove more carbon from the atmosphere than it had ever produced since it was founded in 1975 (Microsoft 2020).

8.3.1 Empowering Employees to Help Design and Deliver Strategic Change Equinor, formerly known as Statoil, is a Norwegian broad energy company that is making dynamic moves to deliver energy in a low-carbon future. Knowing that inaction on global warming was elevating climate change from a slow-burning concern to become a business-critical matter, the management team had to make bold moves to prepare for the future. In 2014–15, the company was already leading the industry in carbon efficiency and had a sustainability strategy that had been approved by the board of directors. Despite international growth, Equinor had always stayed true to the strong Norwegian ethos of actively engaging employees and caring for the physical environment. These traits were a good basis to address the next chapter in the history of the company, but it was apparent that improving existing processes would only go some way in shaping the future of energy. Emerging company leaders were immersed into a training programme that included dialogue with dozens of international leaders from academia, business, politics and non-governmental organisations, to understand different viewpoints and expectations on how the world’s energy systems should and could evolve. The company also took the time and care in engaging employees in a process of revisiting the purpose, vision and values of the company. In 2015, a sharp drop in oil prices meant Equinor had to focus on costs and further efficiency improvements, but it also made a bet on energy systems changing and launched Equinor’s dedicated New Energy Solutions division. The management team had the conviction to steer the company in a new direction with the knowledge that employees had been involved in the change process. The following year, a refreshed strategy was announced to the markets, with the strapline: “always safe, high value, low carbon”. This was a transformative move for a major oil and gas producer. The implications of such strategic change would be to profoundly reconfigure how energy is produced and delivered. The implementation plan was to retain a steadfast focus on remaining competitive, while

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reducing emissions from existing production facilities through efficiency improvements, carbon capture and storage, and investing in renewable energy and emerging technologies. Both the company and its stakeholders were ready on launch to enact the new strategic direction. Creating so-called “climate ambassador” among staff was seen fundamental to success, with the objective to inform and educate employees on the science around climate change and to empower action at all levels. Suppliers were engaged through collaborative projects to reduce emissions, thus creating wider ripple effects across the whole industry. Since the launch of the refreshed strategy, Equinor has continued to reduce emissions in its oil and gas production and made significant investments in renewable energy and new low-carbon energy solutions. In 2019 alone, Equinor reduced carbon dioxide from its operations by 303,000 tonnes and added 1.8 Terawatt Hours of renewable energy, an almost 40% increase on the year before. It had secured licences to build and operate some of the world’s largest offshore wind farms, including Dogger Bank with a total installed capacity of 3.6 GW, equivalent to powering 4.5 million UK homes, and invested in solar farms in Brazil. Building on the know-how garnered from building deep-sea floating oil platforms, Equinor has established the world’s first floating wind farm combined with battery storage onshore known as Hywind, situated around 25 km off the Scottish coast. The company is also pursuing several promising partnerships in commercialising carbon capture and storage value chains and converting existing gas infrastructure to emission-free hydrogen. Equinor’s focus on empowering staff, early in the process, meant it could raise ambitions with ease, knowing that the whole organisation would be ready to deliver further emission reductions. In early 2020, Equinor pledged to be carbon neutral for all operations by 2030 and reducing net carbon intensity, from production to consumption, of energy produced by at least 50% by 2050. It also aims to grow its renewable business tenfold by 2026 (Equinor 2020).

8.4

Standing up for Change

Business success depends in large part on conducive regulation, economic systems and customer demand. This is also true in the delivery of sustainability ambitions. Success hinges on society embracing the needed change. For the world to meet stated climate goals, major changes in behaviour must be achieved, including emission-free transportation, plant-based diets and energy efficiency in buildings. As has been seen throughout the COVID-19 pandemic response, business has the capability to innovate, finance and deliver needed solutions quickly. To ensure that society keeps up the pace, it is vital for business to take a stand on issues and call for change that is in public interest.

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8.4.1 Advocacy and Integrity—A Way to Earn Trust Edelman’s Global Trust Barometer for 2020 found that 92% of respondents see it important for company CEOs to speak out on social issues, with training for future jobs, the effect of automation and ethical use of technology being the top three issues of concern. Income inequality, diversity, climate change and immigration follow in respective order. Interestingly, 74%, up nine points over the past two years, believe CEOs should take the lead on change rather than waiting for governments to impose it (Edelman 2020). As global societal challenges intensify, consumers are expecting integrity and increased advocacy or campaigning around specific causes. Business has been found to contribute to destruction of the natural environment or treating employees as cost items rather than as sources of knowledge and innovation. Countless food, beverage, tobacco and financial products have left consumers in worse health or financial stability, whereas progressive businesses are trying to undo problems of the past and shape future operations to be better aligned with social purpose. An impactful example of corporate activism is the “we are still in” campaign that was formed in response to the U.S. intent to withdraw from the Paris Climate Agreement. It is a coalition of U.S.-based public, private, community and academic organisations, representing US$9 trillion of the U.S. economy, pledging to continue to work towards the aims of the Paris Climate Agreement [We are still in 2017]. Unilever has created a web of partnerships around its main brands with the aim to drive systemic change, supported by advocacy strategies, around key issues ranging from gender issues to hygiene (Unilever 2019). Typically, business prefers to be neutral on public issues, and only weigh in on political matters when they affect direct operational interests or framework conditions. Speaking up carries a risk of offending someone with an opposing view or could lead the organisation to be labelled political. However, inaction does not further business aims (Taylor 2018). Employees are often encouraged to speak up to detect fraud or safety concerns, but less empowered to raise broader issues of societal concern. The walkout of more than 1,500 Amazon employees on climate grounds showed that employees can assert powerful advocacy. Social media offer new ways for employees to speak up, organise themselves and hold their employers up for scrutiny on what they expect to be morally just. Why is this happening? Millennials and generation Z now outnumber previous generations. These social media natives are quick to share information on their likes and don’t likes. In general, younger generations tend to be more active around societal causes, and social media amplifies their influence like never before. To be on the right side of such trends, many existing brands are building their ethical credentials, and others are created purely on ethical grounds. Where Body Shop might have had an ethical niche in the 1980s and 90s, displaying moral beliefs in business leadership is now becoming more common. This is further accentuated by the effects of the COVID-19 pandemic, where health and safety, the treatment of staff and suppliers is closely scrutinised by commentators. The Financial Times has

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gone as far as publishing a regular “Business saints and sinners in the coronavirus crisis” column, listing examples of good and bad behaviour by companies. The stronger the purpose, principles and values are embedded in an organisation, the easier it will be to stand up and influence change and respond to a diverse set of demands from the public. Lofty ambitions without substantive action and coalitions that serve corporate posturing will not stand scrutiny. This also means that companies must be consistent in their advocacy and ensure that strategy, actions and rhetoric match advocacy and lobbying practices and those of their representatives.

8.5

Delivering Change Over the Next Decade

8.5.1 Business Role in Society and Adopting a Broader Stakeholder Purpose Addressing the root causes of climate change, inequality and the opportunities and challenges presented by technology will require new ways of working, which means a change in leadership practices as we know them. Business is an essential part of functioning society. Thus, it must take an active role, and invest in strengthening and stabilising local society that can also support constructive political processes. Existing approaches across industry sectors are falling short in creating business and societal value. Research undertaken by the British Academy, canvasing views of some 350 leading experts, delivered a firm conclusion that the purpose of business is to solve economic, environmental and social problems profitably, and not profit from causing such (British Academy 2019). Societal norms have evolved in such a manner that it is no longer acceptable to cause harm to society in the sole pursuit of profit. Instead, core business should address stakeholders’ challenges comprehensively and develop solutions that benefit from new technology and science. If done effectively, the reward should be improved trust with society, resilience and profitability (British Academy 2019). Economist Milton Friedman’s thesis that “business’ only responsibility is to its shareholders” has been much critiqued as a single-minded focus on short-term gain that incentivises unscrupulous corporate behaviour (Posner 2019). To counterbalance unintended consequences of such purist capitalist model, over the years, corporate regulation has been introduced to oblige companies to consider and serve the needs of broader sets of stakeholders. Legal reforms by themselves cannot ensure “enlightened shareholder value”2 (Great Britain 2006). Leadership must exemplify what it means going beyond pure 2 The UK 2006 Companies Act (Great Britain, Companies Act 2006) refers to enlightened shareholder value as how a company director should promote the success of the company for the benefit of its members as a whole, and reflecting wider expectations of responsible business behaviour, such as the interests of the company’s employees and the impact of the company’s operations on the community and the environment.

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shareholder interests and how long-term value and competitive advantage is created in benefit of customers, employees, suppliers and communities through a stated corporate purpose. In the face of global challenges, the 50th anniversary meeting of the World Economic Forum in 2020 brought back the notion of “stakeholder capitalism” where positive impact for all communities and people is at the centre (WEF 2020b). Proof of changing times came in August 2019, when the U.S. Business Roundtable released a new “Statement of Purpose of a Corporation” signed by the CEOs of major corporations. With this statement the purpose of business had changed from focusing on shareholder gains to deliver benefits for all stakeholders (Business Roundtable 2019). Larry Fink, chairman and CEO of BlackRock, the world’s largest asset manager said, “Companies must be deliberate and committed to embracing purpose and serving all stakeholders—your shareholders, customers, employees, and the communities where you operate.” (Blackrock 2020). Scania’s CEO Henrik Henriksson exemplifies what such broad stakeholder focus means to the Swedish truck and bus manufacturer. Scania’s new stated purpose is “to drive the shift towards a sustainable transport system, creating a world of mobility that is better for business, society and the environment”. Henriksson is also very clear that sustainability must be built into everything you do. “We will soon reach a tipping point where it is no longer possible to run a business that is not sustainable” (Lombard Odier 2019). Leading with such purpose will help guide decisions and judgements about balancing the interests of stakeholders and inspire support from investors, customers and governments that can help transform industry. One of Scania’s strategic commitments is to reduce its customers’ emissions. Every vehicle it produces is enabled to be run on biofuels. To ensure the supply of such fuels, Scania is creating so-called ecosystems of partners, including government, industry and customers, to grow crops for biofuels on brownfield sites that will also have economic ripple effects in underserved areas (Scania 2020).

8.5.2 Nurturing Sustainability Competence Leaders must be able to understand the context behind issues and how they relate to broader trends. Essential traits are fluency in emerging environmental and social issues and how they will inflict a change on business. Big transformative decisions must be based on scenario analyses of significant matters, robust environmental and social data and form the basis for stakeholder engagement and new operational practices. A key accomplishment will be to internalise them for action through organisational and management system design and across supply chains. The real strength will be in seeing opportunity in change and being open and accountable on performance. Such systems thinking may be new to most professional circles; however, inspiration can be drawn from the sustainability profession that has evolved a unique set of competences for delivering change through a combination of creative and technical skills. With societal issues providing some of the most disruptive

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elements to business, now could be the right time to elevate such professionals from technical expert roles to executive leadership positions. The skills of sustainability professionals—ranging from literacy in climate change and human rights to resource efficiency, cross-sector partnerships, employee community engagement, supply chain management, measurement, reporting and driving performance—are now business critical (Kreeger and Yorzyk 2019). Both accountancy firm EY and the Swedish fashion giant H&M believe in the strengths of combining leadership and sustainability expertise. In 2019, EY appointed its former UK CEO Steve Varley to become the organisation’s global sustainability leader (E&Y 2020). H&M that is already known for its strong commitments to become “fully circular” and “climate positive” went a step further by appointing former sustainability manager Helena Helmersson to CEO. She has expressed her desire to “develop a sustainable fashion industry”. Fast fashion accounts for one tenth of the world’s greenhouse gas emissions annually; it is a major contributor to waste and human rights concerns prevail in the value chain. H&M has major initiatives in the pipeline including recycling, lending and mending of garments and is leading transparency efforts in the industry by naming its suppliers (Edie 2020). Equinor has placed its corporate sustainability function within the company’s global strategy and business development division. Thus, giving sustainability professionals the befitting opportunity to inform, influence and help deliver the future direction of the business. There are strong arguments for why future-oriented organisations should build diverse sustainability leadership acumen into the job description of top executives as well as other essential functions, including strategy, finance, human resources and engineering.

8.5.3 Mobilising Collaborative Innovation Around a Common Purpose The enormity of the challenge of reaching the Paris Climate Agreement and the United Nations Sustainable Development Goals calls for unprecedented cooperation and collaboration between business, governments and civil society. Individual company action is inadequate and must evolve to collective deliveries that cut across society and value chains, demonstrated through new levels of transparency, openness and continued responsiveness. Every business has a value chain, which is an ecosystem of connections that is much bigger than the organisation itself. Walmart’s “Project Gigaton” is a good example, where a company uses its leverage and expertise beyond own operations to broaden positive impact. The retailer’s supplier engagement programme is aimed at avoiding one billion tonne of greenhouse gas across its value chain. Suppliers can earn credits with Walmart by setting targets and reporting on performance in the areas of energy, waste, packaging, agriculture, forests and product use and design (Walmart 2017).

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Mars, the confectionary business, has committed US$1 billion to deliver its “Sustainable in a Generation” plan that aims at reducing greenhouse gas emissions across its value chain, improving working conditions of one million people in the supply chain and help consumers enjoy better lives (Mars). In Europe, six major oil and gas companies—BP, Eni, Equinor, Repsol, Shell and Total—have all made public pledges around reducing carbon emissions drastically by 2050. While the companies are still working on detailed roadmaps to back up their ambitions, there is consensus that the industry must work across sectors and society to change their business models and enable lower carbon energy systems. Engaging consumers in support of societal change is still mostly untapped in its tremendous potential. Digital platforms can help inform, engage and empower consumers to adopt more sustainable lifestyles. Equally, the opportunity to engage and reach vulnerable and remote communities has the potential to transform social hierarchies and to leapfrog development. Mobilising employees, younger generations and other stakeholders to engage and support changes will open new opportunities for inclusion, diversity and more human-centric approaches (Leurent and Coll 2020). Coalitions and alliances are formed in quick succession to give an outlet for a new wave of corporate action, each addressing specific sustainability challenges. Initiatives such as the Alliance to End Plastic Waste, Global Water Initiative, The B Team and the Oil and Gas Climate Initiative aim to accelerate the scale and pace of delivering towards societal goals. Collaborating with new and unfamiliar partners can be difficult to pursue, but the potential for innovation makes it worthwhile. By aligning stakeholders around a common purpose new perspectives can be forged (Rodriguez). There is no doubt that impactful political action on climate change will depend on the strengths of economic development and social cohesion. The public and private sector must cooperate in new ways to help deliver an as orderly as possible transition from jobs, products and services in high-carbon sectors to deliver growth of a green economy that serves as many stakeholders as possible.

8.6

Conclusion

At the time of writing, much of Europe is slowly lifting lockdown restrictions imposed due to the COVID-19 pandemic. Shaken by the discovery of how weak our societies are, the conversation has turned to the desire of building a better society than the one we “left” only some months ago. The pandemic has exposed continued underinvestment, since the last financial crisis in 2008, and lack of attention to deliver economic security and equality of opportunity to all. The old path of seeking profits at any cost, only limited by legal frames, did not withstand the stresses of this crisis. With climate change looming, now is a good time to strengthen our collective resolve and seek a new path for a resilient future that would make the Paris Climate Agreement and the United Nations Sustainability Goals within reach.

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Charlotte Wolff-Bye joined Equinor (formerly known as Statoil) in 2014 as Vice President Sustainability in the company’s Global Strategy and Business Development division. She is also Equinor’s representative on the Oil and Gas Climate Initiative Executive Committee and the Steering Committee of the World Bank’s Global Gas Flaring Reduction Initiative. From 2007– 2014, she was General Manager Corporate Responsibility for the global steel and mining company ArcelorMittal. Prior to her career in the extractives and manufacturing sectors, Charlotte spent a decade in the telecommunications industry holding several different positions, most notably in Telefonica and O2. Previous experiences include working in multilateral lending, music marketing and diplomatic affairs. In 2018, Charlotte joined the Board of Trustees of UN Environment World Conservation Monitoring Centre.

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How to Approach the Development of a Corporate Sustainability Strategy Sally Taylor

Abstract

This chapter will provide a framework for the development of a sustainability strategy within an organisation. It is recommended that a compelling case for change is built. Once this is established, (and bought into) the business can define its ambition and focus on the steps necessary to achieve it. The theoretical lens of the strategist is applied throughout, with core strategic principles and frameworks applied to developing a sustainability strategy; however, this chapter will not evaluate the moral obligation of engaging with sustainability, nor take an ethical stance. Corporate sustainability can be considered, if harnessed correctly, as a potential strategic asset, and this chapter will endeavour to highlight that the successful development of a corporate sustainability strategy could significantly contribute to an organisation’s long-term competitiveness. The process described in this chapter reflects both relevant theory and the practical experience of the author. It is recommended that all stages of the framework are followed. At each stage, relevant tools to employ are suggested; one can follow the recommendations or indeed make use of alternatives.

The views expressed are those of the author and not necessarily those of Imperial College Business School or its affiliates. S. Taylor (&) Imperial College Business School, Imperial College London, South Kensington Campus, London SW7-2AZ, UK e-mail: [email protected] © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_9

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9.1

S. Taylor

Introduction

Corporate sustainability is gaining in momentum as a surge in social and eco-awareness increases the demand for businesses to pursue a purpose beyond profit. Many corporations are responding to this ‘market shift’ (Laszlo and Zhexembayeva 2011), and there is compelling evidence to suggest that organisations pursuing sustainability are outperforming their non-sustainable peers. Yet, reconciling sustainability with corporate success is undoubtedly a challenge, and achieving the status of a sustainable organisation is certainly no easy undertaking. There are numerous challenges associated with ‘translating sustainability into business strategies and operations’ (Orsato 2009). As a prerequisite to developing a corporate sustainability strategy, a critical review and analysis of the organisation’s current approach to corporate sustainability should be undertaken to establish its sustainability profile, as characterised by Formentini and Taticchi (2015): traditionalist, practitioner and leader. Once the sustainability profile of the firm is established, a compelling case for change can be built through stakeholder and industry analysis, with an assessment of the potential risk to the organisation of not engaging more with corporate sustainability as well as the potential opportunities. With the why established, an organisation should then define its sustainability ambition, taking into consideration the current corporate sustainability approach and profile. A clear path to achieving the ambition can be mapped to successfully convert vision into value, through the following steps (the what and the how) (Fig. 9.1).

Fig. 9.1 Framework to develop a corporate sustainability strategy

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– Identify a framework to structure the strategy – Create strategic pillars and design initiatives within each strategic pillar – Conduct a materiality assessment and create a materiality matrix to determine what the business should focus on and prioritise – Address how an organisation can successfully embed sustainability within the organisation.

9.2

Pre-work: Capture the Core Business Strategy

For the development of an organisation’s corporate sustainability strategy, this chapter will apply the theoretical lens of the strategist, applying core strategic principles and frameworks to sustainability strategies (Laszlo and Zhexembayeva 2011). Indeed, this chapter will not evaluate the moral obligation of engaging with corporate sustainability, nor take an ethical stance. As per Laszlo and Zhexembayeva (2011), ‘this is not an issue of corporate social responsibility’ but rather one of ‘market economics and business strategy’. A strategic approach to corporate sustainability can be largely attributed to Porter and Kramer (2006), and their principle of creating ‘shared value’ for both the firm and society, challenging the traditional notion of value creation. In summary, Porter and Kramer (2006) assert that when considered strategically, corporate sustainability can be a source of ‘opportunity, innovation and competitive advantage’ for the company and, in this way, also provide greater social impact. Yet, as highlighted by Orsato (2009), it does not always ‘pay to be green’, it is ‘conditional on certain circumstances’. For sustainability to become a source of value creation, Willard (2012) asserts that ‘sustainability investments must be aligned with the core strategy of the company’. A generic sustainability strategy will not provide any benefits to the company (Porter and Kramer 2006), nor will side-lined activities, or so-called ‘bolt-on’ sustainability (Laszlo and Zhexembayeva 2011). Many companies are guilty of ‘aggregating anecdotes about uncoordinated initiatives to demonstrate social sensitivity’ (Porter and Kramer 2006). Instead, sustainability should be truly embedded and integrated into the core business strategy, with the ‘context and capabilities of a firm determining sustainability priorities’ (Orsato 2009). As cited by Porter and Kramer (2006), corporate sustainability should be ‘fundamentally about business and economic value creation’ and therefore must be treated as a ‘core strategic management task’ (Schaltegger and Wagner 2006), rather than ‘social responsibility’ or ‘philanthropy’ (Porter and Kramer 2011). As such, it is necessary to capture the core business strategy of an organisation before setting out a proposed sustainability strategy. The use of Porter’s Value Chain (1985) as adapted by Ian Mackenzie (2018) (Fig. 9.2) is recommended. Once a firm’s strategic choices have been outlined, sustainability practices should be closely aligned to these choices.

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Fig. 9.2 Porter’s Value Chain (1985). (Source adapted by Ian Mackenzie 2018)

9.2.1 Establish the Organisation’s Sustainability Profile and Approach to Corporate Sustainability To establish the sustainability profile of the organisation, as characterised by Formentini and Taticchi (2015), a critical review and analysis of the organisation’s current approach to corporate sustainability should be conducted. Formentini and Taticchi (2015) characterise three different sustainability profiles, considering primarily a triple bottom line approach and sustainable supply chain management (Table 9.1). In order to establish the sustainability profile of an organisation, a critical review and analysis of the organisation’s current approach should be conducted; the Corporate Sustainability Model (Epstein and Buhovac (2010)) (Fig. 9.3) is the recommended framework, ‘…the model describes the drivers of corporate sustainability performance, the actions that managers can take to affect that performance, and the consequences of those actions on corporate environmental, social, economic, and financial performance’ (Epstein and Buhovac 2010).

