From Incremental Steps To Impactful Change
Let us start by releasing the fox in the henhouse - by taking a helicopter view with an ear on the ground, it is noticeable that many companies have sustainability not just as a paragraph in the annual report, but also as a paragraph in the business operations plan. We do not think there is a lack of good intentions, quite the contrary. Companies are fully committed to sustainability. Directors and Supervisory directors are engaged with pilots, experiments, and new policies. But the actual sustainability of the business model and operations is still extremely limited. We see six obstacles as the cause of this stagnation. Of course, we also want to offer perspective and contribute to solutions. More on that toward the end.
Obstacle 1: Accurately assessing what the real impact is (or: the mother of barriers)
We fear that many managers still do not know and/or understand exactly what damage their current business will cause (or will soon cause) if structural change is not implemented. The impact is far greater than a number in the annual report or an event that brings NGOs with banners to the main entrance of your headquarters. As long as managers do not really understand - for example, as a result of the pressure of the limitations of current economic thinking - what that real impact is, they cannot and will not initiate fundamental transformations. Or as Kees Klomp says in Mgmt. Scope 03 2022: a fundamental shift is needed from an ecological economy in which ESG goals are one part of the discourse, to an economic ecology in which every decision is first and foremost ecologically motivated. This barrier is perhaps the mother of barriers: without resolving it, all actions will remain superficial and we will remain stuck with incremental change.
Obstacle 2: Lack of knowledge is a limiting factor
The concept of Scope 1, 2 and 3 (the official classification of the corporate carbon footprint) is well understood by most executives. But changing your impact in this area is very complex and requires considerable knowledge about end-to-end chains. In recent years, there has been much investment in functional operational excellence, with the result that silos in the chain have been optimized. But the chains themselves have remained largely untouched. As a result, they are often not equipped for the implementation of radical changes and there is also a lack of knowledge in this area. The ability to cooperate in a chain and knowledge about how sustainability can be incorporated into the current business model will soon be success factors for the survival of companies. The government also lags in knowledge in this area; this while knowledge about chains is a prerequisite to put forward effective policies.
Obstacle 3: Leadership from connection, accountability, and trust
While the competition keep squeezing the old model based on profit maximization in order to keep prices low, executives are challenged more than ever to take the lead by venturing a new way of doing. In addition, they encounter fellow executives or other stakeholders who are not yet truly supportive of sustainability goals - think shareholders who judge shares primarily on realized growth. Not all business models can be made sustainable, and it is not always possible to pass on all the costs of sustainability to your customer. In short, it requires extraordinary leadership to understand what is needed to make the company and the chain in which it operates more sustainable and to do it at the right (fast) pace, while getting the right people on board.
New leadership cannot revert to what leadership has been over the past decades. The demands of our time can impede on personal ambitions, as a moral compass and strongly developed personal leadership are called upon: with different choices from the customary and unpopular measures imposed, resistances will need to be overcome.
Obstacle 4: Companies are not (yet) driven by broad value creation
Companies are focused on cost minimization, profitability improvement and growth. Profitability and margin are perhaps becoming even more important than before in order to be able to invest in sustainability. We can argue about growth. Whatever the fact is, in the near future other considerations will certainly play a dominant role in decision-making, with more balance between financial value and overall value creation in order to in fact meet future trends and sustainability goals. As an example: a manufacturing company aiming to reduce its emissions by 50 percent by 2030, which also wants to continue growing by 10 percent per year over the next eight years, will have to set a goal of a 75 percent reduction instead of 50 percent - because the company is doubling in size. From a business economics view, a sustainable future means doing different math.
Obstacle 5: We are not prepared for true scarcity
In the West, we do not know real scarcity (anymore). We have been using other parts of the world for our needs for many years. Scarcity can even be applied as a cost or an opportunity to get the better of others. But what if in the near future the factory closes down because the supply of raw materials has, literally, been depleted?
The availability of raw materials, energy and labor will increasingly be a limiting factor in achieving sustainability goals. Shortages of chips slow down the electrification and digitization of business processes. The capacity of the electricity grid is reaching its (technical) limits in many places in the Netherlands, and elsewhere. Sustainability of the energy supply itself is forcing executives to accelerate: on the one hand to benefit from a possible first mover advantage and cost advantages and on the other hand because of the risk that they will simply miss the boat otherwise. The scenario where the lights are literally extinguished for good is not unthinkable.
The war for talent is on every Boardroom’s agenda. From now until around 2040, organizations needing to procure additional IT or technical staff for sustainability plans will do so in competition with organizations from across the world.
Obstacle 6: Macro-economic paradigm shifts
Current economic thinking inhibits sustainability. Not only due to organizations focusing on profit and growth, but also because of the consumption-driven society. One of the most significant changes that executives must help shape is to factor in the burden on the earth and the welfare and well-being of people and animals. Predation is an inherent part of many business models - though we still find that hard to admit. But what happens when we actually start pricing damage? Are we going to eat Dutch apples (and stock the supermarket with them) when it becomes clear what the impact of apples procured from other continents is? It is just one example, but significant. How are we going to change our current system? How can corporate executives contribute to this shift without allowing their company's personal stake be the deciding factor?
Sustainable transformation: drivers & enablers
In the period ahead, we at Kearney will be working with De Raad - a team of top experts, consisting of Sandra Phlippen, Frank Biermann and Rick van der Ploeg, who are exploring a topical Boardroom theme - and a number of files to find solutions to the obstacles and barriers described in this essay. How can we replace taking incremental steps with decisive action toward impactful, structural change? What needs to happen for the transition to really take off and succeed? To be continued!
This article is published in Management Scope 02 2023.