If you ask any group of sustainability professionals what sustainability is about, the answers might range from the challenges of climate change to consumption of depleting natural resources to fair labor and fair trade practices, and more (recognizing this confusion, The International Society of Sustainability Professionals aims to rectify it by defining a lexicon, starting with a session at its 2011 conference). A sampling of non-sustainability executives would return an even broader set of responses, perhaps including “a fad” or “a marketing gimmick” or, “I don’t know what it means.”
Sustainability is still a nascent discipline, for the most part practiced as a silo of activity and reporting separate from other business activities, not yet considered integral to a company’s governance or strategic planning, and not yet codified into any standardized best practice. Even with recent SEC disclosure guidance, it is interesting to note how few corporations address sustainability matters in their annual reports. And of course there have been examples of egregious misrepresentation as well. For many skeptics, these factors constitute a self-reinforcing “proof” that sustainability is irrelevant, or of marginal value at best.
Yet despite the lack of a commonly understood definition, or even widespread agreement on relevance, sustainability practices repeatedly have been shown to be good for business, accruing high-value benefits such as strengthened competitive position, enhanced reputation, increased investor interest, easier talent acquisition and retention, and the brass ring, reduced operating expenses / increased margins.
Why is sustainability such a challenging concept for so many professionally and ethically managed companies? What is the disconnect?
Part of the problem is that the language of sustainability often inadvertently clouds the subject it aims to illuminate: by focusing on terms such as “green premiums” and “eco-efficiency,” current sustainability rhetoric frequently fails to acknowledge, let alone fully address, the fact that sustainability is fundamentally good governance — astute and prudent management of complex, multifaceted risk. Rather than tackling the increasing complexity of business risk front and center as the primary focus of sustainability practice, many sustainability books and articles allude to it late in the narrative, sometimes mentioning risk management, resiliency, robustness, or competitive advantage as a benefit or a flip side of the sustainability coin, rather than the principal issue at hand.
The reality is that businesses of all sizes and types are facing unprecedented risk and volatility, for which sustainability strategy is a direct, timely, and effective countermeasure. On the input side, there are both long-term shifts and short-term instabilities in both price and availability of necessary supplies, including qualified labor; goods and services; raw materials and commodities; energy and fuel; and even basic resources such as fresh water. On the output side, solid, liquid, and gaseous wastes are becoming more challenging and expensive to dispose; shipping and delivery costs are skyrocketing; and stakeholders of all stripes are beginning to recognize waste streams as unnecessary expenses, as well as potential exposures to litigation and/or fines. Regulatory demands and tax policies vary regionally and temporally. Insurers are increasingly taking these and other factors into account in issuing or renewing policies. And, of course, customers of all kinds are changing their buying patterns, becoming both more demanding and more unpredictable as their purchasing options proliferate.
Risk factors include (partial list):
- Unforeseen / unpredictable acts of nature (droughts, storms, tsunami, earthquakes, etc.)
- Volatility / variability / acts of markets (fuel prices, housing bubbles, exchange rates)
- Rapid cultural / social shifts (political upheavals, elections, etc.)
- New ratings expectations (bonds, major insurers, SEC, etc.)
- Increasing compliance demands (new FTC marketing guidelines, etc.)
These and many other trends present dynamic, pressing concerns that every C-suite has to address in order to assure shareholders and stakeholders that they are providing effective, prudent management in fulfillment of their fiduciary obligations.
So how should a business approach these issues? Exactly as they would any other issues of strategic importance: by recognizing that they face long-term, systemic risks and opportunities different from and more complex than ever before, and managing those issues accordingly.
The first step is to determine what trends and threats are material to a company’s risk profile, and how that risk profile should be prioritized for ongoing strategic management. Each company will have a unique constellation of risks and opportunities, as well as a specific appetite for certain kinds of risks over others. Either as an internal exercise, or with the assistance of outside experts, the executive team takes a comprehensive inventory of both broad and narrow risk and opportunity vectors, maps their interrelationships, and charts their materiality to future top line and bottom line performance indicators. There will be uncertainty — increasingly, uncertainty itself is becoming a contextual risk (and, for some, an opportunity as well).