This framework should be used to evaluate the organisation’s sustainability inputs, processes, outputs and outcomes. Such an evaluation will provide a holistic view of an organisation’s approach to sustainability, for the Corporate Sustainability Model (2008) does not focus solely on sustainability strategy. As cited by Epstein and Buhovac (2014), a sustainability strategy is merely ‘a minimum

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Table 9.1 Different sustainability profiles Sustainability traditionalist

Characterised by traditional approaches to business that do not necessarily include explicit triple bottom line (TBL) and sustainable supply chain management (SSCM) initiatives, but might present sustainability elements (Formentini and Taticchi 2015). Management is focused only on financial performance. The company does not have a clear sustainability strategy or agenda. Initiatives are unstructured, not aligned with the business strategy and mainly focused at the corporate level Sustainability Characterised by a myopic approach to business sustainability with a practitioner limited focus to one or two TBL dimensions, and isolated SSCM initiatives The company has a strategy, agenda and a range of sustainability initiatives. Nonetheless, the sustainability strategy is disconnected (mainly CSR) or only partially connected to the business strategy. Initiatives are mainly at the corporate level, but extend occasionally to the supply/value chain level (e.g. customers, suppliers, partners). The TBL approach is often not balanced (e.g. dominant focus on the environmental or social dimensions) Sustainability Characterised by a TBL approach to business which extends to SSCM leader The company has a clear strategy and agenda which is fully integrated into the business strategy. Initiatives are structured and well balanced from a triple bottom line perspective. Initiatives extend to the supply and value chain level Source adapted from Formentini and Taticchi 2015

Fig. 9.3 Corporate sustainability model. (Source Epstein and Buhovac 2010)

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enabler’, as it must be supported with both formal and informal organisational systems. According to Epstein and Buhovac (2010), buy-in from leadership is critical for success. Considered in the framework as both an input and within processes, the role of leadership is central to the corporate sustainability model; management must have a commitment to sustainability and a shared belief that it can create increased financial value for the business (Epstein and Buhovac 2010). Other aspects to consider in analysing the firm’s current approach to corporate sustainability and establishing its profile include a critical analysis of how sustainability is impacting the firm’s strategy and business model; is there evidence of sustainability being integrated into decision-making and is sustainability contributing to building a competitive advantage for the firm? In addition, a critical review of the sustainability agenda should be undertaken, identifying if there are any gaps and whether or not material issues are addressed. And finally, any evidence of transformation should be noted.

9.3

Why

In the successful development of a corporate sustainability strategy, it is necessary to build the case for change. Although the hope is that the why for many organisations will be given, and that time and resources can be immediately allocated to the how, this is often not the reality. Indeed, even if the business is convinced of the merits of developing a corporate sustainability strategy, it is still highly recommended that a compelling case for change is established. As cited by Willard (2019), when ‘the going gets tough’ on the sustainability journey, and inevitably it will, for it is a notoriously ‘messy, non-linear process’ (Laszlo and Zhexembayeva 2011), it is important to have the why at the top of the agenda and strongly advocated by senior management.

9.3.1 Conduct Stakeholder and Industry Analysis Stakeholder and industry analysis is an important first step in understanding the organisation’s environment, the actors within it and their level of engagement with sustainability, both now and how this might evolve in the future. Laszlo and Zhexembayeva (2011) assert that sustainability constitutes a ‘market shift’ and, as such, it will create both ‘winners and losers’. Professor Ioannou, from the London Business School, as cited by Kiron et al. (2017), supports this notion further, espousing that ‘the pressure for sustainability is, in many ways, the mother of all disruption. It will be no surprise that a lot of companies will simply fail to meet that expectation’.

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9.3.1.1 Customers and Users A core element of an organisation’s strategy is addressing the needs of their customers (and/or end users), and it is the customer who has been recognised as ‘the major engine for the change toward sustainable societies’ (Orsato 2009). Laszlo and Zhexembayeva (2011) describe a ‘monumental shift’ in consumer expectations regarding sustainability. Consumers are increasingly seeking products and brands which align with their own values (Best and Mitchell 2018), and this is particularly pertinent for Millennials and Gen Z. Without doubt, an organisation needs to meet current consumer needs and demand trends, but critically it must also anticipate changes in these states. The extent to which this is happening in an industry and the potential effects on customer acquisition and retention should be evaluated. 9.3.1.2 Competitors A benchmarking exercise will illustrate how an organisation and its competitive set are responding to this market shift, establishing its competitive position relative to its peers. The inclusion of a ‘best in class’ comparator (not necessarily from the same industry, particularly if the industry in which the organisation operates is a laggard), is also recommended. Such benchmarking will demonstrate if the organisation’s competitive set are pursuing corporate sustainability and whether they have identified it as a business imperative. 9.3.1.3 Suppliers and Business Partners Sustainable supply chain management is an essential component in the pursuit of corporate sustainability. As cited by Krause et al. (2009), ‘a company is no more sustainable than the suppliers that are selected […] by the company’. The same could be deemed equally applicable to the selection of a firm’s business partners, highlighting the need to work with those who uphold the same values, have the same levels of commitment to pursuing sustainability and who are aspiring towards similar goals. As articulated by Lechler et al. (2019), ‘this is especially crucial when considering the fact that focal companies are often made responsible for their suppliers’ failures’. 9.3.1.4 Government Governments play a critical role in the development towards sustainable societies; indeed, policy decisions taken by governments could define the future of a sustainable world. According to a KPMG report (2017), the government has four distinct roles in addressing sustainability concerns: policy development, regulation, facilitation and internal sustainability management. The impact of public policy (particularly decisions made concerning the environment and labour law) on business activity is sizable and can indeed change the way in which businesses have to work. Considering the government’s influence in such stakeholder analysis provides an opportunity for the firm to ‘get ahead of the game’ rather than being in a position that is reactive to changes. There is further opportunity, particularly if as a sustainability leader, to lobby and shape policy. The government can be friend or foe based on a firm’s approach to sustainability.

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9.3.1.5 Society It is necessary to look beyond the firm’s immediate ecosystem to consider a wider cast of stakeholders. In general, sustainable development is a core topic within developed societies; those who are not customers, users or partners may still have an interest in the impact of your business activities. Society at large is therefore a key stakeholder, and with ever increasing attention on sustainable corporate activity, companies need to be aware of the conversation at societal level. 9.3.1.6 Employees This chapter has acknowledged the consumer as ‘the major engine for the change toward sustainable societies’ (Orsato 2009) and the importance of future-proofing for emerging customer needs. And yet, the role of the employee is also critical; attracting and retaining talent is identified as another significant risk, as cited by Davis-Peccoud (2013), ‘sustainability matters in the battle for talent’. According to the most recent McKinsey Global Survey (2017), 24% of organisations cited ‘to meet consumer expectations’ when asked why they are addressing sustainability, while 21% stated ‘to attract, motivate or retain employees’. The latter are increasingly attracted to work for companies that align with their values and this is of particular prevalence in Millennials and Gen Z (who will make up the majority of the global workforce by 2020 Deloitte 2019). 73% of respondents in a recent Business of Fashion survey claimed that ‘creating positive impact is critical to their long-term commitment to an employer’ (Mellery-Pratt and Soar 2019). 9.3.1.7 Owners and Shareholders Publicly listed companies are required to have a certain level of transparency, regulations which must be adhered to impose a certain level of sustainability. Conversely, privately held companies face far less pressure on both levels of transparency and governance. Indeed, owners have the freedom to make decisions based on the short term rather than more long-term considerations. 9.3.1.8 Investors Traditionally, investors have been predominantly driven by financial performance but, as evidence grows demonstrating that the pursuit of sustainability can have a positive impact on long-term performance, environmental, social and governance criteria (ESG) are increasingly employed in the decision-making process. Recent research by Eccles and Klimenko (2019) demonstrated that for the overwhelming majority of investment leaders interviewed in the study, sustainability ‘is top of mind’, and furthermore these leaders described the ‘meaningful steps their firms are taking to integrate sustainability issues into their investing criteria’. Additionally, ESG investors, driven by different objectives, such as accepting lower financial returns, are on the rise. It is necessary to conduct a comprehensive analysis of the current situation, trends and material issues. This kind of analysis could be summarised in a table similar to the one below:

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Material issues

External stakeholders Customers Users Competitors Business partners Suppliers Government Society Internal stakeholders Employee Owners/Shareholders Investors

9.3.2 Build the Business Case To successfully pursue sustainability, it is necessary to build the business case, since ‘the business case finds the money to execute the vision’ (Willard 2012). According to an eight-year study conducted by MIT Sloan Management Review and the Boston Consulting Group (2017), 60% of companies have a sustainability strategy, but only 25% have a supporting business case; companies combining the two were 200% more likely to profit from their sustainability strategies. Yet, establishing a clear business case for sustainability is not without its challenges. The creation of value across all three elements of the triple bottom line—economic as well as social and environmental—is the most significant challenge (Elkington 2018). For sustainability, initiatives should be evaluated just as any other business initiative would be, ‘on their bottom-line merits’ (Willard 2012). The business case should address whether the firm’s performance, and therefore competitiveness, could be improved if it engages more with sustainability. This chapter recommends establishing a two-part business case: avoiding risks (what it could lose) and capturing opportunities (what it could gain) (Willard 2012).

9.3.2.1 The Potential Risk of not Engaging More with Sustainability The threat of the risks associated with not engaging more with corporate sustainability could be ‘the critical motivator’ for many organisations (Willard 2019). Indeed, a full understanding of the potential risks, and their implications, could be the ‘tipping point’ (Willard 2012), and for this reason, it is recommended that a risk assessment is carried out when building the case for change.

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It is recommended that a sustainability risk register is created using a typical enterprise risk management (ERM) process, or aligning to the process already used in the firm to assess business risk. This will assess, as well as quantify (in monetary terms), the potential risks an organisation could face if it were not to engage more with sustainability. It is likely that this assessment will demonstrate an overwhelming risk to a firm’s reputation and a potential loss of brand trust. As cited by Schaltegger and Wagner (2006), ‘social performance is playing an increasingly important role as part of the brand image of a company’. For an organisation seeking to ‘maintain competitive differentiation’, safeguarding its reputation and maintaining brand trust is critical (Esty and Winston 2009). Furthermore, ‘the phenomenon of reputation in its various forms has become an increasingly valuable corporate asset’ (Hansen 2017). Indeed, as outlined by Laszlo and Zhexembayeva (2011), intangible assets, such as reputation, now make up over 70% of a company’s stock price, whereas 100 years ago 70% of value was attributable to tangible assets. Ultimately, a tarnished reputation, a loss of brand trust and compromised legitimacy could result in a negative effect on revenue streams and future profitability (Willard 2012). To mitigate these very real threats, the organisation needs to shift from a reactive to a proactive stance, moving from ‘risk avoidance’ to ‘building positive reputation’, as cited by Orsato (2009).

9.3.2.2 What Are the Opportunities of Engaging More with Sustainability? Not engaging more with corporate sustainability could pose a considerable threat to an organisation. And yet, as cited by Schaltegger and Wagner (2006), pursuing sustainability can offer more to a firm than risk mitigation; it should also be considered as a means to increase a firm’s competitiveness and harnessed as a value creation opportunity. As such, the potential value creation opportunities associated with sustainability, rather than just risk management, should form a fundamental part in building a compelling case for change. This chapter proposes evaluating the opportunity of engaging more with sustainability through the strategist’s lens, as well as Porter and Kramer’s principal of creating shared value (CSV) (2006): Policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions of the community in which it operates (Porter and Kramer 2011).

Porter and Kramer (2011) assert that CSV should not be about ‘personal values’ or ‘doing good’ nor should it be considered a ‘cost, constraint, or a charitable deed’. Instead, it is an opportunity to create ‘economic value in a way that also creates value for society by addressing its needs’ (Porter and Kramer 2011). To realise the potential of shared value, organisations must adopt a strategic approach to corporate sustainability, employing ‘the same frameworks that guide their core business

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choices’ (Porter and Kramer 2006). Porter and Kramer (2006) assert that ‘the more closely tied a social issue is to a company’s business, the greater the opportunity to leverage the firm’s resources—and benefit society’. A firm can create shared value in the following ways (Porter and Kramer 2011): • ‘By reconceiving products and markets’ • ‘By redefining productivity in the value chain’ • ‘By enabling local cluster development’.

9.4

What

With the case for change established, it is necessary to establish what an organisation should be aiming for: the ambition, approach and strategic pillars.

9.4.1 Defining the Ambition Defining the ambition is an essential early step in the development of a corporate sustainability strategy. It is necessary to take into consideration the current corporate sustainability approach and profile in order to create a vision for the future. Collins and Porras’ framework, presented in the HBR article ‘Building your Company’s Vision’ (1996), provides an uncomplicated and straightforward conceptual framework to define an organisation’s vision and presents very practical guidance for its application. Indeed, they promote a ‘substance over style’ approach to building a vision, all of which is entirely applicable to defining a ‘sustainability ambition’. The vision must have a core ideology, made up of core values and a core purpose, and should be communicated as an envisioned future, with a big, hairy, audacious goal (BHAG) explained through a vivid description (Collins and Porras 1996). A clear path to achieving the ambition can now be mapped, to successfully convert vision into value through the following steps:

9.4.2 Identify a Framework to Structure the Strategy This chapter recommends the use of the Five-Stage Sustainability Journey (Willard 2012) (Fig. 9.4). This framework allows for easy identification of where the organisation is currently positioned as well as identifying the organisation’s ambition. It outlines a clear path to successfully transition from one stage to the next and yet it is important to note that each stage need not be accomplished sequentially.

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Fig. 9.4 Five-Stage Sustainability Journey. (Source Willard 2012)

As cited by Elkington (2018), ‘too often companies get stuck at the level of visions and strategies, failing to make the necessary next-stage transition to embedding and implantation in day-to-day operations’. Considering the nature of this challenge, common to many organisations, the recommendation is to use this framework as it is orientated towards, and well designed for, practical application. Companies can build their sustainability initiatives by focusing on each of the stages suggested by this framework.

9.4.3 Create Strategic Pillars It is recommended that when an organisation has identified where it is on the journey, and where it is aiming to get to, strategic pillars should be created to provide structure to the strategy and frame the sustainability agenda. Classic pillars could include strategies and tactics aimed at strengthening the brand, with perhaps a focus on revenue-generating initiatives or on specific stakeholder groups. Initiatives should be created for each of the strategic pillars and plotted on a sustainability roadmap along the desired time frame. Every initiative should be assigned an owner within the organisation and a time frame, as well as a SMART target. Initiatives should fall into two categories: strategic necessities, which are issues to be managed within ‘day-to-day operations’ (EY 2018) and strategic opportunities, which are potential sources of competitive advantage.

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Both types of initiatives are of importance; if an organisation is not making an attempt to match practices common to its industry (strategic necessities), Ioannou and Serafeim (2019) assert it risks compromising its legitimacy and will ‘likely stand out as an outlier in a negative manner within their own industry’. Indeed, Ioannou and Serafeim (2019) claim that pursuing such ‘common practices’ should, in fact, be considered vital ‘for corporate survival’. Ioannou and Serafeim’s (2019) research finds that within most industries ‘sustainability practices have converged over time’, signalling inherent challenges when attempting to differentiate sustainability initiatives to establish sources of competitive advantage. Furthermore, Ioannou and Serafeim (2019) attest that when a market leader is also a sustainability leader there will be an even higher level of convergence amongst the peer group. Whilst failing to match practices common to the industry in which it operates puts an organisation’s legitimacy at risk, if the firm only strives to match practices, rather than differentiate, a competitive advantage will not be successfully established. It is only through building and maintaining a competitive advantage (through sustainability initiatives and practices which cannot easily be matched by competitors, as opposed to ‘imitation and homogeneity’ Porter and Kramer 2011) that an organisation will attain superior financial performance; ‘it is the adoption of strategic sustainability practices that is more reliably, consistently and significantly associated with superior performance’ (Ioannou and Serafeim 2019). And finally, as per the strategist’s lens, initiatives must be relevant to, and help address, current business activities and priorities. A process must be established to ascertain whether an initiative will create shared value or if it is indeed a priority for limited resources.

9.4.4 Conduct a Materiality Assessment There is somewhat of a haze of ambiguity surrounding the concept of sustainability, and this ambiguity has become, for many, ‘an alibi for inaction’ (Elkington 2018). As articulated by Willard (2012), what the majority of these organisations are really seeking to understand is what does sustainability mean for my organisation? Schaltegger and Wagner (2006) assert that ‘one company can’t, and isn’t expected to, address every issue. Or even every demand made by a stakeholder’. Therefore, to determine what the business should really focus on and thus addressing the question above, a materiality assessment should be undertaken at the outset. As articulated by Bartels (2014), assessing materiality is the process of ‘defining the social and environmental topics that matter most to your business and stakeholders’. Through this process, material issues can be identified and then addressed with the sustainability agenda and strategy. Kiron et al. (2017) assert that companies achieve up to 50% in additional profit from sustainable practices when they address material issues.

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According to a recent report by KPMG (Blasco and King 2017), a significant number of companies are now linking their sustainability strategies to sustainable development goals (SDGs). Furthermore, KPMG (Blasco and King 2017) claims that the SDGs will only increase in significance for both the creation of corporate sustainability strategies and reporting. As such, the SDGs are recommended as a starting framework for an organisation’s materiality assessment. The sustainability accounting standards board (SASB) (2019) has developed industry-specific materiality matrices and the adoption of these is also recommended in the creation of an organisation’s materiality matrix. This should be further supported by competitor analysis to ensure issues deemed material by competitors are also considered. It is then necessary to prioritise a process vital for creating shared value (Porter and Kramer 2006), by assessing the impact of each material issue on the business, as well as its relative importance to stakeholders and positioning them on a matrix. Prioritising in such a way can support an organisation in successfully transitioning from responsive to strategic action. As cited by Porter and Kramer (2006), responsive corporate sustainability is ‘being a good corporate citizen and addressing every social harm the business creates’, whilst strategic corporate sustainability ‘is far more selective’. Being selective means considering the core competencies and business activities of an organisation to determine priorities from all possible material issues (Orsato 2009). The end result should be ‘a small number of initiatives whose social and business benefits are large and distinctive’ (Porter and Kramer 2006). A materiality assessment should be dynamic, and as such, it should be carried out periodically to ensure that the topics being addressed remain those most material to the organisation and its stakeholders: what matters to them and what they want the organisation to disclose. GRI (2019) recommends a materiality assessment is carried out every two years. Further to this, an evaluation of an organisation’s stakeholders (and their varying importance, for ‘not all stakeholders are created equally’ Chandler and Werther 2014) through stakeholder mapping should also be undertaken periodically.

9.4.5 Design Sustainability Initiatives Once a company has identified a strategic framework, the strategic pillars and the material issues, it is left with the exercise of designing suitable, coherent sustainability initiatives. Indeed, sustainability initiatives must be assessed against the same business criteria as any other project (Esty and Winston 2009), with profitability at the core of the sustainability approach (Taticchi 2019). According to research conducted by Steger (2006), very few companies consider the ‘economic logic’ of their sustainability strategy. Sustainability initiatives should be evaluated just as any other business initiative would be, ‘on bottom-line merits’.

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In addition to economic sustainability, project proposals should also be evaluated using the CSB ROSI Methodology developed at the NYU Stern Center for Sustainable Business (2019). This is a holistic approach to understanding the full range of tangible and intangible benefits associated with sustainable practice. It is highly recommended that business analysts (or their equivalents) are upskilled to evaluate all project proposals within the business in this way, thus broadening the company view of what return on investment, and indeed value creation, should mean to an organisation pursuing sustainability with a triple bottom line approach (Elkington 1997).

9.5

How

9.5.1 Change Management: How to Successfully Embed Sustainability Within the Organisation As cited by Laszlo and Zhexembayeva (2011), ‘embedded sustainability is the primary means for achieving the goal of sustainable value’. Further underscoring the importance of embedded sustainability, Willard (2012) devotes an entire stage of the five-stage sustainability journey to it and, as such, it should form one of an organisation’s strategic pillars. Achieving truly embedded sustainability often necessitates a transition from existing ‘bolt-on’ sustainability practices; ‘projects and anecdotes’ which are poorly integrated and on the fringes of the core business activities which create value (Kiron et al. 2017). Should sustainability remain simply ‘bolted-on’, a firm’s efforts will only ever produce, at most, ‘fragmentary and symbolic wins’ (Laszlo and Zhexembayeva 2011). This transition will require a culture change within the organisation (this is described fully in the following chapter of this book). This is not an easy task and ‘there is no formula’ (Willard 2019) since changing a culture is a serious undertaking which requires long-term commitment as well as change management. Kotter (1995) underlines the inherent difficulties faced by firms attempting to make significant changes to the way in which an organisation is run, and advocates eight steps to successfully execute a change effort. Indeed, Kotter’s (1995) eight-step change model influenced the primary framework used in this chapter (Laszlo and Zhexembayeva’s (2011) four-step framework for the successful embedding of sustainability within an organisation). The aim is for sustainability to become a lens through which every employee is looking, rather than separate activity on an already ‘long to do list’ (Willard 2012). As articulated by Laszlo and Zhexembayeva (2011), ‘at its best, it [sustainability] is invisible, similar to quality yet still capable of hugely motivating employees and creating loyalty in customers and supply chain partners’.

