The Organizational Dynamics of Sustainability Transformation Design

Sustainability is a top concern for business leaders. In Davos this year, 3,000 global leaders convened to discuss their roles as stakeholders in a sustainable world. For the first time, climate change contributed to all five of the top global risks in The World Economic Forum’s Global Risk Report. The world’s largest asset manager warned of the need to reshape finance to consider the lasting impact of climate change. Global events like COVID-19 and increasingly frequent extreme weather are testing corporate resiliency. It’s clear that climate change poses wide-reaching challenges that will affect operations, supply chains, business models and workforces. Companies will need to transform in ways that have deep and profound effects to their business.

At the same time, ambition is rising. Employees, investors, customers and peers recognize the urgency and value at stake. Just a few years ago, companies were praised for simply producing a sustainability report. Today, hundreds of companies have set Science Based Targets, leaders like Microsoft and IKEA have announced carbon neutral and carbon negative goals, and employees are staging walk-outs to protest corporate actions that don’t go far enough. ENGIE Impact’s analysis of CDP disclosures reveals that there has been a three-fold increase in average annual carbon reduction targets and that the average time horizon to achieve these goals has decreased to just over eight years today.

However, while ambition has risen and critics are watching carefully to hold businesses accountable, ENGIE Impact analysis shows that only 24 percent are on track to achieve their goals.

What makes sustainability transformation uniquely difficult?

Any transformation is inherently complex, but sustainability transformation poses its own unique challenges. For centuries, businesses have been built to drive operational efficiency and profitability. Companies spend decades perfecting processes to master their core business.

Traditional organizational structures provide a myriad of barriers. Most large organizations have siloed specialties, structural hierarchies and long innovation cycles.

• Finance departments weigh investments according to stringent payback periods within annual budget cycles. These practices often fail to account for the meaningful short and long-term financial benefits of enhanced reputation, reduced risk and improved return on investments. Traditional financing approaches may not favorably consider green bonds and sustainability-linked loans or innovative off-balance sheet financing options like shared savings agreements – the very type of new solutions corporate leaders are using to scale efficiency.
  
• Most companies are governed by profit and loss statements or other well-understood business metrics. They often lack the metrics and processes to manage and track progress to sustainability goals. With no shared, quantifiable success metrics, such as carbon emissions, teams lack the incentive to innovate and collaborate across departments.
• Most employees lack sustainability literacy. They may have heard (and embraced) their corporate sustainability strategy, but do not have the tools or education to understand their role in it. Unlike training on health and safety, corporate ethics or IT security, most companies don’t invest in training employees to understand the carbon footprint of their day-to-day activities and their impact on business value.

These historic business structures are at odds with the uniquely collaborative, pioneering demands of sustainability transformation, resulting in siloed strategies, stifled innovation and slow decision-making. All of which contribute to delays or barriers to successfully implementing sustainability initiatives.

So, how can companies successfully tackle the increased ambition given the complexity of this change? Companies will need to engage diverse skill sets, cultivate high levels of ownership across the organization and design an operational infrastructure that fosters innovation and collaboration to successfully capture the value at stake.

What is the value of a strong sustainability strategy?

A well-designed sustainability strategy with broad support will accelerate the depth and speed of transformation.

• Speed – The best strategies remove hurdles associated with funding, coordination and ownership, allowing businesses to move faster toward their end goal. An Economist study found that organizations that successfully execute strategic initiatives completed 20 percent more initiatives in a year.
  
• Depth – Deep sustainability literacy, metrics and accountability provide the foundation for innovation to occur across the organization.

A purpose-driven, differentiated strategy can provide a competitive advantage.

In 2019, research conducted by Ioannis Ioannou of London Business School and George Serafim of Harvard Business School showed that companies that adopted a uniquely strategic approach to sustainability saw higher returns on capital and better expectations of future performance. Their research evaluated the performance of companies that either conformed to established sustainability norms in their industry or developed uniquely innovative sustainability strategies. Their findings reflect the business imperative to go beyond the sustainability status quo by developing a differentiated and material strategy that drives business value.

Deep sustainability transformation can help employees connect to a greater purpose, driving increased engagement and retention.

Create a sense of meaning and purpose that fuels engagement and productivity. Not only will organizations achieve outcomes toward sustainability transformation, but they will also produce a 'halo effect' that drives improved outcomes across the business. Research from Gallup shows that companies with high employee engagement are 20 percent more productive and 21 percent more profitable than low engagement groups.

