Business needs to accelerate the shift from incremental to transformational change

Sustainable business cannot exist in a policy vacuum, but in light of the Rio+20 summit in June, focusing on the role of business leadership seems critical.

There are many doubts over the ability of the inter-governmental process to deliver meaningful progress and timeframes on issues such as climate change.

Looking forward, in getting our bearings right, it is important to ask whether the push towards sustainable business has delivered more or less success than meets the eye. It is perhaps more important to ask where “true north” lies on the road ahead for business to innovate and align market forces with sustainable development.

Finding true north for sustainable business means resetting the compass, from the misleading “magnetic north” of incremental change, to radical change. True north means advancing the sustainable business agenda beyond celebrated examples of innovation from pioneer companies at the margins, to rethinking and reinventing the economic and business systems that support the way we live, work, play and interact as societies. True north means re-orienting sustainable business towards scale at speed. True north means transformation.

Taking stock

Sustainability – in its interconnected social, environmental and economic sense – is increasingly an agenda item in boardrooms around the world. For example, in a recent United Nations and Accenture study more than 93% of chief executives we spoke to from 800 global companies spanning 100 countries and 25 industries said that they saw sustainability as “important or very important” to their future business success.

What’s more, we can point to game-changing examples of sustainability permeating corporate strategies, operations and supply chains around the world in a way that would have been almost unthinkable even five or 10 years ago.

Take the consumer goods sector and Unilever’s much celebrated Sustainable Living Plan, which, interwoven with its business strategy for the next decade, plans to double the company’s top line while in effect halving its environmental footprint and empowering 500,000 smallholder farmers in the process. Take SABMiller, Diageo, Heineken and other brewers’ efforts to rethink water and agriculture in their supply chains; or the retailers thinking through new business models such as Kingfisher’s One Planet approach to home improvement and DIY and Marks & Spencer’s innovative new concept of “schwopping”, crediting consumers for returning old garments that charities can resell; or indeed Natura, the Brazilian cosmetics and personal care brand that sources from natural biodiversity in the Amazon rainforest and empowers one million women as its sales agents in their communities.

Take Nike, Puma or Timberland; or Siemens, General Electric, Schneider and others that are already making hundreds of billions of dollars collectively out of solutions that directly tackle sustainability issues.

And of course this is not to mention some of the pioneers reshaping markets on the fringes in industries from clean energy to base-of-the-pyramid social entrepreneurship. These include companies you may never have heard of such as Esquel in China, pioneering new developments in textiles or Aerofarms in the US, which is pushing the boundaries of vertical farming. There are others such as Better Place and Patagonia that are becoming well known. The list goes on.

Promising progress has also been made on sustainable business in key sectors via industry-level collaboration. Many prominent examples exist across industries, from the Forest and Marine Stewardship Councils to the Rainforest Alliance and Roundtable for Sustainable Palm Oil to the International Council on Mining and Metals – all with their challenges, but all having made real gains. These are matched by the growth and impact of a range of cross-sector initiatives and business coalitions pushing for change such as the United Nations Global Compact, the World Business Council for Sustainable Development, the Principle for Responsible Investment, the Global Reporting Initiative, the Carbon Disclosure Project and others.

We have even seen progress in shaping the thinking of future business leaders at business schools and universities with initiatives such as Net Impact, The Academy of Business in Society and the United Nations Principles for Responsible Management Education. Not to mention the pioneering work of the World Economic Forum and its Young Global Leaders Forum, in areas such as water, agriculture and closed-loop business models.

So there is much to celebrate. But sustainable business has, in large part, been the victim of what I have started to call “pilot paralysis”. We see fantastic initiatives and innovation, many indicating a pathway to real change, but they are not the norm, and they have neither gone to scale nor moved at the speed required to have a material impact.

Take forestry. The Forest Stewardship Council – initially championed by retailer B&Q, WWF and others – has seen fantastic growth with FSC-certified forest area growing 32% a year since 1993. However, in 2011 only 3.4% of global forests were FSC-certified. Similarly, Marine Stewardship Council-certified fisheries operate in only three of the 10 largest fishery regions in the world.

Getting down to the numbers

Stripping it down to the brutal reality of the facts and figures of the business impact on sustainability, although there is much to be optimistic about, the numbers tell us that inequality and poverty persist almost unabated around the world, and our environmental systems are declining at an alarming rate.