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The four-step framework for the successful embedding of sustainability within an organisation is set out below (Adapted from Laszlo and Zhexembayeva’s 2011). Step One

Getting the start right

Mobilising, educating and acting around specific low-hanging fruit

Step Two

Building the buy-in

Step Three

Moving from incremental to breakthrough Staying with it

Aligning company, value-added activities and all key stakeholders around the vision of embedded sustainabiliy Developing clear but unorthodox goals, designing the strategy and capturing value through co-creation and innovation Managing learning and energy while making sustainability ubiquitous but largely invisible in business practice

Step Four

To achieve embedded sustainability within an organisation, the following initiatives are proposed (please note, these initiatives are most applicable to a firm at stage two on the Five-Stage Sustainability Journey, while working towards stage four). As cited by Laszlo and Zhexembayeva (2011), an organisation will need to ‘learn and iterate’ its way to embedded sustainability. Steps One and Two: ‘Getting the Start Right Managing Director Buy-in and Engagement and Building the Buy-in’ (Laszlo and Present the sustainability vision and strategy to Zhexembayeva 2011) the Managing Director and ensure buy-in and engagement; ‘without this commitment, becoming a sustainable company is a “non-starter”’ (Eccles et al. 2012) Presentation to the Board Once the Managing Director is fully supportive of the proposed vision and strategy, engaging the board of directors and gaining their commitment to the sustainability journey is imperative (Epstein and Buhovac 2014) Engage all Members of Senior Leadership Every director must be engaged with the process, and the aim should be to gain their commitment to the sustainability journey, as well as their sponsorship. As cited by Laszlo and Zhexembayeva (2011), this will create ‘a springboard for all future action’. Rachael Sherman (2019), Director of Global Sustainability at McDonalds, asserts that ‘finding sustainability champions at senior levels of the business is critical’ Engage Business Units Managers within each business unit will need to be fully informed, as they will be responsible for the practical application of the vision and strategy (continued)

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(continued)

Step Three: ‘Staying with it’ (Laszlo and Zhexembayeva 2011)

in their own departments. They need to understand the relevance for their business unit and take ownership in deriving a commercial advantage. Business unit managers will need ongoing support from the centralised sustainability team A Call to Action; The Wider Employee Community With buy-in secured ‘at the top’, it is then necessary to instigate a bottom-up approach (Laszlo and Zhexembayeva 2011). A company-wide presentation should be delivered, followed by workshops and open Q + A sessions Establish a Sustainability Steering Committee All senior members of the senior leadership team should form part of the committee, which should meet at least once per quarter. As per Epstein and Buhovac (2014), committee members will provide input as well as ensuring accountability and responsibility. The organisation’s sustainability roadmap would be presented on a quarterly basis by the centralised sustainability team Invest in Education An education programme for all employees should be rolled out. This should be in addition to more specific training for individual departments (for example, those responsible for sustainable supply chain management) For employees within the centralised sustainability team, an ongoing investment in education in the ‘fast-changing field of sustainability’ (Willard 2019) should also be made. This could involve attending conferences and enrolling on relevant courses. It could also be broadened to include the key individuals at different levels of the business who have the greatest involvement with sustainability Guest Speakers Sustainability thought leaders, as well as representatives from organisations who are further ahead on their sustainability journey, should be invited to speak, to inspire, provide insight and to ‘keep the attention high’ (Laszlo and Zhexembayeva 2011) Form a ‘Mars Group’ Collins and Porras (1996) advocate the use of a ‘Mars Group’, a select group of employees who ‘represent the very best attributes of the (continued)

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(continued) organisation’. This group should be ‘cross-functional and cross-generational’ (Laszlo and Zhexembayeva 2011) and charged with initiating test and learn projects, and piloting schemes conceived through ‘off-the-wall brainstorming’ (Laszlo and Zhexembayeva 2011). The group should be supported by a business analyst to ensure each business case is viable Step Four: ‘From incremental to Collaborate with Academia breakthrough’ (Laszlo and Zhexembayeva Collaboration with academics and research 2011) centres could serve to build an organisation’s reputation and credibility in the sustainability field. Potential partnerships should be explored

9.5.2 Measurement and Reporting As cited by Taticchi et al. (2013), ‘measurement is the base of management; disclosure is the base of stakeholder engagement’. Measurement is vital in the monitoring, understanding and improvement of an organisation’s performance (Taticchi et al. 2013), and this applies equally to sustainability performance. As recommended, every initiative should have SMART targets plotted on a sustainability roadmap, which should be reviewed periodically by the senior leadership team. With regard to reporting, an organisation should initially aim for the internal publication of its first sustainability report. As cited by Epstein and Buhovac (2014), internal reporting ‘provides important feedback for effective decision-making and strategic planning’. It also provides a holistic view of individual and business unit contribution. 74% of the largest companies in the world report to GRI standards (Kiron et al. 2017). Current EU regulations stipulate that only publicly listed companies with more than 500 employees must disclose non-financial information (European Commission 2019). Even if the firm is exempt, it should aim to publish a sustainability report, as doing so voluntarily further underlines a long-term commitment to pursuing sustainability. As cited by Taticchi et al. (2013), ‘proper measurement and reporting (M&R) frameworks can facilitate the comprehension of sustainability drivers, the management of processes and the communication/engagement to/with stakeholders, and therefore lead to superior sustainability performance and competitive advantage’. This topic will be analysed in Chap. 11.

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9.5.3 Recognition and Reward Willard (2019) references recognition and rewards systems as two of the four levers one can use ‘to tune a culture’ (alongside measurement and management). Job descriptions, key performance indicators (KPIs) and objectives should be amended to include sustainability for all employees, ‘to make sustainability everyone’s job’ (Laszlo and Zhexembayeva 2011). An individual’s annual bonus could also reflect performance against sustainability commitments and targets.

9.5.4 Marketing and Branding A key reason to engage with corporate sustainability is reputation, and the protection thereof. It goes without saying that a corporate sustainability strategy needs to be supported with a robust marketing strategy. As previously cited, ‘reporting is the base of communication’ (Taticchi et al. 2013), and yet, in addition to publishing a sustainability report, a firm must also create a ‘sustainability narrative’ (Niemtzow 2018), which can be communicated both internally and externally and integrated into the wider marketing strategy. Furthermore, sustainability needs a strong visual identity for both internal and external communications and thus a branding (or, indeed, rebranding) exercise is recommended. As cited by Laszlo and Zhexembayeva (2011), ‘relentless communication is needed to underscore the importance and urgency of the initiative and to make clear that achieving sustainability is a top organisational priority’.

9.5.5 Resource and Organisation Certain sustainability functions, such as materiality assessments and GRI reporting, could be successfully outsourced but this does not negate the necessity of an in-house team and dedicated resource (a centralised sustainability team) that is sufficient in size and seniority to deliver the strategy. In fact, according to Epstein and Buhovac (2014), what matters most is not ‘the number of people working under the top sustainability manager but the number of reporting levels above the sustainability officer’. To be truly effective, the most senior sustainability officer must have direct access to the CEO and board. The appointment of a Director of Sustainability would be recommended to ensure influence at board level and a direct reporting line to the Managing Director (Epstein and Buhovac 2014). The role of an effective Director of Sustainability is discussed in chapter eleven. If a director is not appointed, the centralised sustainability team should instead report to the Director of Strategy, for corporate sustainability should very much be considered a ‘strategic asset’ (Chandler and Werther 2014). As cited by Rasche (2019), a sustainability team in a large company reporting to either the HR or marketing department is ‘a red flag’, indicating that sustainability practices are

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peripheral, potentially cosmetic and ultimately not integrated into the core business strategy. This chapter recommends establishing and maintaining a core, centralised sustainability team; however, sustainability initiatives should be owned and implemented within business units. As cited by Epstein and Buhovac (2014), the centralised team will be responsible for ‘overall strategic planning, guidance and co-ordination’. It is also recommended that in addition to an employee education programme any sustainability expertise and skills gaps within the organisation should be addressed; knowledge as well as resources could be acquired through recruitment (Laszlo and Zhexembayeva 2011).

9.5.6 Short-Term Versus Long-Term Outlook To successfully pursue sustainability, an organisation must take a long-term strategic view (McKinsey 2017). In prioritising short-term financial gains, Porter and Kramer (2011) assert that companies could miss ‘the most important customer needs and ignore the broader influences that determine their longer-term success’. Indeed, the very essence of Porter and Kramer’s principal of shared value is ‘a corrective’ to short-termism (Vallentin and Spence 2017). Moreover, it will not be possible to ‘switch-on’ corporate sustainability, should stakeholder pressure reach a tipping point and be considered no longer possible to ignore. Sustainability requires long-term planning and commitment; in a personal interview with Rachael Sherman (2019), Director of Global Sustainability at McDonalds, she stated that the tension between short-term returns and long-term strategy is an ‘inherent difficulty’ with sustainability. As illustrated within the strategic framework outlined for this chapter, it could take several years to realise fully embedded sustainability within an organisation, by which point stakeholders could have become disillusioned and competitors even further ahead.

References Bartels, W. (2014). Sustainable Insight. The essentials of materiality assessment. KPMG International. Retrieved 20, Nov 2019, from https://assets.kpmg/content/dam/kpmg/pdf/2014/ 10/materiality-assessment.pdf. Best, E., & Mitchell, N. (2018). Millennials, Gen Z, and the future of Sustainability. BSR 24th October 2018. Retrieved 15, Aug 2019, from https://www.bsr.org/en/our-insights/blog-view/ millennials-generation-z-future-of-sustainable-business. Blasco, J. L., & King, A. (2017). The Road Ahead: The KPMG Survey of Corporate Responsibility Reporting 2017. KPMG. Retrieved 1, Nov 2019, from https://assets.kpmg/ content/dam/kpmg/xx/pdf/2017/10/kpmg-survey-of-corporate-responsibility-reporting-2017. pdf. Chandler, D., & Werther, W. B. (2014). Strategic corporate social responsibility: stakeholders, globalization, and sustainable value creation (3rd ed.). London: Sage Publications. Collins, J. C., & Porras, J. I. (1st September 1996). Build Your Company’s Vision. Harvard Business Review.

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Davis-Peccoud, J. (2013). Sustainability matters in the battle for talent. Harvard Business Review. Retrieved 25, Oct 2019, from https://hbr.org/2013/05/sustainability-matters-in-the. Deloitte. (2019). The Deloitte Global Millennial Survey 2019. Societal discord and technological transformation create a ‘generation disrupted’. Retrieved 22, July 2019, from https://www2. deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/deloitte-2019-millennialsurvey.pdf. Eccles, R. G., Miller Perkins, K., & Serafeim, G. (2012). How to become a sustainable company. MIT Sloan Management Review 53(4). Eccles, R. G., & Klimenko, S. (May-June 2019). The Investor Revolution. Harvard Business Review. Retrieved 12, April 2020, from https://hbr.org/2019/05/the-investor-revolution. Elkington, J. (1997). Cannibals with forks: the triple bottom line of 21st century business. Capstone: Austin. Elkington, J. (25th June 2018). 25 years ago I coined the phrase “triple bottom line.” Here’s why it’s time to rethink it. Harvard Business Review. Retrieved 15, Sep 2019, from https://hbr.org/ 2018/06/25-years-ago-i-coined-the-phrase-triple-bottom-line-heres-why-im-giving-up-on-it. Epstein, M. J., & Buhovac, A. R. (2014) Making sustainability work. Best practice in managing and measuring corporate social, environmental, and economic impacts. Second edition. Greenleaf, New York. Epstein, M. J., & Buhovac, A. R. (2010). Solving the sustainability implementation challenge. Organizational Dynamics, 34(4), 306–315. Esty, D. C., & Winston, A. S. (2009). Green to gold: how smart companies use environmental strategy to innovate, create value, and build competitive advantage. New Jersey: Yale University Press. European Commission. (2019). Non-financial reporting. Retrieved 20, Oct 2019, from https://ec. europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/ non-financial-reporting_en. EY. (29 August 2018). How an integrated sustainability strategy can help you stand out. Retrieved 1, Sep 2019, from https://www.ey.com/en_gl/assurance/how-an-integrated-sustainabilitystrategy-can-help-you-stand-out. Formentini, M., & Taticchi, P. (2015). Corporate sustainability approaches and governance mechanisms in sustainable supply chain management. Journal of Cleaner Production. GRI. (2019). Retrieved 27, Sep 2019, from https://www.globalreporting.org/Pages/default.aspx. Ioannou, I., & Serafeim, G. (1st January 2019) Corporate Sustainability: A Strategy?. Harvard Business School Accounting & Management Unit Working Paper No. 19– 065 Retrieved 25, July 2019, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3312191. Ioannou, I., & Serafeim, G. (2019) Yes, sustainability can be a strategy. Harvard Business Review. Retrieved 30, June 2019, from https://hbr.org/2019/02/yes-sustainability-can-be-a-strategy. Keller, S., & Meaney, M. (2017). Attracting and retaining the right talent. McKinsey & Company. Retrieved 20, Oct 2019, from https://www.mckinsey.com/business-functions/organization/ourinsights/attracting-and-retaining-the-right-talent. Kiron, D., Unruh, G., Kruschwitz, N., Reeves, M., Rubel, H., & Meyer Zum Felde, A. (2017). Corporate sustainability at a crossroads: Progress toward our common future in uncertain times. MIT Sloan Management Review. Retrieved 20, July 2019, from https://sloanreview.mit. edu/projects/corporate-sustainability-at-a-crossroads/. Kotter, J. P. (March-April 1995). Leading Change: Why Transformation Efforts Fail. Harvard Business Review. Retrieved 3,Nov 2019, from http://www.mcrhrdi.gov.in/91fc/coursematerial/ management/20%20Leading%20Change%20-%20Why%20Transformation%20Efforts% 20Fail%20by%20JP%20Kotter.pdf. Krause, D. R., Vachon, S., & Klassen, R. D. (2009). Special topic forum on sustainable supply chain management: Introduction and reflection on the role of purchasing management. Journal of Supply Chain Management 45: 18–25. Retrieved 12, April 2019, from https://doi.org/10. 1111/j.1745-493X.2009.03173.x.

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Laszlo, C., & Zhexembayeva, N. (2011). Embedded sustainability, the next big competitive advantage. Sheffield: Greenleaf Publishing. Lechler, S., Canzaniello, A., & Wetzstein, A. et al. (2019). Influence of different stakeholders on first-tier suppliers’ sustainable supplier selection: insights from a multiple case study in the automotive first-tier industry. Bus Res. Retrieved 12, April 2020, from https://doi.org/10.1007/ s40685-019-00103-y. McKinsey & Company. (2017). Sustainability’s deepening imprint. Retrieved 30, Oct 2019, from https://www.mckinsey.com/business-functions/sustainability/our-insights/sustainabilitysdeepening-imprint. Mellery-Pratt, R., & Soar, S. (2019). The truth about Gen-Z and Millennial Fashion employees. The Business of Fashion. Retrieved 24, Oct 2019, from https://www.businessoffashion.com/ articles/careers/millennial-gen-z-employees-fashion-survey-bof-careers-white-paper. Niemtzow, E. (2018). Disrupting luxury: creating resilient businesses in times of rapid change. BSR. Retrieved 18, July 2019, from https://www.bsr.org/en/our-insights/report-view/ disrupting-luxury-creating-resilient-businesses-in-times-of-rapid-change. NYU Stern Center for Sustainable Business. (2019). CSB ROSI Methodology. Retrieved 4, July 2019, from https://www.stern.nyu.edu/experience-stern/about/departments-centers-initiatives/ centers-of-research/center-sustainable-business/research/csb-monetization-methodology. Orsato, R. J. (2009). Sustainability strategies, when does it pay to be green?. Hampshire: Palgrave Macmillan. Porter, M. E., & Kramer, M. R. (2006). Strategy and society: the link between competitive advantage and corporate social responsibility. Harvard Business Review. Retrieved 30, June 2019, from https://www.comfama.com/contenidos/servicios/Gerenciasocial/html/Cursos/ Columbia/Lecturas/Strategy-Society.pdf. Porter, M. E., & Kramer, M. R. (January-February 2011). Creating Shared Value. Harvard Business Review. Retrieved 15, July from http://web.a.ebscohost.com.iclibezp1.cc.ic.ac.uk/ ehost/pdfviewer/pdfviewer?vid=2&sid=c52062c3-1513-428d-b518-a786217e1252% 40sessionmgr4006. Rasche, A. (2019). Interviewed by: Taylor, S. (9th September 2019). Rasche, A. (ed.), Morsing, M. (ed.) and Moon, J. (ed.). (2017). Corporate social responsibility: strategy, communication, governance. Cambridge, Cambridge University Press. Schaltegger, S., & Wagner, M. (2006). Managing the business case for sustainability: the integration of social, environmental and economic performance. Sheffield: Greenleaf Publishing. Sherman, R. (2019). Interviewed by: Taylor, S. (7th November 2019). Taticchi, P., Carbone, P., & Albino, V. (2013). Corporate sustainability. New York: Springer. Taticchi, P. (2019). Sustainability and competitive advantage: Rethinking value creation, lecture notes, Imperial College Business School, delivered 7–8 and 16–17 May 2019. Willard, B. (2012). The new sustainability advantage: seven business case benefits of a triple bottom line (10th ed.). Gabriola Island: New Society Publishers. Willard, B. Interviewed by: Taylor, S. (30th September 2019).

Sally Taylor has over fifteen years experience in luxury retail. Currently Strategy and Business Development Lead at a world renowned department store in London. In this role she developed and implemented the corporate sustainability strategy; presenting a compelling vision and case for change to the senior leadership team and gaining sign-off on a five year sustainability roadmap. A recent graduate with distinction of the executive MBA programme at Imperial College Business School. Lives in London with her husband and daughter.

Sustainability Transformations—From Theory to Practice

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Diana L. Copper

Abstract

There is evidence that sustainability is becoming more central to the way organisations create and capture value. As sustainability strategy becomes business strategy, organisations need to change, aligning structures, cultures, systems and skills to embed sustainability. What does sustainability transformation look like in practice? What are the drivers, challenges and promising practices in change management for sustainability? In this chapter, the author provides sustainability practitioners with a review of existing evidence on change management for sustainability. The author grounds insights from the literature with learning form primary research conducted in the engineering consulting sector in the UK. Then, change management practices that have been adopted successfully in a variety of contexts are highlighted, to support readers in shaping sustainability transformation in their organisations. Keywords

Strategy

10.1


Sustainability
Systems thinking
Change management

Introduction

In the past decade, corporate sustainability has become more central to the way organisations create value, adapt to external pressures, innovate and engage with stakeholders. Corporate social responsibility has evolved from being a philanD. L. Copper (&) Commonwealth Secretariat, Pall Mall, London SW1Y 5HX, UK e-mail: [email protected] © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_10

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thropic endeavour to being a strategy to create economic, environmental and social value. This shift was engendered by increasing awareness among regulators, consumers and firms of risks and impacts of climate change, resource depletion, inequality, globalisation and technological change. Consumer awareness has created new markets for sustainable products and services, and a cohort of increasingly purposeseeking employees have made sustainability essential for organisations to attract and retain talent. As sustainability becomes more central to strategy, organisations need to change, realigning structures, culture, skills and systems to embrace sustainability. What does sustainability transformation look like in practice? What are the drivers, practices and challenges of change management for sustainability? There is some evidence that organisations are successfully embracing sustainability, but there are few qualitative studies of sustainability journeys. Where studies exist, they concern manufacturing and/or large multinational companies. There is a dearth of evidence on change management for sustainability in other sectors, and particularly, in services. In this chapter, the author aims to provide sustainability practitioners with a review of existing literature on change management for sustainability. Learning form primary research the author conducted in the engineering consulting sector is included. Change management practices that have been adopted successfully in a variety of contexts are highlighted, to support readers in shaping sustainability transformation in their organisations. The chapter includes an overview of the existing relationship between organisations and sustainability, how it is defined and how it has evolved over the years (Sect. 10.2). It then proposes a framework to understand sustainability transformations, looking at change management and change drivers (Sect. 10.3). These frameworks are then applied to existing evidence on sustainability transformation in organisations, highlighting how firms have embedded sustainability in business strategy and realigned structures, culture, systems and skills to achieve sustainable outcomes (Sects. 10.4, 10.5, 10.6, 10.7, 10.8). Sections 10.4–10.8 are in three parts. Findings emerging from the literature are highlighted first, followed by findings from primary research the author conducted in the engineering consulting sector; finally, in a table, promising practices that can be adapted in sustainability transformations are summarised. Section 10.9 looks at challenges in change management for sustainability. The conclusion summarises key themes and areas where further research is needed.

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Sustainability and Organisations: An Evolving Relationship

10.2.1 Context Two milestones in the global ambition for sustainability are becoming increasingly entrenched in corporate sustainability efforts. The first is the signing of the Paris Agreement in 2015, setting out clear national targets for carbon emission reduction and channelling governmental and private sector efforts to address climate change. The other key milestone is the adoption in 2015 by the United Nations of the Sustainable Development Goals (SDGs), identifying seventeen key areas where global efforts to achieve development need to be focused, taking into account economic, social and environmental needs of present and future generations. The SDGs are providing a cognitive framework for organisations to conceptualise and report on their sustainability achievements. It is the first time that a multilateral framework has been influential on private sector goal-setting (see Chap. 2 of this book). As sustainability becomes more central to organisations, studies have emerged on sustainability theory and practice. These point towards an evolving definition of what constitutes sustainability and an evolving relationship between sustainability, corporate strategy and value creation.

10.2.2 What Is Sustainability? Sustainability is an ambiguous term, used to define a myriad of concepts within organisations over the years, including corporate social responsibility, corporate sustainability, responsible leadership, sustainable development, climate change, environmental performance, sustainable and circular economies, green business models, business sustainability, environmental, social and governance approach, triple bottom line, sufficiency economy and ‘business in nature model’ (Dyllik 2002; Doh and Quigley 2014; Brannmerk 2012; Paul 2016; Ketprapakorn 2019; Sàrda and Pogutz 2019). Sustainability is not just ambiguous in theory, but also in the practical application by organisations themselves (Doh and Quigley 2014). Whilst the ‘fuzziness’ of the concept poses some challenges in relation to measuring and comparing outcomes, there are advantages to an ‘emergent’ definition of sustainability, allowing the concept to be dynamic, context specific and responsive to the need of multiple stakeholders. There is increasing recognition that ‘system’s thinking’ may be a helpful conceptual framework to understand what sustainability means (see Chap. 3 of this book). This approach acknowledges that sustainability itself is not an end goal but a process (Lahtinen 2019). It is a way of thinking and adapting in the face of evolving

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circumstances, dynamic relationships and positive and negative feedback loops that reinforce or undermine existing paradigms (Williams et al. 2017). A systems’ understanding of sustainability is key to achieving sustainability transformations in organisations. It allows for sustainability leaders to co-create a sustainability language with key stakeholders including colleagues, customers, clients, regulators and suppliers (May et al. 2017). In the planning and execution of sustainability transformations, it allows for the harnessing of feedback loops and the ‘emergence’ of sustainability innovations. Working within a systems approach, planners and implementors can accommodate a degree of ‘self-organisation’ among change actors. Finally, a systems approach recognises some of the key skills required for sustainability transformations: complex problem-solving, emotional resilience to complexity, trust and cognitive diversity. For the purpose of this chapter, the definition of corporate sustainability presented in Chap. 4 is used: ‘Corporate sustainability is an integral approach to business aimed at enhancing competitive positioning and profitability through the sustained creation of shared value, co-creation practices with stakeholders and the integration of ESG factors in decision-making’.