To note a recently topical example, a consumer goods company may have contracted multiple sources in an effort to distribute procurement risk, but failed to notice that the vendors are located in the same geographic region and are likely to be vulnerable to the same set of natural, social, or political risks. Shifting to a broader and more systemic perspective, the executive team may identify alternate vendors with different exposures to risk factors of significant concern, or begin to reconfigure its supply chain relationships to minimize or avoid those emerging critical risk factors that are most material to its business.
As a practical matter, risks cannot be eradicated. They can only be mitigated. That fact accepted, a strategic approach that starts with materiality and progresses with continuous assessment, prioritization, and management of critical risks and opportunities, leads to resilience: being able to compete more nimbly and proactively, and when setbacks occur, bounce back faster and stronger.
Large corporations have, so far, led the charge into sustainable business practices with targeted endeavors such as energy use reduction programs, supply chain alignment programs and detailed sustainability reports. But, arguably, small and mid-size businesses — and, for that matter, smaller municipalities, universities, NGOs, and nonprofits — are even more vulnerable to the risks associated with resource cost and availability, natural and man-made disasters, market volatility, and so on, because they operate without the plentitude of resources available to larger organizations.
For organizations of any size, strategic planning for risk and resilience reduces the occurrence and mitigates the impact of “unforeseeable” accidents; costs from waste, fines, and litigation; losses from man-made and natural disasters, whether from an oil spill, a blizzard, or a drought exacerbated by crippling forest fires; and expenses associated with rising and volatile supply costs. Moreover, it equips the management team to recognize and seize new opportunities more efficiently and with less disruption, in a persistently uncertain market context.
These are real performance gains. They are also real sustainability gains, achieved without ever having a conversation using the language of sustainability
Neither risk nor resilience currently plays a prominent role in sustainability discussions, even though risk management and resilience planning are basic tenets of sustainability. But this is precisely why these two lenses are exactly the ones through which both large and small organizations alike may be more willing to look at sustainability.
Compared with the increasingly freighted language of eco, clean, green, etc., the more conventional terms of risk and resiliency are far more recognizable to executive teams busy trying to run profitable enterprises, and (so far) unimpressed by sustainability rhetoric. We have heard again and again from business leaders that they don’t perceive the applicability or value of sustainability (or even understand what the term means), but they are acutely aware that they face increasingly dynamic risks — and, if they can move adeptly enough to capture them, opportunities — that are both qualitatively and quantitatively different from those they have faced in the past. By applying the principles of sustainability under the framework of assessing risk and cultivating resiliency, companies can gain traction in this era of persistent uncertainty, and — as a side-benefit — become more sustainable as well.
It bears emphasis that this shift of language and focus doesn’t skirt the challenge of driving change into core practice; it only provides a different way in. Just as with practices that go by the sustainability name, undertaking a risk / resiliency strategy is not a once-and-done proposition, or a task that can be outsourced to a vendor or consultancy. While there are experts who can offer guidance and support to executive teams struggling to incorporate new systemic risk evaluations into their strategic planning and decision-making functions, an organization needs to internalize and operationalize the new perspective on strategic planning for it to be fully effective.
Sustainability language has been very effective with a segment of business leaders who have embraced its principles in a wide variety of interpretations, but has been far less successful with the wider majority of companies, particularly small and medium-sized businesses. For all companies (and, to greater or lesser degrees, other organizations), cultivating resilience to risk is a fundamental strategic management goal, with clear fiduciary implications. Framing the conversation in this terminology can provide a more pragmatic, less freighted entrée to executives who have struggled to see the relevance of sustainability to their businesses. This inversion of the sustainability proposition offers to assist those companies to significantly strengthen their businesses (and thus the economy at large) while paradoxically advancing the cause of sustainability far more broadly, if only by another name.