Take climate change. According to International Energy Agency estimates, global CO₂ emissions from the energy sector reached a record 30.6 gigatonnes in 2010 – with emissions rising again after a dip caused by the financial crisis in 2009 and ending 5% up in 2011 from the previous record in 2008. This comes despite record investment in clean energy, more than $250bn in 2010.

Put simply, sustainable business, and efforts on sustainability more broadly, are not keeping up with what the science tells us we need to do. And as studies ranging from the Stern Review for the UK government to the UN TEEB report (The Economics of Ecosystems and Biodiversity) show, this matters from a global economics perspective as much as from any environmental concern.

According to the UN and Trucost, the cost of environmental externalities – or put another way the full cost of doing business picked up by society at large – of the 3,000 largest companies in the world is already $2.2tn a year, a sum greater than the GDP of all but seven countries in the world.

With a closer lens, real progress on sustainable business looks questionable. The extent of the challenge appears not to have fully penetrated mainstream discussions, and objective performance assessments reveal a mixed bag. A recent study by US environmental business coalition Ceres on US companies progress on sustainability makes for a stark reality check. Despite good examples, few of the 600 companies assessed against sustainability leadership criteria had made anything more than minimal progress against its four-tier performance measures.

Research also suggests that while many executives have made huge progress on sustainable business, the level of awareness and understanding on the implications of what sustainable business means now and in the future for their industries and companies is still unclear. Of the 766 chief executives Accenture surveyed for the UN Global Compact, 96% believed that environmental, social and governance issues should be “fully embedded into the strategy and operations of a company”.

Sounds promising. However, 81% felt that they had already done this in their organisations. From my own experience covering more than a decade of working with many of the leading companies in the world on this agenda, at a guess, I would say that less than 1% or 2% could honestly say that they have fully integrated sustainability into strategy and operations, and those companies – the real true north innovators and leaders – probably wouldn’t make the claim because they know what it means and that it’s a journey of continuous improvement and renewal.

Finding true north 

So where does this leave us? A lot of progress has been made, but it is clear that we are not headed in the right direction on most key sustainable development metrics, and the sustainable business compass does not appear to be set to get us to where we need to go.

Navigation provides a useful analogy. “Magnetic north” is easy to mistake for “true north”, but it can send you a long way off course on a long journey. The gap between true north and magnetic north is called magnetic declination. Put simply, true north is the direction to the North Pole, as located along the Earth’s rotational axis, while magnetic north is the direction towards which the compass needle points. If you were to travel across the United States, the gap, or declination, varies from 20 degrees west in Maine, to zero degrees in Florida, to 10 degrees east in Texas – meaning a compass adjusted at the beginning of the journey would have a true north error of over 30 degrees if you didn’t continue to adjust it.

Why is this relevant to sustainable business? I think in the rush to celebrate progress on sustainability, we sometimes risk confusing true north and magnetic north. We need to be careful that we don’t mistake some of the examples we currently see, good though they are, as the kind of shift that will be required to drive systems change towards sustainable development. Magnetic north on sustainable development is about creating sustainable businesses, whereas true north is about the kind of innovation and transformation that lead to sustainable systems. This doesn’t mean that strong progress on an incremental scale is somehow “the enemy” in and of itself. But it does mean we need to be careful not to settle for what we know doesn’t do the job.

To achieve this, we need urgently to close two gaps – an “execution gap” and a “transition gap”. Closing the execution gap is about delivering real progress against established targets, whether those are national targets such as those within Kyoto, or the strategies and targets set by industries and individual companies. They may not be enough, but they are realistic and they get us moving in the right direction.

There is also consensus building around goals, and a growing number of companies that can show the way in making a success out of sustainable business. This is about embedding sustainability into the heart of organisations – into marketing, R&D, supply chains, IT, HR, finance etc – and using our business toolkit to get serious about delivery and shifting us off the business-as-usual trajectory that risks the collapse of social and environmental systems at the most extreme end of the spectrum.

Closing the “transition gap” requires rethinking systems at a more fundamental level and the role that business can play in delivering the products and services people want, need and desire in new ways. It ranges from looking at governance, business, financial markets, all the way through to values and behaviours.

If the execution gap is about driving incremental change then the transition gap is about driving transformational change.