10.2.3 From Corporate Social Responsibility to Corporate Sustainability In the past decade, sustainability has evolved from being considered a ‘cost of doing business’ (Kennedy et al. 2017) to a driver of competitive advantage via being a compliance requirement (Dunphy et al. 2010). Where the compliance approach is reactive, the strategic approach to sustainability is aggressive and proactive (Taticchi et al. 2017). Sustainability has moved from being project oriented, aimed at expressing good intention, to quality oriented, looking for operational efficiencies, to strategically oriented, looking for critical business opportunities involving complex network of strategic relationship and activities (Kiron et al. 2017). Strategic sustainability engages values, skill sets and organisational learning and recognises the value in building and maintaining relationships, rather than engaging with stakeholders transactionally (Martinuzzi and Krumay 2013). A number of categorisations and taxonomies have emerged, tracking where organisations are in the journey between compliance and creating new sustainable business models (Nidumolu et al. 2009; Formentini and Taticchi 2016). These categorisations provide a useful backdrop from tracking a sustainability transformation in organisations.

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Becoming a Sustainable Organisation

10.3.1 Framing Change To move from a compliance approach to sustainability to a strategic one, an organisation needs to undergo a process of change that addresses strategy, values and capabilities, beyond the merely technocratic (Lozano 2015). Becoming a sustainable organisation requires a distinct kind of leadership effort that is beyond conventional management and requires strategic (vision), tactical (enabling environment) and operational (everyday practice) action (Lahtinen and Yrjölä 2019). A number of change management frameworks help understand sustainability change. The contingency approach, in line with systems thinking, highlights change as continuous, multidimensional and challenging, engaging people, behaviours, practices, processes, structure and mechanisms. This framework helps to account for the complex, multidimensional and context-specific nature of sustainability. Kotter’s widely used change model is also helpful to think through the ‘how’ of sustainability transformations involving understanding, communicating, executing and institutionalising (Kotter 1996). The literature on the reach and timing of change management is also relevant to sustainability. Effective change is about ‘alignment’ of the critical factors that make up an organisation. A useful model to think about organisational factors is an adapted version of the McKinsey 7s model, focusing on five elements: strategy, structure, systems, shared values (culture) and skills. A performance hypothesis postulates that an organisation achieves optimal performance when strategy is placed at the centre, and all other elements are aligned to the strategy. The literature, as well as empirical evidence described later in the chapter, indicates a relationship between the depth and scope of organisational change and sustainability performance (May and Stahl 2017) supporting this performance hypothesis (Fig. 10.1).

Fig. 10.1 Adapted McKinsey 7s Model (Source McKinsey 1982)

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The process of keeping these elements aligned and particularly aligned with organisational strategy can be proactive or reactive. Proactive changes occur in anticipation of external events and involve adjustments or major changes without a sharp break from current organisational frame (Nadler and Tushman 1989). Reorientation is often regarded as a ‘healthier’ type of change as it is incremental, proactive and ‘sense-making’ (Fig. 10.2). Change for sustainability, as a process to adjust and improve internal activities, structure, management and engagement with stakeholders to more effectively contribute to sustainable societies (Lozano 2018a), is often a reorientation type effort. Most existing studies of sustainability change management highlight the iterative, constantly evolving and learning nature of the process. Frame-breaking type of changes rarely observed, though pursuing a transformational sustainability strategy can result in ‘disruption’ of industries and sectors (Sàrda and Pogutz 2019).

10.3.2 Why Change—Sustainability Change Drivers The key drivers for sustainability change identified by companies themselves include customers, consumers and employees (UNEP 2010). Customer/client demand, reputation, regulation, technological and environmental change are external drivers. Internal divers include leadership, the business case for sustainability, efficiency, collaboration and innovation (Ha 2014; Ivanaj et al. 2015). Employees, and particularly millennials, seeking purpose through their employment, are also an internal driver (Dunphy et al. 2010). Lozano’s sustainability driver model highlights internal and external drivers and the connection between these (Lozano 2015). The interplay between external and internal drivers is dynamic and can create substantial value, in the form of collaboration and co-creation between customers/clients and firms and between firms within and cross-industry (Ivanaj et al. 2015; Niesten et al. 2017; Arnold 2017). Fig. 10.2 Types and timeframes of change (Source Nadler and Tushman 1989)

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10.3.3 Sustainability Transformation Journeys In the previous sections, sustainability was defined and the evolution of sustainability approaches within organisations was tracked. Different approaches to change management that can be useful to understand sustainability transformations were reviewed. In the next sections, the author describes how sustainability transformations happen, starting from the integration of sustainability strategy into business strategy (Sect. 10.4) and then describing the realignment of structures (Sect. 10.5), shared values (Sect. 10.6), systems (Sect. 10.7) and skills (Sect. 10.8) to execute strategy. Each section starts with a review of the academic literature on the topic. Findings from primary research the author conducted on a global engineering consulting firm based in the UK are then included. The research was conducted as part of an Executive MBA for Imperial College London in 2017. It was carried out at a time of steady expansion of sustainability services, with demand for sustainability consulting globally estimated to grow by 4% annually between 2015 and 2021 (Verdantix 2015). The firm studied provides engineering consulting services in the infrastructure industry, with practices in water, transport, energy, construction and international development. The data was collected through semi-structured interviews with leadership, senior and middle management in both sector and corporate functions. A review of internal and external documentation regarding the firm and its sustainability strategy was done to triangulate findings. It is hoped that the outcomes of the empirical research will ground insights emerging from the literature and support practitioners in understanding how transformations can work in practice. Each section terminates with a box with practical suggestions that sustainability practitioners can apply in their own organisations.

10.4

Sustainability Strategy as Business Strategy

According to the growing literature on sustainability and strategy, firms become sustainable ‘sustainably’ when they develop competitive advantage through ‘ecologically and socially supportive production processes […], and innovative human and knowledge resource management practices’ (Dunphy et al. 2010:146), when they consider sustainability as an opportunity to create and capture value rather than a risk to be managed (Gasbarro 2017). Sustainability is strategic when it is clearly articulated as ‘value creation story’; it is anchored in a clear business case, and spelled out in a long-term vision, a policy with clear goals and targets, an implementation plan developing new organisational capabilities and practices (Dunphy et al. 2010; Schneider 2012; Kiron et al. 2017; Lozano 2015; Battacharja 2017; Sàrda and Pogutz 2019).

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Strategic sustainability is an approach that guides management’s way of thinking and approach to relationship management (Arnold 2017; Grewatsh 2017), and requires deep understanding and intense collaboration with stakeholders across the value chain (Sàrda and Pogutz 2019). Sustainability needs to be a matter of strategy clearly addressed by CEOs and the board (Battacharja 2017). It is important that a sustainability plan clearly spells out responsibilities and accountability, strategic, tactical and operational actions (Lahtinen and Yrjölä 2019), engaging the organisation and having clear systems for measuring, monitoring and reporting outcomes (Sàrda and Pogutz 2019). In terms of outcomes, the literature emphasises how firms that address material issues in their value chain achieve greater longevity and better financial results (Dunphy et al. 2010; Schneider 2012; Martinuzzi and Krumay 2013; Kiron et al. 2017). The link between sustainability and competitiveness is empirically proven, though there is variability across sectors and contexts (Fairfield et al. 2011). There are particularly positive results where sustainability is embedded in strategy, and firms adopt ‘aggressive’ action linking sustainability to competitive advantage (May and Stahl 2017; Porter 1995; Martinuzzi and Krumay 2013; Taticchi 2017). The depth of change management effort adopted by the firm to embed sustainability strategy has an impact on the sustainability performance (May and Stahl 2017). In the engineering consulting firm studied, sustainability transformation was predicated on closing the gap between corporate strategy and sustainability strategy. While reviewing its position on sustainability in 2013, the firm’s Board rejected the option of keeping sustainability separate from the firm’s broader value proposition by developing a separate suite of sustainability services. Rather, it opted for ‘strong’ approach to sustainability, making it an integral part of its value proposition to clients in all service provision and making sustainability a part of the job description of the 15,000 employees. The idea behind this approach was to engender growth across the firm’s sectors by improving services through the sustainability value-add, rather than engender growth in sustainability services only. Employees interviewed for the research acknowledged that since this strategic stance from the top, sustainability had become part and parcel of the work of the firm not an ‘ad on’. Interviewees identified a clear shift from a corporate social responsibility approach to a strategic sustainability approach, where sustainability is seen as a value-adding proposition fully embracing all aspects of the organisation. Staff were helped to identify things they were already doing: reducing, repurposing, cutting out, as sustainability. Client focus was a key element of this approach to sustainability. The firm ‘exploited’ the perceived weakness of sustainability, i.e. the ambiguity of the term, to tailor its value proposition in relation to sustainability to the needs of each client. Whilst the sustainability offering varied from client to client, there was a strong focus on achieving positive environmental and social outcomes and a universal focus on achieving efficiency, through, for example, innovative design. Efficiency was identified as a key way of creating value. The firm endeavoured to capture

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some of the value created through ‘value based pricing’, agreeing contractually with the client to share cost savings achieved by implementing sustainability effectively. This opportunity to capture value further inspired the firm to deliver value through connected thinking, leveraging expertise in different parts of the firm and transferring lessons across sectors or across geographies. Part of the value creation and capture was linked to a focus on material issues for the sector; for example, carbon measurement and management. In infrastructure, carbon efficiency can achieve substantial, commercial and environmental benefits, and the firm effectively leveraged this to create value for the client and themselves. Having a ‘flagship’ initiative on carbon helped ‘spell out’ the sustainability approach in concrete terms in a way that both staff and clients could easily understand and operationalise. In terms of change process, listening and understanding stakeholders, and clients in particular, was essential to align sustainability strategy and business strategy. A client survey and one-to-one interviews with the firm’s top 20 clients enabled understanding of what the client’s sustainability questions, challenges and approaches were and an elaboration of how the firm could better ‘interpret’ sustainability in a way that was value creating to the client. The information garnered enabled the creation of a strong business case for sustainability within the firm, demonstrating value to client and versatility of the sustainability concept to achieve client focus. It also provided feedback for the empowerment and the capacity building of account managers and account leads within the firm. Further, the sustainability team in the firm embarked in a series of one-to-one meeting with senior management to understand their aspirations, and enlist support for the development of a sustainability vision and approach. To flesh out this vision, the board was engaged, and was given three options: a weak option, where effectively the firm would make no change to the current approach and be ‘one of the pack’, a second option where the firm would adopt a ‘strong’ sustainability approach embedding sustainability in its strategy and becoming a leader in the industry or a third option, becoming an overall leader beyond its industry. After substantial discussion considering the latter two options, the board opted for a 2.2 vision, where the firm would lead in its industry and take forward wider leadership on specific issues more broadly, for example, carbon efficiency and management. A sustainability roadmap and action plan were then articulated, incorporating the aspirations expressed by top management during 1–1 discussions with the sustainability team as well as results from client survey and engagement. The roadmap had a number of prongs, including skills development to enable all staff across the firm to deliver on the firm’s sustainability aspiration and strategy.

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Summary table—Change practices in strategy development

• Align sustainability strategy to business strategy with a ‘value creating story’. • Focus on material issues. • Make sustainability part of everyone’s job. • Understand stakeholders’ needs through surveys, one-to-ones and stakeholder events. • Engage and enlist top management and the board. • Develop a sustainability vision, with scenarios and options. • Develop a roadmap and a plan with clear responsibilities and measures of success.

10.5

Realigning Structure to Deliver Strategy

According to the literature, creating the right structure to execute strategy is essential to sustainability performance (Kiron et al. 2017). Leadership is an important structural dimension that impacts sustainability performance (May and Stahl 2017). Board involvement, oversight and leadership is essential, as well as integrated governance for sustainability (Dunphy et al. 2010; Kiron et al. 2017; UNEP 2014; Battacharja 2017). Diversity of expertise and backgrounds at board level is an enabling factor (Meuleman 2013; Fuente 2016). Beyond the board, sustainability and accountability for results need to be integrated in multiple departments (Lozano 2015) and cross-functional teams (Kiron et al. 2017), from junior staff to middle management (Dunphy et al. 2010). Integration at different levels in the organisation is essential because knowledge is dispersed and does not reside in one person or team specifically. The sustainability team has an important role in thought leadership, considering trends and challenges and coordinating different actors involved (Lahtinen 2019). The use of change agents embedded throughout the organisation with expertise and vision is pivotal to successful sustainability transformations (Dunphy et al. 2010; Ha 2014; Stroufe 2017). The effectiveness of change agents is dependent on their mindsets and approaches to sustainability, but also on a number of contextual factor, both internal (strategy, management commitment, planning, collaboration and organisation of roles) and external factors (government action and technology) (van den Berg et al. 2019). Sustainability champions can act as nodes and affect systems change. As managers respond to improving indicators of sustainable

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progress, positive feedback loops are engendered and reinforce sustainability transformation (Williams et al. 2017). In the engineering consulting firm researched, in order to achieve the firm’s sustainability vision, there was a strong understanding that structure needed to follow strategy and that sustainability leadership and know-how had to be embedded throughout the organisation. There was consensus that responsibility and leadership for sustainability resided in the hierarchy vertically, horizontally, at the level of project, practice, function and region. Each project benefitted from environmental and sustainability oversight at inception, and expertise was made available throughout the lifespan of the project. At the very top, the board is involved in the delivery of the sustainability strategy through the Chairman and a sustainability lead. Expertise and leadership was also at the front line, in account management and project design. The sustainability leader and the sustainability team provided overall leadership, horizon scanning and coordination. In terms of change practices, the use of sustainability champions was a successful way to ensure sustainability leadership throughout the organisation. Champions were important to the visibility of the agenda, to idea generation and knowledge transfer across the organisation. Champions provided front-line staff with tools to achieve sustainability outcomes and ensured coordination. Sustainability champions were also included in the network of early career professionals underscoring the importance of this agenda for future leaders in the firm. Sustainability champions across the organisation benefited from context specificity and flexibility. There was no standardised job description for sustainability champions, but each was enabled and empowered to lead. This allowed for a degree of ‘self-organisation’ and emergence of unexpected collaboration and innovation, underscoring the importance of balancing structural interventions with flexibility and openness to ‘emergence’. Summary table—Change practices in structure realignment

• Engage the Board and senior management. • Build sustainability expertise and leadership vertically, horizontally and cross function. • Appoint sustainability champions, give them space and ownership to lead. • Ensure sustainability team provides overall coordination and thought leadership.

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Creating a Sustainability Culture

The literature on sustainability and organisational culture highlights a number of essential values. Complex problem-solving, sense-making and emotional resilience in the face of ‘wicked problems’, conflict and change are essential leadership qualities to achieve sustainability outcomes (Metcalf and Benn 2013; Williams et al. 2017). The need for these ‘system’ capabilities is observed cross-culturally. In the Asian context, for example, perseverance, resilience, moderation and sharing are key values of sustainability leaders (Ketprapakorn 2019). The leadership style most associated with complex problem-solving distributed intelligence, i.e. leadership behaviour encouraged throughout the organisation (Macke and Genari 2019; Metcalf and Benn 2013) and connected thinking. A further value that was found to be essential for sustainability transformation is collaboration. This is true both for internal collaboration and engagement with stakeholders, including other firms and even competitors, across sectors and across disparate ideas (Miller 2003; Edmondson 2008; Dunphy et al. 2010; Ha 2012; Metcalf and Benn 2013; Kiron et al. 2017; Kennedy et al. 2017; Husted 2017; Niesten et al. 2017; Williams et al. 2017). Collaboration within and across firms and industries enables greater innovation and risk sharing, and the ability to better identify and capitalise on global opportunities (Dunphy et al. 2010; Kennedy et al. 2017). There is a clear link between relationship management among firms, co-creation and sustainable innovation, with benefits increasing the more diverse the stakeholder group involved (Arnold 2017). The ability to manage conflict and mediate conflicting needs of different stakeholder is needed in sustainability leaders. In terms of sustainability outcomes, an organisation’s culture, principles, values and characteristics have an impact on how successful the implementation of the sustainability strategy is (Macke and Genari 2019; May and Stahl 2017). A key difference is made by committed employees’ driving action (van den Berg 2019). Further, values highlighted as essential to effective sustainability transformations include agility, flexibility and adaptability (Dunphy et al. 2010; Metcalf and Benn 2013; Martinuzzi and Krumay 2013; Lozano 2015; Davis 2016, Kennedy et al. 2017). Transparency and the ability to learn from failure are extremely relevant to change management for sustainability (Lahtinen and Yrjölä 2019). In the firm studied, there was a clear understanding that sustainability is needed to engage the culture and values of the firm for it to be truly everyone’s responsibility. The firm tried to instil sustainability as a core behaviour so that individuals could apply it almost subconsciously, and be empowered to solve problems in innovative ways. Empowering staff was viewed as critical, beyond process type changes. The need to have sustainability leadership at every level of the organisation, rather than centrally held, was deemed essential to respond to the complexity of the challenges the firm and clients were facing. It was clear that one person and one team would not have the solutions for the issues affecting a breadth of sectors as diverse as

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transport, energy, construction, water and international development. A ‘collaborative’ approach where the sustainability team is repository of the questions but not the answers was deemed essential. The firms’ sustainability journey fostered collaboration as a key value. All interviewees acknowledged that sustainability had increased collaboration across the organisation and contributed to connected thinking to solve complex environmental and social problems. The transfer of solutions and best practices across clients, projects and geographies was helpful to embed the firm’s sustainability overall approach. This resulted in significant opportunities for the firm. Collaboration increased internally, but also externally with clients and also with competitors. The firm partnered with others to achieve overall industry change. This was the case with the firm’s leadership on thinking about carbon reduction in the infrastructure value chain, in the UK. The firm’s commitments and thought leadership resulted in substantial reputational gains. Employees felt that external commitment was a powerful statement from the firm’s top leadership in relation to the role of sustainability within the firm. In terms of change practices, the shift in the firm culture was achieved by cascading leadership at all levels, affording individuals’ trust and ownership to interpret sustainability in the context of the client relationship and identify opportunities. Trust was mentioned severally as important to this process of change. There was clear evidence in this case on how a system’s approach is useful to understand sustainability transformations. There was a degree of self-organisation, where the sustainability beliefs and agendas of individual employees could meld and consolidate a sustainability culture within the firm. There was ‘space’ within a clear strategy and implementation plan for ‘emergence’ of sustainability innovations and spontaneous collaborations. This has allowed for ownership and empowerment of individuals creating positive feedback loops that have catalysed the sustainability transformation. The use of sustainability champions highlighted in the structure section was enabling for cultural change as well, embedding sustainability advocacy at every level in the organisation. Summary table—Creating a sustainability culture

• • • • •

Build leadership capacity at every level. Foster a culture of collaboration and joint problem-solving. Enable ‘emergence’ and self-organisation. Galvanise change champions. Create and nurture a sustainability network with clients, regulators and competitors.

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Implementing Sustainability Through Systems

Whilst leadership, the buy-in and empowerment of individuals is important in achieving sustainability transformation, it is equally important to embed sustainability in key systems and processes to reduce reliance on individuals (Dunphy et al. 2010). The development of a sustainability system serves a number of purposes in organisational transformation: allowing communication, collaboration and learning; developing data for decision making; measuring and monitoring economic, social and environmental value created, and enabling transparency and reporting, both internally and externally. Systems for clear and continual communications are important because organisational discourses and narratives have an impact on organisational structure and the success of sustainability transformations (Narayan 2016). A number of specific sustainability systems and processes have been created/adapted to measure and monitor results achieved across the whole value chain. Commonly used systems include life cycle analysis and assessments, balanced scorecards, carbon footprint and/or energy footprint analysis, environmental accounting, enterprise resource management and the use of quantitative, qualitative and financial metrics (Sàrda and Pogutz 2019). The manufacturing sector has seen an increase in the use of big data analytics for business intelligence, supply chain management, procurement and operations management, improving capabilities, competitive advantage and enabling sustainability transformation. The likelihood of the use of big data analytics for sustainability is dependent on a number of contextual factors including integration in global value chain and government regulation (Raut et al. 2019). The importance of reporting cannot be overstated in the literature. Sustainability reporting is considered a helpful way of measuring sustainability outcomes and inspires further sustainability change (Lozano 2018b). Reporting enables learning and signals transparency. To foster internal learning, it is important for different organisational department to participate in the reporting effort, as different individuals will bring insights depending on where they sit in the organisation. As change happens iteratively, reporting allows to track continuous improvement. There is evidence that companies where the board is more diverse and has mechanisms to engage with sustainability (e.g. committees) are more likely to report sustainability outcomes (Fuente et al. 2017). For learning, it is important that organisations disclose what is working, but also what is not working (Lahtinen and Yrjölä 2019). The cumulation of learning form reporting can contribute to industry/system level change (Lozano 2015). There is also increasing demand for transparency and disclosure from governments, civil society organisations and investors. Recent years have seen an exponential increase of the use of non-financial reporting. A number of global initiatives capture organisations’ reporting, including the Global Reporting Initiative,

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reporting under EU Directive 2014/95, the Sustainable Stock Exchange Initiative and the International Integrated Reporting Council and Sustainability Accounting Standards Board. Reputational gains can yield to organisations who report in a standardised and recognised way, while the existence of these global frameworks enables tracking the development sustainability as a new business paradigm (Sardà and Pogutz 2019). In the firm studied, to enable collaboration across the firm, communication and knowledge sharing systems and practices were initiated. The firm also developed a suite of models for carbon measurement and management, and economic and social impact assessment. These are shared across projects to achieve sustainability outcomes. In terms of change practices in the area of communication systems, the annual sustainability week was identified as particularly transformative as well as the annual sustainability award. These enabled individuals and teams to share information and understanding on sustainability challenges and solutions. They enabled collaboration to be established between teams and created an atmosphere of healthy competition, where visibility and financial reward stimulated teams to be innovative. The use of ‘yammer’ groups was also deemed particularly helpful to disseminate and share information, initiate and consolidate collaboration across teams and geographies. All interviewees mentioned how they use the firm’s social media tools to communicate, share, jointly solve problems and establish new connections. Sustainability reports, a relatively new initiative by the firm, highlight in the words of clients the impact the firm on the client’s sustainability aspirations, and the firm’s engagement with social issues (employment, regeneration, equality and diversity). The company’s external twitter account was also referenced as a vehicle for internal visibility, communication and leadership. Interviewees acknowledged that sustainability is one of the priorities of the firm that is better communicated internally and externally. Summary table—Systems to implement sustainability

• Develop systems and tools to address material issues, e.g. carbon. • Leverage internal and external communication tools. • Sustainability weeks, awards and showcases can result in innovation and energy. • Use sustainability reporting for learning and transparency.

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Developing Sustainability Skills and Capabilities

Skills development is often neglected in change management efforts, but research indicates that organisational learning and innovation are pivotal for organisations to embrace sustainability. Key skills required for sustainability leadership cross-culturally include perseverance, resilience and moderation, (Ketprapakorn 2019). In turn, sustainability positively encourages the building of specific organisational capabilities such as confidence, innovation and independent thought (Davis 2016; Kennedy 2017; Grewatsh 2017). Because of the unpredictability, complexity of sustainability itself, its non-linear and emergent nature and impact, skills building for complex cognition is essential to solve sustainability problems. Developing skills for holistic thinking is found in the literature to be the most important leadership skill. Managers need to cultivate adaptive capabilities in order to continuously sense-make change (Metcalf and Benn 2013; Williams et al. 2017). Sustainability challenges leaders to reconcile multiple and conflicting goals and requires extraordinary capabilities. The ability to hold conflicting situations and sustainability tensions is essential to ensure over time interconnections between system elements and the maturation of sustainability outcomes (Williams et al. 2017). In terms of outcomes, the development of human and social capital contributes to organisational longevity and performance for and beyond sustainability in the knowledge-based economy (Dunphy et al. 2010; Ha 2012; Martinuzzi and Krumay 2013). There is emerging evidence of a link between cognitive diversity and leadership ability for sustainability (Williams et al. 2017). In the firm studied, the importance of skills cannot be underestimated, given the engineering consulting industry and the level of challenges the firm and its clients experience. In the interviews, it was universally acknowledged that sustainability was fundamental to the firm to attract, motivate and retain talented staff. Employees, especially newer recruits, ‘millennials’, attached great importance to the firm’s purpose, as contributors to environmental and social value. Senior management was keenly aware that the sense of purpose, integrity and moral imperative associated with sustainability was a key driver of staff attachment and commitment to the firm. The ability to bring diverse skills to the table because of one’s identity, background, experiences and field of study was deemed essential to bring a fresh pair of eyes to the sustainability challenges experienced by the firm. Many interviewees acknowledged that the firm had become more skills oriented in the last few years. The fast pace of external change had required innovation and continuous improvement, across geographical and cultural boundaries. Skills recognised as essential to sustainability were complex problem-solving and innovation. The firm’s drive towards behavioural change for sustainability is supporting the development of these skills across the firm: for example, innovation for sustainability is part of the job description of practice leaders, who are expected to be on the look out for things that could match client’s needs. There was a mix of

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Fig. 10.3 Sustainability transformation in the engineering consulting firm studied by the author, summary table

formal and informal skills building within the organisation. Professional excellence training was referenced, as well as courses both in person and offline. The informal types of skill-building were frequently mentioned as powerful, including the availability of sustainable expertise at project level, the sustainability team itself, the sustainability weeks and awards, client events and practice networks all facilitated skills building and the bringing to bear different skills to projects (Fig. 10.3). Summary table—Developing capabilities for sustainability

• Map key sustainability skills across the workforce. • Include key sustainability skills (complex cognition, collaboration) in job descriptions. • Provide formal and informal learning opportunities. • Promote diversity and inclusion, understanding its impact on sustainability skills development in the organisation.

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Challenges

A number of studies on sustainability transformation are emerging, providing practitioners with useful information on how to develop and execute sustainability strategies. Studies however also point to considerable challenges and barriers to successful sustainability transformations. One of the key barriers is the lack of internal consistency between business strategy and sustainability strategy. Aspirations do not always translate into competitive action. This consistency gap is an obstacle to achieving sustainability results (May et al. 2017). A major review of sustainability in organisations identified a big gap between theory and practice. As sustainability is a moving target and constantly evolving, it requires a careful balance between clear targets and measures and enough flexibility to adapt to emerging issues. It is imperative that practitioners and leaders continue to ask the right questions and remain alert to new trends and challenges. Knowledge and good practice on sustainability solutions is still emerging and is often difficult to access. In many cases, sustainability remains confined to supply chains, but there is a need to consider the whole value chain. Whilst the number of sceptics on the need for action, e.g. on climate change is decreasing, there is still an overwhelming number of ‘undecided’ people, customers, investors and employees that need to be brought on board in order for organisational and system transformation to be embraced. There is also a need to shift the mentality of firms and sectors from competition to collaboration to solve the challenges of sustainability (Battacharya 2017). The applicability of lessons learned in sustainability transformation across size, sector and geography remains to be explored. Different geographical and cultural contexts, different regulatory pressures affect the drivers of sustainability and execution of strategies (Ivanaj et al. 2015). Most research has been conducted in Europe, North America, Australia and to a lesser extent Asia and South America, but little is known about how sustainability is conceptualised, embedded and practised in other parts of the world. The majority of action, and the analysis of same, seems to be occurring in large organisations. Though extrapolation can be made to smaller companies, comparatively less is known on sustainability challenges and action in Micro, Small and Medium Size Enterprises (Fairfield et al. 2011). There are also challenges with monitoring and reporting. Self-reporting has significant limitations (Dunphy et al. 2010), and there are also a multiplicity of systems and standards for tracking and reporting different aspects of sustainability (Mustapha et al. 2017). The relationship between corporate reporting (e.g. GRI) and state reporting (e.g. to the UN, the SDGs) requires conceptualisation and research. The Reporting on the SDG Action Platform, an initiative of the UN Global Compact and the Global Reporting Initiative is promising in this regard.

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Challenges with measuring and reporting were also observed in the firm studied. The benefits of embracing sustainability were acknowledged by interviewees while discussing the firm’s sustainability journey; but when asked to enumerate key outcomes, there was some hesitation in clearly spelling out and quantifying results. The reluctance to quantify is understandable and coherent with the firm’s view of sustainability as a lens for all its services rather than a separate suite of services. However, the ability to clearly and easily identify tangible and intangible outcomes of sustainability in the firm might be helpful to ensure continuity and energy in the firm’s sustainability journey. This is especially helpful in relation to the emergence of competing narratives, which appear to be sometimes perceived, counter-intuitively, as conflicting rather than complementary with sustainability. While the firm has leveraged the ambiguity of the term sustainability as a strength, enabling it to be tailored to clients’ needs and aspirations, a number of interviewees were uncomfortable with this ambiguity. Developing a strong and clear narrative around sustainability results would contribute to countering this narrative and provide renewed energy and impetus to the firm sustainability journey. Sustainability reports may support the firm in this regard.

10.10

Conclusion

There is evidence that sustainability is becoming more central to the way organisation creates and captures value. As sustainability strategy becomes business strategy, organisations need to align structures, cultures, systems and skills to embed sustainability. Research on change management for sustainability remains fragmented, and mostly concerns multinational corporations and the manufacturing sector in the western world. There are promising theories and practices emerging from the literature, as well from the primary research conducted by the author, which provide valuable insights on the process of sustainability change. The definition of sustainability is ambiguous. This is both a strength and a weakness. It enables organisations to co-create a sustainability language with their stakeholders as well as adaptation to a constantly shifting landscape and emerging issues and solutions. On the other hand, ambiguity contributes to fragmentation and poses challenges to measuring and comparing results across sector. The relationship between sustainability and organisations has evolved from philanthropic endeavour to value creating story. Where this has happened, a number of benefits have accrued to organisations. There remains however a ‘consistency gap’ (May et al. 2017), and a difference between theory and practice, which means the alignment of business strategy and sustainability strategy is still a challenge for many organisations.

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Aligning structure, values, systems and skills to achieve sustainability within organisations requires a clear vision, targets and measures of success and a substantial change management effort. Change happens in an iterative structured and unstructured, planned and unplanned way. The engagement of the Board and C suite is essential to sustainability transformation. Sustainability champions play a key part in change, especially if the context allows them to have agency and space to interpret their role and mandate. Leadership and the use of change agents allows for strong ownership of the sustainability transformation process, top down, bottom up and sideways in organisations. Creating a culture of collaboration is essential to achieve sustainable organisations and sustainable development more generally. There is a link between collaboration and value creation and sustainable innovation. Joint problem-solving and strategic engagement with networks can engender a paradigm shift from competition to collaboration. The adoption and/or creation of systems is essential to complete sustainability transitions beyond individual leadership and commitment. Systems serve a multiplicity of purposes; they enable value creation and implementation, help communicate and inspire and allow for measurement and reporting. Transparent and standardised reporting is important to enable learning and organisational and system change. The literature has identified key skills needed to imagine and implement sustainability change, including complex cognition, emotional resilience to uncertainty and conflict, curiosity and openness to learning. As these are not ordinary management capabilities, organisations should invest in both formal and informal skills development and learning. There is a relationship between sustainable outcomes and diverse cognition. The link between sustainability and diversity should be further investigated and strengthened. Gaps and uncertainty remains. This chapter, however, has identified a number of good practices readers can apply in their sustainability transformation, as summarised in the table below. Change practices in strategy development

• Align sustainability strategy to business strategy with a ‘value creating story’. • Focus on material issues. • Make sustainability part of everyone’s job. • Understand stakeholders’ needs through surveys, one-to-ones and stakeholder events. • Engage and enlist top management and the board. • Develop a sustainability vision, with scenarios and options. • Develop a roadmap and a plan with clear responsibilities and measures of success.

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Change practices in structure realignment • Engage the Board and senior management. • Build sustainability expertise and leadership vertically, horizontally and cross function. • Appoint sustainability champions, give them space and ownership to lead. • Ensure sustainability team provides overall coordination and thought leadership.

Creating a sustainability culture • • • • •

Build leadership capacity at every level. Foster a culture of collaboration and joint problem-solving. Enable ‘emergence’ and self-organisation. Galvanise change champions. Create a sustainability network with clients, regulators and competitors.

Systems to implement sustainability • Develop systems and tools to address material issues, e.g. carbon. • Leverage internal and external communication tools. • Sustainability weeks, awards and showcases can result in innovation and energy. • Use sustainability reporting for learning and transparency.

Developing capabilities for sustainability • Map key sustainability skills across the workforce. • Include key sustainability skills (complex cognition, collaboration) in job descriptions. • Provide formal and informal learning opportunities. • Promote diversity and inclusion, understanding its impact on skills development in the organisation.

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Lozano, R. (2018) Proposing a definition and a framework of organisational sustainability: A review of efforts and a survey of approaches to change. Sustainability, 10(4). Lozano, R., Carpenter, A., & Huisingh, D. (2015). A review of ‘theories of the firm’ and their contributions to Corporate Sustainability. Lozano, R., Nummert, B., & Ceulemans, K. (2016). Elucidating the relationship between Sustainability Reporting and Organisational Change Management for Sustainability. Macke, J., & Genari, D. (2019). Systematic literature review on sustainable human resource management. Journal of Cleaner Production, 208(20), 806–815. Malhotra., N, Course slides (2017). Mangham, I. L. (1995). Organizational change: A Processual approach by patrick dawson (Paul Chapman Publishing, London, 1994), pp. xii + 211, £14.95, ISBN 1-85396-237-6”, Prometheus, vol. 13, no. 2, pp. 272–274. Martins, V. W. B., Rampasso, I. S., Anholon, R., Quelhas, O. L. G., & Leal Filho, W. (2019). Knowlegde management in the context of sustainability: Literature review and opportunities for future research. Journal of Cleaner Production, 229, 489–500. Martinuzzi, A., & Krumay, B. (2013). The good, the bad, and the successful—how corporate social responsibility leads to competitive advantage and organizational transformation. Journal of Change Management, 13(4), 424–443. Matinaro, V., & Liu, Y. (2017). Towards increased innovativeness and sustainability through organizational culture: A case study of a Finnish construction business. May, G., & Stahl, B. (2017). The significance of organizational change management for sustainable competitiveness in manufacturing: exploring the firm archetypes. International Journal of Production Research, 03, 55(15), 4450–4465. Metcalf, L., & Benn, S. (2013). Leadership for sustainability: an evolution of leadership ability. Journal of Business Ethics, 112(3), 369–384. Meuleman, L. (2013). Trans-governance: Advancing Sustainability Governance, Springer. Mustapha, M. A., Manan, Z. A. & Wan Alwi, S. R. (2017). Sustainable Green Management System (SGMS)—An integrated approach towards organisational sustainability. Nadler, D. A., & Tushman, M. L. (1989). Organization frame bending: Principles for managing reorientation. The Academy of Management Executive, III(3), 194–204. Nawaz, W., & Koç, M. (2018). Development of a systemic framework for sustainability management in organisations. Journal of Cleaner Production, 171(10), 1255–1274. Niesten, E., Jolink, A., Lopes de Sousa Jabbour, Ana Beatriz, Chappin, M., & Lozano, R. (2017). Sustainable collaboration: The impact of governance and institutions on sustainable performance. Paul, A. C., Jonas, W. B., Lang, B., Rupert, J. Baumgartner, A.C (2017). A multilevel approach for assessing business strategies on climate, Journal of Cleaner Production, 160. Peters, T., & Waterman, R. (1982). In search of excellence. New York: Harper & Row. Porter, M. E., & van der Linde, C. (1995b). Toward a new conception of the environment-competitiveness relation-ship. Journal of Economic Perspectives, 9(4), 97–118. Ragsdell, G. (2000). Engineering a paradigm shift?: An holistic approach to organisational change management. Journal of OrgChange Mgmt, 13(2), 104–120. Ram Nidumolu, C. K. Prahalad, & Rangaswami, M. R. (2009). Why sustainability is now the key driver of innovation. Harvard Business Review. Raut, R. D., Mangla, S. K., Narwane, V. S., Gardas, B. B., & Narkhede, B. E. (2019). Linking big data analytics and operational sustainability practices for sustainable business management. Journal of Cleaner Production, 224(1), 10–24. Sadler-Smith, E. (2015). Communicating climate change risk and enabling pro-environmental behavioral change through human resource development. Advances in Developing Human Resources, 17(4), 442–459. Schneider, A., & Schmidpeter, R. (2012). Corporate social responsibility. Springer Berlin Heidelberg.

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Sharma, S. 1. (2014). Competing for a sustainable world: Building capacity for sustainable innovation, Greenleaf Publishing, Sheffield. Shvindina, H. (2017). Organizational changes: new challenges in search for sustainability. Environmental Economics, 8(4), 80–86. Siqueira, R. P., & Pitassi, C. (2016). Sustainability-oriented innovations: Can mindfulness make a difference?. Sprengel, D. C., & Busch, T. (2011). Stakeholder engagement and environmental strategy—the case of climate change. Business Strategy and the Environment, 20(6), 351–364. Sroufe, R. (2017). Integration and organizational change towards sustainability. Journal of Cleaner Production, 162, 315–329. Stephan, U., Patterson, M., Kelly, C., & Mair, J. (2016). Organizations driving positive social change. Journal of Management, 42(5), 1250–1281. Taticchi, P. (2017). Course Slides, Imperial College. Teles, M. D. F., & Freire de Sousa, J. (2017). Linking fields with GMA: Sustainability, companies, people and Operational Research. Thomas, B. (2012). Lawrence, Namrata Malhotra and Tim Morris, 2012, Episodic and Systemic Power in the Transformation of Professional Service Firms, USA. Journal of Management Studies, 49, 1. Touboulic, A., & Walker, H. (2016). A relational, transformative and engaged approach to sustainable supply chain management: The potential of action research. Human Relations, 69 (2), 301–343. United Nations Development Programme Finance Initiative, Integrated Governance, a new model of Governance for Sustainability, A report by the Asset Management Working Group, June 2014. van den Berg, J., Zijp, M. C., Vermeulen, W. J. V., & Witjes, S. (2019) Identifying change agent types and its implication for corporate sustainability integration based on worldviews and contextual factors. Journal of Cleaner Production, 229, 1125–1138. Verdantix. (2015). Sustainability strategy & sustainability research—sustainability reporting. Wiesner, R., Chadee, D. & Best, P. 2017, “Managing Change Toward Environmental Sustainability”, Organization & Environment,, pp. 1086026616689292. Williams, A., Kennedy, S., Philipp, F., & Whiteman, G. (2017). Systems thinking: A review of sustainability management research. Journal of Cleaner Production, 148(1), 866–881.

Diana Copper is Head of Portfolio Management at the Commonwealth Secretariat. The Commonwealth is an intergovernmental organisation of 53 countries in Africa, Asia, Caribbean, Europe and the Pacific. The Secretariat supports member states in economic, social and political development. In her role, Diana develops the organisation’s strategy, and supports designs and improves performance across a wide set of programmes ranging from climate finance, debt management, ocean governance, rule of law, gender equality and election management. She also supports the Secretariat’s partnerships and innovation work, and the interface with governing boards. Prior to this role, Diana was an Advisor in the Governance and Peace Division of the Secretariat; Head of International Policy at the Equality and Human Rights Commission of Great Britain; Policy Manager at the International Council on Security and Development, working in Afghanistan, Uganda and Brazil and Gender Mainstreaming Consultant for the Centre for Ethics and Global Politics in Rome. She has fifteen years’ experience working in social and economic development for international organisations, national governments and civil society. Diana holds an Executive MBA from Imperial College London; a Masters Degree in Gender, Development and Globalisation from the London School of Economics and Political Science, London and a Masters in International Relations and European Policy from LUISS, Rome and Sciences-Po, Paris. She also holds a BSc in Political Science from LUISS in Rome. Publications include ‘Gender, Conflict

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Society and Human Rights’, in Civil Society and the Politicisation of Human Rights, Ed. R Marchetti, N Tocci, United Nations University Press, 2011 http://unu.edu/publications/books/ civil-society-conflicts-and-the-politicization-of-human-rights.html#overview and ‘The Pompidou turn in Anglo French Relations, the new Entente Cordiale’ (1968–1974) in Venutnesimo Secolo, Review of Transitional Studies, 2006 http://www.torrossa.it/resources/an/2196291.

The Evolution of Sustainability Reporting: Integrated Reporting and Sustainable Development Challenges

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Cristiano Busco and Elena Sofra

Abstract

In this chapter, we shed light upon the current practice of integrated reporting in relation to sustainable development issues. Throughout the chapter, we present an approach which understands the practice of integrated reporting and integrated thinking as two tools which manage to benefit from the aspirational trait that characterizes the concept of sustainability in corporate discourse. To this aim, we outline the historical and academic debate that has fostered the embedding of sustainable development issues in corporate discourse. We explore how the gradual shift of the accountability relationship between business organizations and society is reflected within the evolution of corporate reporting practices, with a specific focus upon integrated reporting. Keywords

Sustainability reporting challenges




Integrated reporting




Sustainable development

C. Busco
E. Sofra (&) LUISS Guido Carli University, Rome, Italy e-mail: [email protected] C. Busco University of Roehampton, London, UK e-mail: [email protected]; [email protected] © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_11

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Introduction

In the eighteenth century, Thomas Robert Malthus published “An Essay on the Principle of Population,” in which he expressed concerns upon the ratio between food production and world population. According to Malthus, the food production system in place could not support the growing population, thus it would have led to starvation or to a decrease in the living conditions of individuals. Indeed, Malthus had not foreseen one unpredictable variable, namely technology, which at the time proved him wrong; nonetheless, his work shed light upon issues of sustainable development (Brander 2007). The quest for finding alternative means of productive capacity to meet the rate of demographical growth is even more relevant today than it was back then. We are now challenged to find alternative productive means to feed the growing World Population which will be 34% higher than today by 20501 while keeping the environmental impact of these tools under check. Meeting the expectations of a wider number of stakeholders while ensuring that the means adopted guarantee an economic, social, and environmentally sustainable growth are the ultimate quest bound to be faced by business organizations. The tension between short-termism pressures and long-term prospects are far from new to the private sector. However, transcending profit maximization to understand the societal impact of generating profits is relatively new but is now widely understood as the defining trait that characterizes the sustainable growth of a company. Indeed, reporting the sustainable growth of a company is the ultimate step of a deeper and longer process which starts with the definition of a sustainable corporate strategy which is then translated into the several steps of the value creation process of the business organization itself. Hence, discerning the path that has led to the creation of sustainability reporting inevitably is linked with the historical path that has led to the definition of the very concept of sustainable development and how it has been embraced by the private sector. Within this chapter, we will briefly retrace the road which has led to sustainability reporting. Then, we will shed light upon the current state of the art by paying particular attention to how the practices of integrated reporting and integrated thinking are useful tools in translating issues of sustainable development in the corporate discourse, with a specific focus upon the sustainable development goals (SDGs) set by Agenda 2030.

11.2

Toward Sustainability Reporting

11.2.1 A Historical Perspective The path which led to the creation of sustainability reporting has its roots in the historical sustainability movement which characterized the end of the twentieth 1

http://www.fao.org/fileadmin/templates/wsfs/docs/expert_paper/How_to_Feed_the_World_in_ 2050.pdf.

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Century. Within the past 50 years, several transnational conferences took place which have demanded a more active global participation toward the achievement of sustainable development goals and have gradually called upon business organizations to take on-board global goals. The sustainability movement began with the 1972 Conference on Human Environment held in Stockholm, which was attended by 113 states, 19 international organizations’ representatives and was held by 27 experts who laid out the interconnections that link environmental and economic development issues. The conference led to the adoption of an Action Plan which included 109 specific recommendations for international cooperation on issues affecting the environment and a declaration containing 26 general principles which then became the Stockholm Declaration. However, the 1972 Conference and the Stockholm Declaration on Human Environment, led to little effective change and the absence of concrete results spurred the wave of criticism. These were especially concerned with the limited scope given to the concept of sustainability (Bac 2008). The concept of Sustainability was further developed by the UN World Commission on Environment and Development, better known as the Brundtland Commission, after its Chair, Gro Harlem Brundtland. The Commission, founded in 1983, published in 1987 “Our Common Future,” a Report which carried forward what had been initiated in Stockholm in 1972. “Our Common Future,” generally referred to as the “Brundtland Report,” laid down a first clear and politically significant definition of sustainable development: “sustainable development is the development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (World Commission on Environment and Development 1987). The necessity to commit the private sector to endogenize sustainable development issues became crucial as the World witnessed unprecedented environmental disasters between 1979 and 1989. The massive oil spills2 which took place throughout these years and polluted the oceans in an unprecedented way, produced enormous repercussions to the extent that within the US, socially responsible investment funds (SRI) and environmental groups called to take action and started a movement which advocated for greater disclosure of environmental risks by corporate organizations (Rupley et al. 2017). The demand for greater awareness over the environmental and social impact of business activities came at a time in which the role of business within society was highly debated also in academia. The shareholder view which had been first theorized by Friedman (1970) and according to which the main responsibility of a corporate executive is to their shareholders, was now challenged. The very nature of the accountability relationship of corporate executives had shifted to the Amoco Cadiz, Ixtoc 1, Atlantic Express, Nowruz field platform, Castillo de Belluer, Odyssey, are the names of the tankers which led to massive oil spills in between 1979 and 1988. In less than 10 years the oceans were filled with millions of gallons of oil, which polluted the sea and created a number of environmental disasters. In 1989, the second largest oil spill in the US History occurred when the tanker Exxon Valdez ran aground in Alaska, 10.8 million gallons spilled into the Prince Willian Sound.