Asking the tough questions

To illustrate the point, closing the execution gap requires asking tough questions and managing trade-offs in creating change within the existing business paradigm. Going beyond business-as- usual focuses on asking questions strategy and delivery for:

Customers – How can I generate demand for product and service lines that either tackle sustainability directly or have sustainability embedded in their core and drive either volume or differentiation?

Talent – How do I develop the right talent and capabilities to manage sustainability as a core business agenda, both at the organisational and individual leader level?

Performance – How can I move my business towards a new way of assessing corporate value that takes into account sustainability practices and resonate with key stakeholders?

Regulation – How can I make the right long-term sustainability investments against the backdrop of regulatory uncertainty? How can I contribute to policy in a way that drives sustainability and my own business interests?

Investors – How can I structure my sustainability strategy in a way that I can communicate clearly to the investor community the impact on current and future value, or quality of management, so they reward me for it?

Closing the transition gap towards transformational change in systems requires asking questions that challenge and potentially even disrupt and transcend the business paradigm. Put another way: “business as unusual”. Or for those of us who believe that there is enormous creativity and adaptability intrinsic to well-structured markets: “business as extraordinary”.

True north questions on sustainable business are focused on new thinking and models in the areas of:

Disruptive innovation – how can we drive new waves of innovation on sustainability which decouple growth from natural resource use and environmental impact? How can we ensure this spans products and services, new business models and new approaches to management? Could we shift from a product to a service-based industry? Could we explore shared ownership? Could we rethink R&D, manufacturing and logistics to design for disassembly?

Circular economy – how can we rethink our end-to-end value chain in a way that eliminates the concept of waste and is based on closed-loop business models and cradle-to-cradle use of resources? How can we re-engineer or build new sustainable, intelligent cities?

Convergence, collaboration and competition – how can we shape new types of partnerships that sit across traditional industry and sector boundaries as we see convergence of issues, interests and solutions – including in our own value chain, but also across civil society, academia, government and entrepreneurs? How do we balance the need for collaboration with competition?  What new hybrid business models could emerge?

Shared value – how can we go beyond traditional definitions of value creation to deliver for shareholders and owners, while explicitly delivering for stakeholders? How can we measure and communicate that value and engage stakeholders in the process? How do we ensure trust?

Leadership – how can we set clear vision and goals on the journey to both execute and transform, amidst ambiguity? How can we make it exciting and inspiring? How do we use the tools available to take stakeholders on the journey with us (eg engaging consumers with the marketing mix to both shape and respond to our business environment on sustainability)?

These actions can add up quickly. If industries aggregate their impact and actions, the effects are comparable with the impacts of entire countries and continents. For example, the top 50 consumer goods and retail companies have combined revenue of almost $3tn. Investing just 1.2% of this in a step shift in manufacturing and logistics for producing and transporting consumer goods around the world would match European investments in clean energy in 2011.

A new industrial revolution

Even just taking the transition to a sustainable global energy context, for example – tackling climate change, energy security and energy access to power economic development – will require not just sustainable businesses, but also a new energy system and indeed probably a new industrial revolution. It will create new winners and losers as companies compete and collaborate for new markets, products and services, and as rising resource costs force them to rethink operations and global supply chains. But the power of aligning market forces with sustainable development outcomes in creating a new industrial revolution is a tantalising and exciting prospect.

Looking back to the Rio summit and reflecting on whether sustainable business has delivered more or less success than meets the eye, the answer is probably both. Progress over the past 20 years has been slower than we might have hoped and many challenges of speed and scale still exist.

However, looking at the problem with a different lens, many of the solutions already exist, and many of the business models that can close both the execution gap and the transition gap are already available. But we must make a shift from incremental to transformational change, staying focused on delivery but at the same time rethinking systems back to their fundamental principles.

That is the way to find our bearings and chart a new path on the journey towards “true north” for sustainable business in the transition to a sustainable global economy, society and planet. A journey towards a new and exciting era of business. A journey towards transformation.

Peter Lacy is a senior executive at Accenture and runs its sustainability service group in Asia Pacific, based in Shanghai. He is a member of the Ethical Corporation editorial advisory panel and a fellow at Oxford University’s Smith School of Enterprise and Environment. This essay is based on Smith School and World Economic Forum Young Global Leader discussion papers, published in 2012. He writes here in a personal capacity.