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stakeholders of organizations, rather than only the stockholders (Freeman and McVea 2001). According to Kolk (2016), several other approaches have been theorized which vary according to the degree of responsibility of a company, to the extent that a considerable number categorizations of these approaches have been carried out [see: (Garriga and Melé 2004; Höllerer 2012; van Marrewijk 2003)]. The gradual shift of the accountability relationship between business organizations and society was reflected within the evolution of corporate reporting systems from being mainly concerned with the idea of conveying financial information of the company, to answering the rising demand over non-financial information. This gradual shift was supported by a number of initiatives. For example, in 1989 the Coalition for Environmentally Responsible Economies Principles (CERES) was issued, which aimed at creating a framework for the flow of information necessary to evaluate a company’s performance against both its historical context and community norms. The CERES Principles represented a landmark in molding a standardized environmental reporting system to which companies could voluntarily adhere. Thus, the principles gave space to rethink business organizations also accountable for the impact that their value creation processes had upon the external environment. This reinterpretation of business organizations implied the gradual adoption of accounting tools and reporting systems which addressed corporate issues of sustainability. This project led to the launch of the Global Reporting Initiative (GRI) a non-profit organization aimed at integrating economic, governance and reporting standards of CSR into a unified single sustainability reporting framework (Rupley et al. 2017). As stated by its 1998 Steering Committee, GRI’s goal was to work toward the additional disclosure of information that went far beyond the mere environmental perspective of sustainability and included social, economic, and governance issues.3 This aim led to the release of the first set of GRI guidelines (2000 GRI Guidelines).4

11.2.2 Defining Sustainability and Sustainability Reporting The very concept of sustainable development was politically legitimized with the Brundtland Report and is now generally accepted as to be built upon three pillars: economic development, social equity, and environmental protection. Nonetheless, its interpretation and applicability have been thoroughly debated within academia to the extent that Gray (2010) has conceptualized an understanding of sustainability that ranges from weak to strong. A weak understanding of sustainability believes in the possibility to compensate for the loss of species, habitat, and natural resources through human intervention. A strong understanding of sustainability foresees losses as being neither replenishable nor compensable with human intervention

3

https://www.globalreporting.org/information/about-gri/gri-history/Pages/GRI’s%20history.aspx. The 2000 GRI Guidelines were immediately revised to ensure major compliance with international sustainability agreements which were established in those years.

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(Gray 2010). Moreover, scholars have emphasized the complexity of sustainability and the misconception of interpreting it with either an environmental or anthropocentric focus (Reinhardt 2000; Lozano 2008). As stated by Quattrone and Giovannoni (2016), the very nature of definitions does imply a continuous evolution; nonetheless, the number of definitions provided to the concept of sustainability are so many that Onn and Woodley (2014) have argued that the word has been left undefined yet Lozano and Huisingh (2011) have also claimed that the lack of a definition does not imply that the concept does not lack meaning. Although this may be true, several scholars have counterargued that the concept has been left in the thrall of the collective eye, thus triggering an incorrect use within accounting and reporting practices (Gray 2006). Moreover, Tregidga et al. (2018) have argued that the universality of sustainability has left corporate discourse with the ability to fill the void with economic-focused discourse, thus enabling it to be used by groups of interests to exercise their power. The “hegemonic construction” of sustainability has thus enabled business corporations to use the concept to pursue shareholder ends. Indeed, other scholars have argued that the endogenization of sustainable development issues within corporate discourse has fostered negative implications rather than virtuous positive outcomes. For example, Zappettini and Unerman (2016) have argued that the concept has been mixed and bent to build fictitious discourses over business organizations aimed at meeting only shareholder expectations. Indeed, Gray and Milne (2002) have also argued that the concept of sustainability has been used in the past to wash out poor sustainability managerial actions and have questioned the impact that accounting practices for sustainability may have in delivering the aspirational outcome of shedding light upon what a business organization does and how it actually carries it out. Academic literature thus suggests that there still is a gap between what business organizations state to do and what they actually do.

11.3

The State of the Art

The applicability of the concept of sustainability within corporate discourse is rooted in two paradigmatic changes which affect the analysis of a business organization. Firstly, the value creation process of business organizations which have shifted from resembling a classical input–output model—in which investors, suppliers and employees provided the inputs and customers represented the recipients of the outputs to a Stakeholder model—in which a broader number of parties now contribute to and are affected by the production process of business organizations (Donaldson and Preston 2016). This model has not only reinterpreted the process through which business organizations create outputs but it has also understood companies as producing value beyond the financial one, thus leading to analysis and assessment not only of the financial performance of a company but also of the value added (VA) produced by a business organization. In the work carried out by Haller and Staden (2014), the VA model is interpreted as being built upon a duality:

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the entity focused performance aspect and the society focused social aspect. The former focuses on the value created by the organization’s business activities (internal/indirect method), whereas the latter focuses upon how the value created by the organization’s business activities affects the wider environment, characterized by factors such as “labour” and “capital” as well as of the community represented by the public sector. Hence, VA is understood as the value produced by the organization which impacts the social and economic growth of the external environment. The second change regards the accountability perimeter of business organizations. Indeed, if inputs and outputs match in a value creation perspective that goes beyond the mere economic one, then the very accountability relationship of a company has to assess the expectations of all the actors involved. In laying out a model which foresees the existence of an organization to be linked in an extricable way to its external environment and to the support of its stakeholders, the model recognizes the need to address several issues. Indeed, the model recognizes the importance of assessing the impact of the business organization on the external environment, the concerns of its stakeholders. Thus, it has required the crafting of an adequate corporate reporting system which addresses the non-financial performance of companies (Vaz et al. 2016). These two changes are extremely linked to the corporate necessity to endogenize sustainable development issues. Acknowledging the role of business organizations farther than the profit-maximizing rationale has enabled us to understand business organizations as entities which produce outcomes beyond outputs (goods and services). This has required the crafting of concrete corporate reporting tools to assess whether those outcomes produce negative or positive externalities. Thus, it has required to understand whether a business organization is contributing to the sustainable development of its external environment. That same external environment provides the capital (inputs) necessary to produce the goods and services (outputs) adopting a sustainable strategy or not. This approach enables to overcome issues of definition over what sustainability means in corporate discourse and allows an interpretation of it which is aspirational. To this extent, Christensen et al. (2013) have argued that corporate discourse over sustainability has to be aspirational and has to be understood as the fuel which powers the future of an organization. The aspirational trait of corporate sustainability does find its realization in the practice of integrated reporting, which connects the financial and non-financial information in such a way as to explain their interaction within the corporate value creation process (Owen 2013), thus building a “One Report” (Eccles and Krzus 2010).

11.3.1 Integrated Reporting Integrated Reporting is defined by the International Integrated Reporting Council as a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the

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creation of value over the short, medium and long term. (IIRC 2013). The International Integrated Reporting Council—established in 2010 as a partnership between GRI and Accounting 4—its aim is to create a globally accepted integrated reporting framework. The latter is envisaged as to pool together financial, social, environmental, and governance information in a reporting system that would be clear, concise consistent and comparable. The first prototype of the framework was released in 2012 giving all the stakeholders the possibility to have a say prior to the final publication which occurred in 2013 and led to the creation of the International Framework. The International Framework is built upon a principle-based approach and its aim is to enable the creation of a globally applicable reporting system. Its content is structured as to deliver in a balanced way, flexible, and prescriptive principles that may be applied by a number of different firms varying across industries. The flexibility of the framework allows disclosure to occur over different topics according to the industrial relevance they hold. The enables companies to produce a report, nonetheless, it is the endogenous force required to produce it which revolutionizes the way of doing business. Indeed, building an integrated report requires a deeper practice of integrated thinking, defined as an active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects” and “to provide insight about the resources and relationships used and affected by an organization and to explain how the organization interacts with the external environment and the capitals to create value over the short, medium and long term (IIRC 2013).

The integrated report which companies may produce by adopting the framework is the final result of a practice which starts with adopting integrated thinking is reiterated with the practice of integrated reporting and materializes with the issuance of an integrated report. A metaphor may be helpful in delving into the relationship between integrated thinking and integrated reporting. When an environment no longer fulfils our needs (Place A), moving our body toward an environment that will fulfil those needs (Place B), becomes imperative for our brain. The latter will elaborate on the movement required to move our body from place A to place B and will send a message to our muscles, that will eventually take the first step. The growing societal needs have pushed organizations to find a new stand. Undoubtedly, integrated thinking may be interpreted as a company’s brain for this new journey, which elaborates corporate reporting discourse through integrated reporting to take the first step toward the place in which those societal needs are met, namely the integrated report. Within this view, the International Integrated Reporting Framework < IR > is to be understood as the street signs that will take corporate reporting discourse from Place A to Place B in a fairly safe way. The “street signs” provided by < IR > are built upon two core concepts: the identification of the capitals of an organization and how these capitals interact to create value.

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Fig. 11.1 The octopus which describes the value creation process of business organizations (Source THE INTERNATIONAL < IR> FRAMEWORK)

The Framework sets seven principles which should be taken into account by integrated reports, these are strategic focus and future orientation, connectivity of information, stakeholder relationship, materiality, conciseness, reliability and completeness, consistency and comparability. Moreover, the Framework prescribes a set of eight content elements which ought to be taken into account when working on an integrated report, these are the organizational overview; the external environment; governance; business model; risks and opportunities; strategy and resource allocation; performance; outlook; basis of preparation and presentation; general reporting guidance (IIRC 2013). The Framework detects six capitals as those through which the company acts and upon which the company may have an impact, these are intellectual capital; financial capital; manufactured capital; natural capital; and social capital. The latter is understood as inputs used by the company to carry out its business activities and produce outputs. Nonetheless, the company’s value creation process is understood beyond the production of outputs and encompasses also the outcomes, namely the impact that the production process has upon the external environment and thus the six capitals. Thus, the production process of the business organization is understood in a holistic way and is best summarized in the so-called “Octopus” herein reported (see Fig. 11.1). The practice of integrated reporting well adapts to the aspirational trait of sustainability since it enables to understand the value creation process of a company in a holistic way. To this extent, Gibassier et al. (2018) argue that integrated reporting holds an aspirational trait which fosters action even though the aims of integrated reporting are not

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met and along these lines Busco et al. (2018a) state integrated reporting to be “aspirational as it praises an imaginary future which stimulates more tailored accounting practices” (Busco et al. 2018a).

11.3.2 Integrated Reporting and Sustainable Development Goals5 The aspirational nature of integrated reporting well adapts to capture the value creation process of a business organization against goals set internally and externally by international independent standard-setting bodies, institutions and organizations. Hence, this practice easily flows in the general trend which has characterized the past twenty years in which the private sector has been called upon to take action in order to achieve global development goals, the most prominent example being the sustainable development goals (SDGs). The latter were described and analyzed at the beginning of this book, we here discuss them from the perspective of measuring sustainability performance and reporting. Thus, the following section will briefly recall the most salient historical steps undertaken to create the SDGs and will then address their relation to sustainability reporting practices with a specific focus on integrated reporting. The first global development goals, the Millennium Development Goals (MDG), were adopted by 168 Member States of the UN in September 2000 and had to be achieved by 2015, their aim was to promote “economic well-being, social development and environmental sustainability and regeneration”(OECD 1996). Nonetheless, their implementation shed light upon the necessity to take onboard business organizations in order to attain global sustainable development goals. This required building a new discourse among International Organization, Government and Business Organizations which converged in the creation of the United Nations Global Compact Initiative. As the World approached the deadline given to the Millennium Development Goals (MDGs), the international framework began to approach the quest of the post MDG phase, Summits and Conferences were organized to address this issue. Indeed, among the most important Summits organized to create a dialogue on what had to be done in the post-2015 international framework era, the two pivotal ones that ought to be remembered are the United Nations Conference on Sustainable Development which took place on 20 June 2012 in Rio, Brazil, and the Addis Ababa Agenda6 (AAAA) which stemmed from the Third International Conference on Financing for Development and took place on 5

We do not specifically and exclusively refer to the sustainable development goals. Indeed, the latter represents the goals to be achieved in order to assess current sustainable development issues faced by our Planet. Nonetheless, we here propose integrated reporting and integrated thinking as two tools which are flexible enough as to evolve as the sustainable development issues faced by our Planet do the same. 6 The Addis Ababa Agenda (AAAA) was the outcome of two previous conferences which took place in Monterrey, Mexico, and Doha, Qatar, and represented an early step in defining the post-2015 international framework for sustainable development.

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the 13 July 2015 in Addis Abeba,7 Ethiopia.8 The outcomes of the conferences led to the creation of the 2030 Agenda, the international framework setting 17 sustainable goals (SDGs) declines into 159 specific targets, which was adopted in September 2015, at the General Assembly of the United Nations in New York. In order to foster effective change and attain the SDGs, the role of the private sector is beyond crucial. Lucci (2012) analyzed this from the least developed countries (LDC) perspective, arguing that the presence of multinational corporations in LDCs could play a crucial role in fostering development. Nonetheless, the revolutionary trait of the 17 SDGs is that they are not only targeted toward LDC but should rather be achieved at a global level, binding all actors to take action no matter their sector of origin (private–public). Moreover, business organizations can benefit from achieving the SDGs. According to the Business Sustainable Development Commission, the private sector will shed light upon new opportunities, such as providing new growth markets; improving production systems and supply chains; initiating regulatory changes.9 As argued in Busco et al. (2018b), making SDG alignment part of their strategies and business models can help companies generate new revenue; increase supply chain resilience, recruit, and retain talent; spawn investor interest; and assure license to operate. This requires business organizations to understand their value creation processes in a holistic way and their overall performance in an aspirational value adding for all of its stakeholders. Indeed, as outlined in the work carried out by scholars, this calls for an integrated approach to planning, measurement, and reporting Busco et al. (2018b). Integrated reporting is a valid tool in developing better awareness upon the relationship between the value creation process of an organization and sustainable development issues, due to its traits: the value creation process of a business organization is understood as being affected by the external environment and in turn affects it; the external environment with whom the business organization holds this interrelationship is characterized by issues of sustainable development which affect the availability of the capitals used by the business organization to produce value. Hence, taking into account issues of sustainable development implies assessing whether the value creation process enacted by the company may endure in the long term. This rationale enables integrated reporting and integrated thinking to be appropriate in unraveling the relationship that business organizations hold with present sustainable development issues, as well as with future ones. This is the rationale which has led us to refer to this section as the relation between < IR > and sustainable development issues, whether present or future ones; the practice of integrated thinking and the practice of integrated reporting are flexible enough to evolve as the sustainable development issues that our Planet faces do as well. The conference laid down a number of practical and financial means to achieve the sustainable development goals and comprehended more than 100 concrete measures, which covered nine areas of interest: Technology; Infrastructure; Social protection; Health; Micro-, small-, and medium-sized enterprises; Foreign aid; A package of measures for the poorest countries; Taxation; Climate Change (UN 2015). 8 https://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf. 9 Report available at http://s3.amazonaws.com/aws-bsdc/Valuing-the-SDG-Prize.pdf. 7

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The < IR > Framework provides an important tool to align integrated reporting and sustainable development issues. To this aim, Adams sheds light upon the link between < IR > and the SDGs, the ultimate relationship that the two frameworks hold is illustrated in the revisited < IR > octopus (Adams 2017). In the report, Adams detects a five-step process that a business organization can follow to align its value creation process to the SDGs. The first step prescribes understanding which of the sustainable development issues are relevant to the business organization and to the external environment from which it pools the inputs and releases the outcomes. The second step foresees the identification of those sustainable development issues that influence and are influenced by the value creation process of the business organization itself. The analysis carried out in the second step may be summarized and illustrated through a materiality matrix which links corporate material issues to the SDGs. The third step is to develop a corporate strategy that aims at contributing to the attainment of the SDGs; this entails allocating resources and building development plans and specific targets based upon a short-, medium-, and long-term horizon. The fourth step foresees the permeation of the SDGs within the business organization, that is to say, that the business organization shall develop integrated thinking, connectivity, and governance as to broaden the external environment and take into account stakeholder expectations and assessing the trade-offs. The last step entails the preparation of the integrated report, which will at that point reflect and deliver the internal processes which the organization holds that work toward the attainment of the SDGs detected in the first step. Thus, organizations are called to report their material contributions to the SDGs, identifying which capitals are being increased, decreased, or transformed in the process (Adams 2017). In order to assess the state of art of the practice of integrated reporting in relation to reporting on the SDGs, an analysis was carried out to understand whether a relationship was held between these two practices limited to the geographical scope of Europe and for the fiscal year 2018. This was done by carrying out two univariate analysis and one bivariate analysis. The databases chosen to frame this practice were the UNGC SDG Reporting Initiative Platform database and the < IR > Example Database. The analysis yielded interesting results; more than one-third of the companies adhering to the UNGC SDG Reporting Initiative Platform were also issuing an integrated report (Fig. 11.2). Indeed, the adoption of these two Databases to identify the current state of the art does hold a few limitations. Firstly, the < IR > Database Example does provide a useful insight into the current trend of integrated reporting, nonetheless, it does not hold an internal monitoring and evaluation upon the degree of alignment of the integrated reports and the < IR > framework [see: (Bratu 2017; Sofian and Dumitru 2017)]. Secondly, the adoption of the UNGC SDG Reporting Initiative Platform is useful in taking a glimpse at the degree to which business organizations are reporting over the SDGs, nonetheless, the number of members adhering to the SDG Reporting Initiative Platform is an underestimation of the actual number of companies that are undergoing this process. Although the number of business organizations adhering to the UNGC SDG Reporting Initiative Platform is not so many, this analysis may suggest that a relation between reporting on the SDGs and adopting an integrated

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Fig. 11.2 Relation between European UNGC SDG and < IR > Example members (Authors’ elaboration)

report may hold. Thus, this analysis suggests that an ‘integrated SDG reporting’ does function in theoretical and practical terms and may represent a clear and concise answer to the debate on how to incorporate sustainable development issues within the corporate discourse.

11.4

Final Remarks

Current sustainability reporting practices are the answer of business organizations to the environmental, social, and economic issues faced by our Planet, these issues are summarized in the 17 SDG that are bound to be achieved by 2030. A recent study10 carried out by PricewaterhouseCoopers (PwC), which was carried out to understand the current corporate reporting trend over SDGs. The study showed that, although the global average of companies that have identified priority SDGs is 50%, these fail to look deeply into each goal and the relation that the goals hold with corporate performance. To this extent, the research yielded three main findings which suggest three major areas of improvement. Firstly, the study found that there is an extensive lack of guidance on how to measure positive and negative impacts in key areas and their relation to the SDGs. Secondly, sustainability frameworks which have been developed by international independent standards-setting organizations11 offer different 10

Access is available at https://www.pwc.com/gx/en/sustainability/SDG/sdg-reporting-2018.pdf. E.g., as the global reporting initiative (GRI) and sustainability accounting standards board (SASB).

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ways of approaching sustainability disclosures but do not include guidance over how the disclosure has to be carried out and linked to the reports. Thirdly, there still is slow sector collaboration in sharing best practices and knowledge over how to tackle sustainable development issues at a corporate level. Finally, the report outlines that companies do still rely upon governments’ guidance on how to tackle the SDGs, thus suggesting the necessity to create homogenous policies. Moreover, the research interestingly concluded that (…) while there is a clear appetite for embracing the SDGs, many organisations still lack the strategy, tools and culture needed to transform those commitments into tangible business actions. That has a knock-on effect in terms of measuring and reporting on their progress in meeting the Goals. As a result, they are unable to demonstrate to investors, peers and their own employees how and why the SDGs are helping improve their overall business, both now and sustaining it for the long term.12

Hence, one of the challenges that we are faced with nowadays is to bridge the gap between business and Agenda 2030 without producing redundant complexity. To this aim, integrated reporting is a useful tool for it enables to integrate information over how an organization produces its outputs in such a way as to take into account the environmental and social constraints of the external environment and thus may be interpreted as an evolution of sustainability reporting. Moreover, integrated thinking enables business organizations to rethink the impact of their value creation processes in a flexible way. Integrated reporting may also promote a dialogue among the international independent standard-setting organizations. However, reporting over sustainable development issues is only the final output of a deeper process which starts with the corporate mindset. These processes do begin with nurturing a corporate culture and corporate mindset that enables the organization to be understood as a whole, namely as an agent which operates in society and thus is affected and in turn affects it. Integrating sustainability issues within corporate discourse requires companies to rethink their value creation processes as yielding greater returns than only financial ones, in order to do so business organizations are required to assess their performance also on a longer time horizon. To this aim, the role of corporate executives in committing business organizations to strategies which assess and encompass sustainable development issues in corporate discourse. Among others, the Board of Directors, especially inside directors, are crucial to foster corporate sustainability (Crifo et al. 2019). By undertaking this holistic approach, corporate executives are able to endure “corporate sustainability.” The latter is crucial in order to prevent sustainability and thus sustainability reporting to become a sustainability strategy rather than what they should pursue, namely a sustainable strategy. To this extent, Eccles and Serafeim (2013) shed light upon the necessity for business organizations to relate the environmental, social and governance performance to the financial one, this certainly does require for companies to quantify this relationship and commit to innovating products, processes, and business models. Indeed, reporting tools which are able to summarize this overall process are of the utmost importance and integrated reporting does to this extent represent a valuable answer. 12

https://www.pwc.com/gx/en/services/sustainability/sustainable-development-goals.

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It is an interesting moment within history for corporate reporting. We are witnessing a revolutionary moment in the history of corporate reporting; we are the witnesses of a huge leap which has occurred in a matter of years from the belief of prioritizing financial performance to the certainty that a company is worth investing only if it has a sense of purpose. As BlackRock CEO Larry Fink stated in a letter: Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth (…).13

Now, the soil appears fertile for us to grow solid, comprehensive, and clear roots for societally responsible companies. Companies whose aim is not to be responsible by addressing social challenges, but rather to address societal challenges, issues which hamper the sustainable growth of humanity, to be understood as the prosperity of humankind in the long term. This process is clear in the evolutionary turn that corporate reporting is witnessing nowadays. What once appeared as a utopia, such as debating upon the societal impact of companies, is now finding its breath of life. Indeed, the process is far from finished and its aspirational nature may suggest that it does not actually possess a finishing line, but the journey has just begun, the journey to craft a societally responsible private sector is in the process of becoming.

References Adams, C. A. (2017). The Sustainable Development Goals, integrated thinking and the integrated report. IR 52. Bac, D. P. (2008). A history of the concept of sustainable development: Literature review. 17. Brander, J. A. (2007). Viewpoint: Sustainability: Malthus revisited?: Sustainability: Malthus revisited? Canadian Journal of Economics/Revue Canadienne d’économique, 40, 1–38. https:// doi.org/10.1111/j.1365-2966.2007.00398.x. Bucharest University of Economic Studies, & Bratu, A. (2017). Empirical study regarding the integrated reporting practices in Europe. The Audit Financiar Journal, 15, 613. https://doi.org/ 10.20869/AUDITF/2017/148/613 Busco, C., Giovannoni, E., Granà, F., & Izzo, M. F. (2018a). Making sustainability meaningful: Aspirations, discourses and reporting practices. Accounting, Auditing & Accountability Journal, 31, 2218–2246. https://doi.org/10.1108/AAAJ-04-2017-2917. Busco, C., Granà, F., & Izzo, M. F. (2018b). Sustainable development goals and integrated reporting, Routledge-Giappichelli studies in business and management. London: Routledge Christensen, L. T., Morsing, M., & Thyssen, O. (2013). CSR as aspirational talk. Organization, 20, 372–393. https://doi.org/10.1177/1350508413478310. Crifo, P., Escrig-Olmedo, E., & Mottis, N. (2019). Corporate governance as a key driver of corporate sustainability in France: The role of board members and investor relations. Journal of Business Ethics, 159, 1127–1146. https://doi.org/10.1007/s10551-018-3866-6. Donaldson, T., & Preston, L. E. E. E. (2016). The stakeholder theory of the corporation: Concepts, evidence, and implications. The Academy of Management Review, 20(1), 65–91.

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Eccles, R., & Serafeim, G. (2013). The performance frontier: Innovating for a sustainable strategy. Harvard Business Review, 91, 50–56, 58, 60, 150. Eccles, R. G., & Krzus, M. P. (2010). One report: Integrated reporting for a sustainable strategy. Hoboken, N.J.: Wiley. Freeman, R. E. E., & McVea, J. (2001). A stakeholder approach to strategic management. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.263511. Friedman, M. (1970). The social responsibility of business is to increase its profits. The New York Times Magazine. Garriga, E., & Melé, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of Business Ethics, 53, 51–71. https://doi.org/10.1023/B:BUSI.0000039399.90587.34. Gibassier, D., Rodrigue, M., & Arjaliès, D.-L. (2018). “Integrated reporting is like God: No one has met Him, but everybody talks about Him”: The power of myths in the adoption of management innovations. Accounting, Auditing & Accountability Journal, 31, 1349–1380. https://doi.org/10.1108/AAAJ-07-2016-2631. Gray, R. (2006). Social, environmental and sustainability reporting and organisational value creation?: Whose value? Whose creation? Accounting, Auditing & Accountability Journal, 19, 793–819. https://doi.org/10.1108/09513570610709872. Gray, R. (2010). Is accounting for sustainability actually accounting for sustainability…and how would we know? An exploration of narratives of organisations and the planet. Accounting, Organizations and Society. https://doi.org/10.1016/j.aos.2009.04.006 Gray, R., & Milne, M. (2002). Sustainability reporting: Who’s kidding whom?, 66–70. Haller, A., & van Staden, C. (2014). The value added statement–an appropriate instrument for Integrated Reporting. Accounting, Auditing & Accountability Journal, 27, 1190–1216. https:// doi.org/10.1108/AAAJ-04-2013-1307. Höllerer, M. A. (2012). Between creed, rhetoric façade, and disregard. Peter Lang D. https://doi. org/10.3726/978-3-653-01464-8. IIRC. (2013). Framework [WWW Document]. https://integratedreporting.org. https:// integratedreporting.org/wp-content/uploads/2015/03/13-12-08-THE-INTERNATIONAL-IRFRAMEWORK-English.pdf Kolk, A. (2016). The social responsibility of international business: From ethics and the environment to CSR and sustainable development. Journal of World Business, 51, 23–34. https://doi.org/10.1016/j.jwb.2015.08.010. Lozano, R. (2008). Envisioning sustainability three-dimensionally. Journal of Cleaner Production, 16, 1838–1846. https://doi.org/10.1016/j.jclepro.2008.02.008 Lozano, R., & Huisingh, D. (2011). Inter-linking issues and dimensions in sustainability reporting. Journal of Cleaner Production, 19, 99–107. https://doi.org/10.1016/j.jclepro.2010.01.004. Lucci, P. (2012). Post-2015 MDGs what role for business?, 2012th ed. OECD. (1996). Shaping the 21st century: The contribution of development co-operation. Onn, A. H., & Woodley, A. (2014). A discourse analysis on how the sustainability agenda is defined within the mining industry. Journal of Cleaner Production, 84, 116–127. https://doi. org/10.1016/j.jclepro.2014.03.086. Owen, G. (2013). Integrated reporting: A review of developments and their implications for the accounting curriculum. Accounting Education, 22, 340–356. https://doi.org/10.1080/ 09639284.2013.817798. Quattrone, P., & Giovannoni, E. (2016). The materiality of absence: Emptiness, institutions and the incomplete cathedral. Academy of Management Proceedings, 2016, 14679. https://doi.org/ 10.5465/AMBPP.2016.14679abstract. Reinhardt, F. (2000). Down to Earth, Boston, MA, Harvard Business School Press. Rupley, K. H., Brown, D., & Marshall, S. (2017). Evolution of corporate reporting: From stand-alone corporate social responsibility reporting to integrated reporting. Research in Accounting Regulation, 29, 172–176. https://doi.org/10.1016/j.racreg.2017.09.010. Sofian, I., & Dumitru, M. (2017). The compliance of the integrated reports issued by European financial companies with the international integrated reporting framework. Sustainability, 9, 1319. https://doi.org/10.3390/su9081319.

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Tregidga, H., Milne, M. J., & Kearins, K. (2018). Ramping up resistance: Corporate sustainable development and academic research. Business and Society, 57, 292–334. https://doi.org/10. 1177/0007650315611459. UN. (2015). Sustainable development. Available at: https://sustainabledevelopment.un.org/sdgs. van Marrewijk, M. (2003). Concepts and definitions of CSR and corporate sustainability: Between agency and communion. Journal of Business Ethics, 44, 95–105. https://doi.org/10.1023/A: 1023331212247. Vaz, N., Fernandez-Feijoo, B., & Ruiz, S. (2016). Integrated reporting: An international overview: Integrated reporting: An international overview. Business Ethics: A European Review, 25, 577–591. https://doi.org/10.1111/beer.12125. World Commission on Environment and Development (Ed.). (1987). Our common future, Oxford paperbacks. Oxford, New York: Oxford University Press. Zappettini, F., & Unerman, J. (2016). “Mixing’’ and “Bending’’: The recontextualisation of discourses of sustainability in integrated reporting”. Discourse & Communication, 10, 521–542. https://doi.org/10.1177/1750481316659175.

Cristiano Busco is a Professor of Accounting and Reporting at LUISS Guido Carli University in Rome, Italy, and at the University of Roehampton in London, UK. He is also currently a visiting professor at the Leventhal School of Accounting and Marshall School of Business of the University of Southern California, Los Angeles. Before joining LUISS, Cristiano served as the Head of the Accounting and Finance disciplines at the National University of Ireland, in Galway, where he was also the Head of the Performance Management cluster of Whitaker Research Institute for Innovation and Societal Change. After his Ph.D. (management accounting) at the University of Manchester, UK, he has hold positions in the US (Babson College, Boston, University of Southern California, Los Angeles), the UK (Manchester Business School), and Italian universities (the University of Siena). His research interests are in the field of management accounting, performance measurement and management, accounting for sustainability, as well as integrated thinking and reporting. He has published articles in leading peer-reviewed journals such as Accounting, Organizations and Society; Contemporary Accounting Research; Management Accounting Research; Accounting, Auditing, and Accountability Journal; Journal of Management and Governance; Qualitative Research in Accounting and Management; Journal of Accounting and Change; Business Horizons as well as in professional journals such as the Journal of Applied Corporate Finance; Journal of Corporate Accounting and Finance; Strategic Finance; and Financial Management. Currently, he is on the Editorial Board of the following peer-reviewed journals: Management Accounting Research, Qualitative Research in Accounting and Management, Journal of Accounting and Organizational Change. Elena Sofra is a research assistant of the project Fixing the Business of Food carried out by the conjoint effort of the Barilla Center for Food and Nutrition, the UN Sustainable Development Solutions Network, the Columbia Center on Sustainable Investment, and the Santa Chiara Lab of the University of Siena. She is also currently collaborating on developing a Framework to collect and communicate the evidence of case studies within the activities of the International Integrated Reporting Council’s Strategy and Integrated Thinking Group. Elena earned her master’s degree in International Management at LUISS University in Rome and a bachelor degree in Politics, Philosophy, and Economics at LUISS University in Rome. Her master’s final dissertation paper focused on the analysis of Integrated Reporting and Thinking as an enabler of the sustainable development goals (SDGs). Prior to this, she has nurtured her passion for this field of research by taking part to the Siena Summer School on Sustainable Development as a tutor and by carrying out a traineeship at the Permanent Representation of Italy to the EU, where she has cooperated with the Working Party on the 2030 Agenda.

12

Sustainable Supply Chain Management Marco Formentini

Abstract

The main objective of this chapter is to present and discuss the Sustainable Supply Chain Management (SSCM) concept by analysing the state of the art in research and practice and considering its future trends and developments. Managers need to develop a careful understanding of sustainability issues along their supply chains, both at strategic and operational levels. Leveraging on established frameworks developed in the SSCM discipline, a comprehensive overview of the key supply chain processes and the variety of actors involved in sustainability initiatives is provided in order to discuss the complex challenge faced by companies in translating corporate sustainability strategies into specific actions at the supply chain level, and in turn, influence performance from an economic, environmental and social perspective. This chapter adopts a specific focus on governance, highlighting the need for collaborative approaches to develop more responsible supply chains. An in-depth example of Barilla—a leading company in implementing sustainability projects at the supply chain level—is presented to discuss these concepts. Keywords










Sustainable supply chain management Strategy Governance Collaboration Contracts Triple bottom line







M. Formentini (&) Department of Information Engineering and Computer Science (DISI), University of Trento, Trento, Italy e-mail: [email protected] © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_12

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Introduction

While supply chain management has been studied extensively over the past three decades, debates on Sustainable Supply Chain Management (SSCM) have only gained momentum in the early 2000s, attracting the attention of scholars and practitioners. SSCM has become a relevant concept, evolving from its initial ancillary role, when it was perceived as a sub-set of the supply chain management discipline. Nowadays, it is acknowledged that sustainability is paramount for supply chains management and extremely relevant in all industries. In other words, an integrated and comprehensive understanding of sustainability should be at the core of supply chain management: in fact, it is not enough to consider the effective management of supply chains from an economic and financial point of view, but the environmental and the social dimensions should be also included, following the “triple bottom line” approach (Elkington 1997). Considering one of the seminal articles in the field of SSCM, Carter and Rogers (2008, p. 368) define SSCM as “the strategic, transparent integration and achievement of an organization’s social, environmental, and economic goals in the systemic coordination of key interorganizational business processes for improving the long-term economic performance of the individual company and its supply chains”. In line with this comprehensive definition, in this chapter, we will focus on the key dimensions of sustainability, taking a supply chain perspective to understand the key governance mechanisms able to provide mutually beneficial outcomes —not only for the “focal company” (i.e. the one orchestrating the supply chain processes) but also for the involved supply chain actors. The concept of supply chain sustainability has evolved from its initial focus on the environmental perspective (i.e. “green” supply chain management). Companies have started to develop increasing awareness about the impact on the environment all along their supply chains, for instance, by reducing carbon emissions, phasing out toxic substances, collecting and recycling products when they reach their end-of-lives, not only in reaction to regulations by governments and institutions (e.g. EU’s Restriction of Hazard Substance directive, Waste Electrical & Electronic Equipment WEEE legislation) and under the pressure of different stakeholders (e.g. Basel Action Network Greenpeace, Oxfam) but also developing pioneering and innovative initiatives. Environmental managers and chief sustainability officers are increasingly looking to their supply chains to preserve the value of natural resources, in a journey towards new paradigms, such as the circular economy. However, a deeper understanding of sustainability from a supply chain point of view is required. More recently, SSCM has started developing a stronger focus on the social perspective. One of the key events attracting attention to social issues is represented by the Rana Plaza accident.1 The collapse of an eight-storey garment factory in Rana Plaza on the outskirts of Dhaka (Bangladesh) on April 24, 2013, killed 1,100 people and injured many more. It was probably the worst industrial accident in South Asia and the worst ever in the garment industry. This disaster 1

https://www.ilo.org/global/topics/geip/WCMS_614394/lang–en/index.htm.

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posed many important questions regarding the governance in terms of controls and audits performed by fashion retailers to guarantee safety along their supply chains, highlighting the need for more transparency and responsibility to target better labour conditions and improve social standards. Companies have started to pay more attention to fair wages, child labour issues, promoting gender equality and provide a safe working environment, however relevant challenges still need to be faced, such as modern slavery, both in emerging and developed countries—e.g. migrant workers exploited in Southern Italy.2 It is clear that although several important steps have been done, there are still many issues and open questions. For instance, “greenwashing” aimed at deceiving consumers into believing that a company’s behaviour is environmentally and socially responsible; measuring the real impact and effectiveness of sustainability actions; the adoption of “incremental” or “low-hanging-fruit” initiatives in comparison with more pioneering and disruptive sustainability improvements. Leveraging on established frameworks developed in the SSCM discipline, a comprehensive overview of the key supply chain processes and the variety of actors involved in sustainability initiatives is provided in this chapter, in order to discuss the complex challenge faced by companies in translating corporate sustainability strategies into specific actions at the supply chain level, and in turn influence performance from an economic, environmental and social perspective. Eventually, a few recommendations on how to use this book chapter. The topics discussed have been the object of several lectures and seminars with students (at different levels, from master degrees to MBAs, in the context of international business school), where debate and critical reflection were playing an important role, not only to review the existing knowledge but also to address the many (still) open questions related to sustainability. Therefore, this book chapter aims at offering detailed insights to students approaching not only the study but also the practice of supply chain management, with the objective to develop a critical understanding of the main issues, risks and challenges related to sustainability from a supply chain perspective; the opportunity to integrate a sustainability perspective in managing several processes, at different strategic levels (i.e. from strategy to implementation).

12.2

The Evolution of Sustainable Supply Chain Management

Traditionally, supply chain management is related to managing the flow of materials and services, information and financial flows within and between firms, consisting of all parties involved, directly or indirectly, in fulfilling a customer request. In addition to this traditional perspective, it is relevant to understand the impact of sustainability along with the interconnected supply chain processes, i.e. sourcing (purchasing raw materials, components, services), transformation (manufacturing, 2

https://edition.cnn.com/2017/12/07/europe/italy-migrant-camp-exploitation/index.html.

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Fig. 12.1 The key supply chain processes using the SCOR model

production, service delivery), delivery (distribution), closed-loop (reverse logistics), as depicted in Fig. 12.1, on the basis of the established SCOR framework.3 The complexity of supply chain management—usually intended in terms of coordination of global supply chains, alignment of different interests and objectives, information asymmetry, lack of visibility throughout the different tiers of the supply chain, the development of specific metrics for measuring performance—is increased when adopting a sustainability perspective, thus posing additional challenges to supply chain managers. Consistent with this need to develop a better understanding of sustainability from a supply chain perspective, in this chapter, we rely on another relevant definition: “Supply chain sustainability is the management of environmental, social and economic impacts, and the encouragement of good governance practices, throughout the lifecycles of goods and services. The objective of supply chain sustainability is to create, protect and grow long-term environmental, social and economic value for all stakeholders involved in bringing products and services to market” (United Nations Global Compact Report 2015). In line with Seuring and Müller (2008), this can be translated in a first important takeaway: “Sustainable supply chain management deals with a wider set of performance objectives, thereby taking into account the environmental and social dimension of sustainability”. The focus on sustainability also highlights the importance of managing relationships, not only with actors of the supply chain directly involved in the several processes but also with additional stakeholders (i.e. parties with interest in a company, which can either affect or be affected by the business). In order to orchestrate effectively their supply networks, focal companies need to develop visibility throughout their key processes to identify key issues and risks. Supply chain risk management should also include a sustainability perspective, providing 3

https://www.apics.org/apics-for-business/frameworks/scor.

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firms with the ability to understand and manage their economic, environmental and social risks along the supply chain, moving from a “reactive” towards a “proactive” approach. The necessity for extended visibility and transparency (e.g. monitoring the processes beyond first-tier suppliers) provides a second key message, in line with Seuring and Müller (2008): “Sustainable supply chain management has to take into account a wider range of issues and, therefore, look at a longer part of the supply chain.” First of all, this message underlines the need to map clearly processes and relationships with supply chain parties and novel influential actors such as stakeholders (institutions, non-governmental organizations, etc.). The interaction with stakeholders requires transparency, not only in disclosure and reporting to communicate about sustainability initiatives and outcomes but also in fostering active engagement with stakeholders to receive their feedback and input with the ultimate goal of improving supply chain processes. An example of comprehensive reporting categories developed by the Global Reporting Initiative (GRI) is reported in Fig. 12.2, which especially underlines the nuances in measuring socially responsible practices. Another example of initiatives developed by stakeholders, such as NGOs, to

Fig. 12.2 GRI categories (Source Adapted from GRI)

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increase transparency is represented by Oxfam’s “Behind the Brands” scorecard4 which focuses on the top ten food and beverage companies and investigates their polices, supplier codes and public commitments. Developing supply chain transparency can play an important role in tackling “greenwashing”, intended as the process of conveying a false impression or communicating misleading information about how a company’s products are more environmentally and socially sound. The integration of a sustainability perspective is becoming relevant not only in the private supply chain context but also in the case of public procurement. Green Public Procurement (GPP) represents an opportunity for the public sector to include environmental criteria in all phases of the purchasing activity, by spurring the diffusion of environmental technologies and the development of environmentalfriendly goods, by searching and choosing solutions with the least impact on the environment along their all lifecycle. GPP can be a major driver for innovation, providing the industry with incentives to develop environmentally friendly works, products and services. GPP may also provide financial savings for public authorities, especially when considering the full lifecycle costs of a contract and not just the purchase price (De Giacomo et al. 2019). Authorities who implement GPP will be better equipped to meet evolving environmental challenges, for example, to reduce greenhouse gas emissions or move towards a more circular economy. The case of IKEA

The Swedish-origin company, leader in the modern furniture industry provides an interesting example of a comprehensive focus on sustainability through the entire supply chain processes. The company aims at providing “a better life for more people”, striking a balance between the economic, environmental and social dimensions. Three key objectives are driving IKEA’s sustainability strategy • Healthy and Sustainable Living–inspiring and enabling people to live healthier, more sustainable lives • Circular and Climate Positive—reducing absolute greenhouse emissions; Transforming into a circular business and regenerating resources, protecting ecosystems and improving biodiversity • Fair and Equal—Providing and supporting decent and meaningful work across the IKEA value chain, being an inclusive business, promoting equality These strategic objectives are translated at the supply chain level with specific actions and measurable results

4

https://www.behindthebrands.org/.

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Sourcing process • Materials and sourcing wood: control of origin and tracking from wood suppliers. Adoption of Rainforest Alliance certification • Cotton: Weather resilient cotton production systems, working in collaboration with cotton farmers • Textiles: recycled textiles, polyester • Plastic: by 2030 al the plastic used should be only renewable and or recycled, thus phasing out single-use plastic • Food: by 2025 increase 20% sales in plant-based dishes • IWAY is IKEA’s supplier code of conduct, a long-standing programme that communicates and ensures the minimum requirements on environmental, social and working conditions, together with IKEA suppliers Transformation process • • • •

Production: reduce coal and oil usage Eliminate waste by applying the principles of circular economy Reduce climate footprint by 80% 100% renewable energy IKEA Group has committed to producing as much renewable energy as it consumes by 2020 • Waste reduction • Effective water usage in production processes Transportation process • • • •

Decarbonizing transportation: using rail or vehicles fuelled by biodiesel Investing in research for biofuels for ships Reducing greenhouse emissions Improving social conditions for drivers

Retail and home delivery process • • • • • • •

IKEA Retail Energy savers inside the retail stores Waste is being reduced by 5% each year Be the most water-efficient as possible Eliminate waste from retail operations Customer Travel & Home Deliveries Strong e-commerce Zero emission deliveries by 2025 Use 100% electric home deliveries

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Life at home & consumption • • • • • •

Long-lasting products Reusable, multipurpose products LED Bulbs Reduced water usage products Furniture leasing test in 2020 Refurbish and resale program

Source IKEA https://www.ikea.com/gb/en/this-is-ikea/sustainable-everyday/

12.3

SSCM Strategies and Governance Mechanisms

Seuring and Müller (2008) underline in their seminal literature review that SSCM is often triggered and characterized by two distinctive and complementary strategies: “supplier management for risk and performance” and “supply chain management for sustainable products”. The first is driven by the fear of company reputation damage if sustainabilityrelated problems are raised. Hence, additional environmental and social criteria are taken up to complement economically based supplier evaluation. The second strategy is driven instead by the definition of lifecycle-based standards at the supply chain level for the environmental and social performance of products. It is evident that SSCM requires rethinking the management of the firms’ economic capital by deploying tangible resources such as investments to improve corporate and supply chain processes and develop intangible resources such as knowledge and organizational culture for sustainability. See for instance the example of a lifecycle-based approach developed by Timberland (box below). The case of Timberland

Timberland pioneered the development of an environmental performance indicator based on life-cycle assessment (LCA). The Timberland “Green Index” is a measure of the environmental impact of their products. The goal is to provide consumers with visibility into the footprint Timberland createsTimberland products are rated on a scale of 1–10 using a system created to measure environmental footprint from raw materials to the finished product. The lower the score, the lower the environmental footprintThree main impact categories are: 1. Climate Impact: The greenhouse gas emissions created through production; 2. Chemicals Used: The presence of hazardous

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Fig. 12.3 Sustainable Supply Chain Governance Framework

substances (PVC and Solvent Adhesives); and 3. Resource Consumption: The percentage, by weight of recycled, organic and renewable materials. Source http://www.ecolabelindex.com/ecolabel/TimberlandGreenIndex.

The need for deepening the knowledge on governance mechanisms from a supply chain perspective is especially critical when considering sustainability. Enriching the definition provided by Gimenez and Sierra (2013), we define sustainable supply chain governance mechanisms as practices, initiatives and processes used by the focal firm to manage relationships with (1) internal functions and departments and (2) their supply chain members and stakeholders with the aim of successfully implementing their corporate sustainability strategies, as represented in Fig. 12.3. In this vein, this chapter refers to internal governance mechanisms and external governance mechanisms to distinguish between actions limited at the corporate boundaries and actions extended at the supply chain level. The literature highlights two relevant factors that characterize governance mechanisms, namely collaboration and formalization.

12.3.1 The Role of Collaboration Companies can implement their sustainability strategies by applying their market power in a non-collaborative way, or conversely by adopting a shared, collaborative governance style. In a non-collaborative setting, the focal firm relies on its contractual power to define governance parameters and impose decisions to supply chain counterparts. While this is a common practice in traditional supply chain management, in the context of SSCM, there is evidence that collaborative and

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Fig. 12.4 The key components of supply chain collaboration

shared governance approaches represent a powerful tool for facilitating sustainability initiatives (Vurro et al. 2009; Gimenez and Sierra 2013). This calls for balancing the traditional power-based approach with new collaborative ways of implementing governance. Among collaborative mechanisms, Cousins and Menguc (2006) clarify the role of socialization that forms bonds and ties that facilitate the exchange of information and helps to build a culture of mutual commitment. Cao et al. (2010) derive a model of supply chain cooperation assigned to seven components (information sharing, goal congruence, synchronization of decisions, incentive alignment, sharing of resources, joint investment and joint knowledge creation). Simatupang and Sridharan (2005) conceptualize supply chain collaboration by including five features: cooperative quality scheme, information sharing, decision synchronization, incentive alignment and integrated supply chain processes. A comprehensive framework derived from Matopoulos et al. (2007) of supply chain collaboration is depicted in Fig. 12.4. In line with Seuring and Müller (2008), a third takeaway emerges: “There is a much increased need for cooperation among partnering companies in sustainable supply chain management”.

12.3.2 The Role of Formalization The second factor suggested by the literature to classify governance mechanisms is formalization. According to Alvarez et al. (2010) and Pilbeam et al. (2012) formalization is defined as the extent to which decision-making is regulated by explicit rules and procedures. A common typology of governance mechanisms distinguishes between formal and informal mechanisms of coordination. Formal mechanisms include control and reporting systems through which organizations structure their interaction in an explicit way and can include command structures, incentive systems, contracts, certifications, standard operating procedures and documented dispute resolution procedures. Formal mechanisms are usually adopted in dynamic

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and unstable circumstances. On the other hand, informal social systems encompass additional coordination mechanisms characterized by relationships rather than by bureaucratic structures and tend to be adopted in contexts where prior relationships exist between actors.

12.4

Sustainability Leaders

Formentini and Taticchi (2016) provided a classification of sustainability profiles, on the basis of the frameworks discussed in the previous sections. The following definitions are given to depict the three sustainability profiles: • Sustainability leaders—characterized by a triple bottom line (TBL) approach to business which extends to SSCM; • Sustainability practitioners—characterized by a myopic approach to business sustainability with a limited focus to one or two TBL dimensions and isolated SSCM initiatives; • Traditionalists—characterized by traditional approaches to business that don’t necessarily include explicit TBL and SSCM initiatives but might present sustainability elements. Who are “sustainability leaders”? Companies able to understand the industry calls for TBL approaches, not only following supply chain risk management purposes but also identifying with a more proactive behaviour sustainability opportunities that may originate from the contextual uncertainty. Strategies of sustainability leaders can be proactive, offensive, pioneering. Their corporate sustainability approaches are defined with clear strategies, business models and practices of the disclosure. Management structure and style sponsor sustainability. A consistent number of governance mechanisms of different nature are implemented, especially at the supply chain level, following the strategic alignment shown in Fig. 12.3. Governance mechanisms are structured internally at the corporate level, and they extend coherently throughout the supply chain both upstream and downstream with a well-developed supply chain focus. Sustainability leaders leverage this in their internal mechanisms with both formal and informal initiatives and extend it at the supply chain level predominantly with informal and collaborative initiatives aiming for long-term trust development of relationships. Sustainability leaders appear to keep a balance between formal and informal mechanisms and a collaborative approach that extends both upstream and downstream in the supply chain. The high level of socialization is translated into the engagement with a broad network of actors in the extended business environment. Resources are dedicated to translating and supporting the sustainability strategy internally and externally. Sustainability leaders invest financial resources, managerial skills and sustainability understanding for the development of “in-house” skills through extensive training initiatives and develop formal dedicated support

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structures (e.g. sustainability teams, project committees). Mechanisms are developed for transferring knowledge and resources at the supply chain level (for instance, upstream with specific supplier development initiatives).

12.5

The Case of Barilla

Finally, the in-depth case of Barilla and the sustainability supply chain contracts developed to source durum wheat is used to review the key elements of supply chain sustainability, such as the role of sustainability leaders, the role of collaboration, formalization, strategy and specific key governance mechanisms.

12.5.1 Barilla’s Corporate Sustainability Strategy Barilla ranks as one of the top Italian food groups, leading in the global pasta business, the pasta sauces business in continental Europe, the bakery products business in Italy and the crispbread business in Scandinavia. Barilla developed an integrated strategic approach for sustainability entitled “Good for You, Good for the Planet”,5 incorporating the triple bottom line with a long-term perspective. Moreover, another key strategic component is represented by the Barilla Center for Food and Nutrition (BCFN) Foundation6 as an independent international idea centre with the objective to analyse the predominant issues tied to food and nutrition around the world. Economic, scientific, social and environmental factors are studied relative to their impacts on food using a multidisciplinary approach. Barilla is a family-owned food company: sustainability is perceived as a core element of the corporate strategy. The company encourages open, transparent partnerships with local communities “from field to fork”. The company recognizes the crucial role of partnerships with stakeholders to achieve objectives that the company could not achieve by working alone.

12.5.2 Implementation of Sustainability Strategy: Durum Wheat Supply Chain Contracts A key example of this close interaction with communities and different supply chain actors and stakeholders is represented by the development of the durum wheat supply chain contracts presented in this case. Supply chain contracts are governance mechanisms able to translate Barilla’s strategic sustainability objectives into practice (strategic alignment) in coordination with other supply chain actors (supply chain focus). 5

https://www.barillagroup.com/en/our-responsibility. http://www.barillacfn.com.

6

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Fig. 12.5 Barilla’s integrated durum wheat supply chain

In 2012, Barilla performed 70% of its Italian wheat procurement through regional supply chain contracts in the Italian wheat market, sourcing the remaining 30% from the regional spot market. In the past, they have also purchased wheat from the US market (e.g. Arizona) for making pasta for the Italian market and did not have contracts in the regional market either. One motivation for this change was the company’s policy of local sourcing for local demand to decrease transportation costs and impact, following a detailed LCA, in order to create and share value with local farmers by shifting the production of high-quality durum wheat in Italy. The company aims to further increase sourcing through regional contracts. The supply chain contracts developed in the Emilia Romagna region represent an innovative and pioneering initiative. In 2006, Emilia Romagna Region institution, the seed producer Società Produttori Sementi and several farmers’ consortia signed the first contract “Grano Duro Alta Qualita” (High-Quality Durum Wheat contract) with Barilla to meet the following three objectives of interest to all signatories: • Turn Emilia Romagna region to become a “region of excellence” in the production of high-quality durum wheat, with the implementation of an innovative and exclusive model for the integration of farmers, pasta industry and institutions; • Offer an adequate productive capacity and supply of high-quality grains for Barilla’s mills and plants and create an alternative for Barilla to imported high-quality grains; • Offer a solution for economic viability to farmers, many of whom had already exited or were considering exiting the wheat market. In parallel, Barilla signed a partnership with one of the most important Italian sugar producers to promote sustainable cropping as a part of its strategic Integrated Supply Chains project (Fig. 12.5), thus creating both vertical and horizontal collaboration projects in its supply network. This collaboration has a strategic value, since it allows the integration of the durum wheat contract with other products in order to facilitate the correct crop rotation, the opportunity for growers to develop a profitable portfolio of products, and the assurance of two critical inputs for Barilla (i.e. wheat for pasta and sugar for bakery product labelled Mulino Bianco). At the beginning of the project, the contract did not mention sustainability objectives pertaining to environmental goals. However, there was a clear

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understanding that economic (i.e. capacity, premium over market prices), as well as social elements (i.e. support to farmers, rural development), were to be a key component of the project. Since then, the nature of these contracts has evolved as aims have broadened towards the development of specific sustainability contracts (additional details related to the pricing process are presented in Formentini et al. 2016). In 2012, Barilla started to introduce guidelines for sustainable production, as the result of the experimentations on the field within the Sustainable Grains project for rollout in 2014. The company has then introduced an additional premium of 3€/ton for certification of adoption of sustainable practices and hopes to achieve its objective of 100% of its procured wheat to be certified as ‘sustainable’ in this way. The company had already been offering premium for protein content, but the sustainability component requires the farmer to use the Granoduro.net decision support system (DSS) and a ‘Decalogue’ of best practices. This DSS is a forecasting instrument connected to a weather network that extends to cover the main production areas and supports farmers in optimizing their agricultural practices. Between 2011 and 2012, the project was extended to 13 Italian farms. The outcomes of this first stage were collected in the “Barilla Decalogue for the sustainable cultivation of durum wheat”. Specific focus was given to traditional rotation techniques, often abandoned for intensive practices that involve an excessive use of resources and a decrease in soil fertility. Between 2012 and 2013, in Italy, the project involved more than 100 farmers for a total of 10,000 tons of durum wheat. In 2013, the activity was also launched in other countries where the Barilla group is present. The ‘best practices’ in the Decalogue pertain to improved crop rotation with other vegetables before wheat sowing vs. rotation with other cereals. The results of the implementation of these best practices consist of reduced direct cultivation costs, improved production yield, reduced use of fuels, reduced carbon footprint and reduced ecological footprint and better agronomic nitrogen use efficiency. The evolution of contracts has not ended: Barilla is continuously experimenting with new pricing techniques. The company has committed to providing financial know-how to its suppliers for the implementation of new financial techniques.

12.5.3 Supply Chain Contract Structure, Objective and Elements of Collaboration The product sourced by the pasta company is durum wheat used to produce a staple food product in Italy. The company seeks durum wheat that is produced and stocked ‘locally’ by farmers’ consortia for delivery to the manufacturer’s mills. A key component of the collaboration (aimed at aligning the interests of Barilla and farmers, synchronize decisions and share mutually beneficial incentives) is represented by the particular risk-sharing contract initiated by Barilla that we call the ‘partially-guaranteed-price contract’ (Tang et al. 2016). Under this contract, at the time of sowing, the firm agrees to purchase the farmer’s produce offering a

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guaranteed unit price for a proportion of the quantity to be purchased. The farmer chooses this proportion of his produce to be sold at the guaranteed unit price with the remaining sold to the firm at the (ex ante uncertain) market price to be realized at the time of delivery after harvest. On top of that, the partially guaranteed-price contracts adopted by Barilla come with incentives and/or price premiums for the farmer following sustainable agricultural practices.

12.5.4 A Formalized Approach: The Contracting Process A supply chain contract between Barilla and any consortium of farmers entails a 1-year duration during which contracted deliveries are made every month. The contract is signed between Barilla and farmers’ consortia—including a memo of

Fig. 12.6 Triple bottom line benefits for Barilla and its supply chain

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understanding jointly between all parties together followed by signing separate contracts with each consortium—and is then transferred to farmers comprising these consortia. Each consortium stores the production of its farmers upon harvest and then transfers 50–100% of their wheat to Barilla on a monthly calendar, selling the remainder on the open market whenever the market price appears attractive. Creation of the contracts entails information sharing with the consortia together with support from the local government and takes place well before sowing. From a “dynamic” point of view, Barilla’s supply chain contracts in Emilia Romagna evolved in order to meet different objectives: firstly, to assure supply capacity and quality improvement, and secondly to integrate these critical elements with the overall sustainability dimensions. Contractual parameters helped to stabilize prices and to create a mutually beneficial relationship between Barilla and involved consortia and farmers, with an extended approach at the supply chain level that overcomes the traditional dyadic buyer–supplier relationship (Formentini and Romano 2016), in line also with the second key message of this chapter. Figure 12.6 shows how supply chain contracts confer the following potential triple bottom line benefits for Barilla and its durum wheat supply chain. Barilla’s contracts are not the only interesting projects in agri-food supply chains to involve sustainability from a triple bottom line perspective. For instance, Starbucks developed a set of global guidelines for suppliers (C.A.F.E. practices) to improve sustainability and fairness and a related set of incentives to reward farmers. Nestlé’s developed various “creating shared value” initiatives that are intended to help the poor farmers to break the vicious circle of poverty by offering a higher price, reducing farmers’ transaction costs, increasing farmer’s productivity creating new non-farm-related employment.

References Alvarez, G., Pilbeam, C., & Wilding, R. (2010). Nestlé Nespresso AAA sustainable quality program: An investigation into the governance dynamics in a multi-stakeholder supply chain network. Supply Chain Management: An International Journal, 15(2), 165–182. Cao, M., Vonderembse, M. A., Zhang, Q., & Ragu-Nathan, T. S. (2010). Supply chain collaboration: Conceptualisation and instrument development. International Journal of Production Research, 48(22), 6613–6635. Carter, C. R., & Rogers, D. S. (2008). A framework of sustainable supply chain management: Moving toward new theory. International Journal of Physical Distribution & Logistics Management, 38(5), 360–387. Cousins, P. D., & Menguc, B. (2006). The implications of socialization and integration in supply chain management. Journal of Operations Management, 24(5), 604–620. De Giacomo, M. R., Testa, F., Iraldo, F., & Formentini, M. (2019). Does green public procurement lead to life cycle costing (LCC) adoption? Journal of Purchasing and Supply Management, 25 (3), 100500. Elkington, J. (1997). Cannibals with Forks: The triple bottom line of 21st century business. Oxford: Capstone. Formentini, M., & Romano, P. (2016). Towards supply chain collaboration in B2B pricing: A critical literature review and research agenda. International Journal of Operations & Production Management, 36(7), 734–756.

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Formentini, M., & Taticchi, P. (2016). Corporate sustainability approaches and governance mechanisms in sustainable supply chain management. Journal of Cleaner Production, 112, 1920–1933. Formentini, M., Sodhi, M. S., & Tang, C. S. (2016). The evolution of Barilla’s durum wheat supply chain contracts for triple bottom line benefits. In Organizing Supply Chain Processes for Sustainable Innovation in the Agri-Food Industry (pp. 109–126). Emerald Group Publishing Limited. Gimenez, C., & Sierra, V. (2013). Sustainable supply chains: Governance mechanisms to greening suppliers. Journal of Business Ethics, 116(1), 189–203. Matopoulos, A., Vlachopoulou, M., Manthou, V., & Manos, B. (2007). A conceptual framework for supply chain collaboration: Empirical evidence from the agri-food industry. Supply Chain Management: An International Journal, 12(3), 177–186. Pilbeam, C., Alvarez, G., & Wilson, H. (2012). The governance of supply networks: A systematic literature review. Supply Chain Management: An International Journal, 17(4), 358. Seuring, S., & Müller, M. (2008). From a literature review to a conceptual framework for sustainable supply chain management. Journal of Cleaner Production, 16(15), 1699–1710. Simatupang, T. M., & Sridharan, R. (2005). An integrative framework for supply chain collaboration. The International Journal of Logistics Management, 16(2), 257–274. Tang, C. S., Sodhi, M. S., & Formentini, M. (2016). An analysis of partially-guaranteed-price contracts between farmers and agri-food companies. European Journal of Operational Research, 254(3), 1063–1073. United Nations Global Compact Report. (2015). Supply Chain Sustainability: A Practical Guide for Continuous Improvement, 2nd Edn. Retrieved from https://www.unglobalcompact.org/ library/205. Vurro, C., Russo, A., & Perrini, F. (2009). Shaping sustainable value chains: Network determinants of supply chain governance models. Journal of Business Ethics, 90(4), 607–621.

Marco Formentini is an Associate Professor in Sustainable Supply Chain Management at the University of Trento (Italy). He received his Ph.D. from University of Padova (Italy) and he has been previously a Research Fellow at Cass Business School, London (UK), a Lecturer at the University of Bath, School of Management, Bath (UK) and an Associate Professor at Audencia Business School, Nantes (France). His research involves activities in the areas of Operations and Supply Chain Management, focusing mainly on sustainability—investigating corporate sustainability strategies and related governance mechanisms—supply chain collaboration with a specific interest on agri-food supply chains, strategic sourcing and integration of international supply chains. He published in leading journals, including Journal of Product Innovation Management, International Journal of Operations & Production Management, Industrial Marketing Management, Journal of Purchasing and Supply Management, European Journal of Operational Research, Journal of the Operational Research Society, International Journal of Production Economics, International Journal of Production Research, Transportation Research: Part E and Journal of Cleaner Production. He is currently a board member of the European Operations Management Association (EurOMA) and sits in the Editorial Board of International Journal of Operations & Production Management and Journal of Purchasing and Supply Management. In 2017, he chaired the “Mainstreaming Responsible Business Conduct in Companies” session at the OECD Global Forum in Paris.

Index

C Change management, 157, 165, 166, 169–172, 176, 180, 183, 184 Climate change, 3, 4, 6–8, 10, 11, 23–26, 42, 43, 46, 53–55, 70, 76, 77, 83, 92, 99, 112, 113, 115–117, 127–135, 137, 138, 166, 167, 182 Climate change risks, 8, 115 Collaboration, 21, 27–29, 59, 75, 77, 137, 160, 170, 172, 174–179, 181, 182, 184, 203, 212, 215, 216, 218–220 Complexity, 25, 27, 28, 30, 38, 43, 44, 83, 91, 117, 168, 176, 180, 195, 203, 210 Contracts, 47, 212, 216, 218–222 Corporate Social Responsibility (CSR), 66–69, 71, 147, 194 Creating shared value, 71, 152, 156, 222 E Energy transition, 41, 43, 46, 56 Engagement challenges, 84 Environmental, Social and Governance (ESG), 66, 69–71, 79, 80, 88, 97–103, 105–109, 111–113, 117–123, 130, 150, 168 ESG integration, 100, 101, 103, 105, 106, 108, 109 F Financial return, 97, 98, 101, 103, 105, 107, 109, 150 Financial risk, 41, 106, 107, 115, 116 G Governance, 17, 66, 69, 70, 72, 79, 80, 82, 83, 90, 97, 98, 102, 105–107, 111, 114, 115, 122, 129, 130, 150, 165, 167, 174, 191, 194, 196–198, 201, 203, 207–210, 214–218

I Impact banking, 112, 120 Impact investing, 101, 103, 107–109 Integrated reporting, 22, 179, 191, 192, 196–201, 203 L Leadership, 21, 37, 86, 108, 128, 134, 135, 137, 148, 158–160, 167, 169–171, 173–180, 184 Limits to Growth, 11, 41, 42, 44–47, 49, 55, 58 M Modern corporate sustainability, 66 Multi-stakeholder partnerships, 25, 27–30, 36 P Paris Agreement, 8, 113, 119, 127, 134, 137, 138, 167 Planetary boundaries, 41, 43, 55, 56, 58, 59 Purpose, 21, 27, 29, 37, 38, 43, 66, 69, 71, 72, 80, 82, 87, 104, 120, 127, 130, 132, 134–136, 144, 153, 166, 168, 170, 180, 184, 204, 217 S Social purpose, 127, 134 Stakeholder capitalism, 136 Strategic alignment, 25, 36, 37, 217, 218 Strategy, 3, 4, 8, 10, 14, 17, 18, 21, 36, 37, 41, 52, 65, 68, 70–73, 76–78, 80, 87, 92, 95, 107, 108, 111, 112, 118–121, 127, 132–135, 137, 143–149, 151, 153–156, 158, 161, 162, 165–167, 169–177, 182–184, 191, 192, 196, 198, 200, 201, 203, 207, 209, 212, 214, 215, 217, 218 Sustainability, 3, 4, 10, 14, 17, 18, 28, 35, 38, 41–43, 48, 53, 56–59, 65, 66, 68, 69, 71–73, 75–95, 97–99, 101–103, 109,

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice, Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8

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226 111, 112, 117–123, 127, 131–133, 136–138, 143–162, 165–184, 191–196, 198, 199, 202, 203, 207–212, 214–220, 222 Sustainability Accounting Standards Board (SASB), 102, 156, 179 Sustainability challenges, 3, 43, 75, 95, 138, 179, 180, 182 Sustainability drivers, 160, 170 Sustainability facts, 75 Sustainability reporting, 69, 102, 178, 179, 184, 192, 194, 199, 202, 203

Index Sustainable development challenges, 84, 191 Sustainable Development Goals, 4, 15, 21–27, 30, 36, 37, 43, 57–59, 76, 84–86, 101, 112, 118, 127–129, 131, 137, 156, 167, 182, 191–193, 199–203 Sustainable finance, 111, 117, 120, 123 Sustainable lending, 111, 118 Sustainable supply chain management, 41, 93, 146, 147, 149, 152, 159, 207–211, 214–217