While there are several paths to building a sustainable and resilient business, successful sustainability transformations share a few common characteristics outlined in this article.

How do you design a successful sustainability transformation strategy?

Sustainability strategies often fail because companies have either moved too quickly towards action or they haven’t moved quickly enough. It is well known that stakeholder engagement is critical to successful execution, but what are the tangible steps that move stakeholder engagement from a box-to-check to deep accountability and investment?

To successfully achieve the scale of transformation required, companies must cultivate high levels of ownership across an ecosystem of stakeholders and co-design strategies that make success a certainty.

The Sustainability Innovation Framework provides a practical guide that aligns soft power with hard systems to develop a rigorous and high-commitment approach to sustainability strategy.



Map the Universe of Stakeholders and the Distinct Value They Bring

Consider the diverse ecosystem of stakeholders that can affect change within and outside of the walls of the company: suppliers, non-profit organizations, utilities, even competitors. Their unique experience and perspective will serve an important role in shaping your strategy. Define it.

Assess Business as Usual

To build a vision, leaders must understand stakeholder interests, the performance of peers and their own carbon footprint.

Build the Foundation for the Right Governance Structure

By engaging leaders from across the organization, companies can give permission for engagement, setting the organization up for deeper and broader adoption of their strategy.

Set the Vision

Jointly envision the pace, scale and leadership that the company should pursue. Level set on the business rationale for the transformation. Determine how the company’s purpose and identity dictate where they must lead on climate. Successful companies tie their bold missions directly to their core business, for example:

In August, Maersk, the world’s largest container shipper, launched its ambition to deliver “Zero-Carbon Shipping.” Recognizing the tremendous carbon footprint of the shipping industry, the Denmark-based shipper opted to lead in carbon-neutral shipping through deep investment in technology, sustainable fuels and supply chain innovation.

Singapore property giant City Developments Ltd launched “Conserve as we Construct,” an initiative that focused on not only highly efficient buildings, but solidified a commitment to sustainable construction materials, low environmental impact at project sites and community engagement on social and environmental issues.

Patagonia, a U.S.-based outdoor retailer, has aligned its bold climate action campaigns to its socially conscious consumers for decades. In recent years, the company has spoken out to defend America’s public lands, funded climate activism through Patagonia Action Works and made particularly deep investments in transparent, circular supply chains, which are slated to become carbon neutral by 2025.

Develop a Robust Baseline

Frame your discussions around the greatest opportunities. Leverage available tools and resources to calculate direct and indirect emissions across your entire value chain and invest in building a broad understanding of the largest contributors.

Deepen Thinking

The leaders may have a shared vision to achieve carbon neutrality but what would this mean for the organization? Share grounded examples of past successes, or examples of companies that have achieved great things. Then utilize the strengths and expertise of the group to develop a shared knowledge base of the economic, political, technological and social possibilities over the next five to ten years.

Unlock Creativity With a Summit

Use design thinking to activate different parts of the brain to inspire divergent thinking. Encourage a spirit of inquiry.

• Physical – Consider integrating physical objects to communicate concepts and trigger new ideas
• Visual – Consider hiring a graphic facilitator to visualize future realities

Integrate the Visions

Cluster intersecting ideas to identify overlapping strategies and elevate overarching ideas.

Quantify the Gap Between Current and Future State

A sustainability strategy hinges on a deep understanding of the current environmental footprint and stakeholder sentiments.

Build Data-Rich Scenarios with Robust Business Cases

Quantify the holistic value at stake. Assess the financing, contracting options, business value, carbon reduction impact and risk profiles associated with the proposed initiatives. Model scenarios to understand the likely evolution of regulatory, technological and economic shifts to identify viable business opportunities.

Certain projects will be very straightforward in their execution. For projects like energy efficiency and renewable energy, the business case is clear and there are an abundance of subject matter experts and readily available research. Other challenges are more complex. Solving for zero waste, mobility and resilient supply chains will be hard. This should not stop companies from setting goals.

Identify the means to achieve your objectives through organic growth, mergers and acquisitions, partners and the remaining gap. Addressing the gap will be a series of ventures and failures, resulting in more refined experiments that ultimately drive companies closer to the right answer. Set milestones for the long-term challenges, plan to introduce new thinking regularly and focus on gaining new learnings through rapid partner pilots.

Craft Bankable Roadmaps

Rank opportunities to determine potential, feasibility and costs. Build a portfolio of projects with both simple, early wins and strategic, longer-term capability building.

Create Accountability

Establish governance processes and requirements that incentivize behaviors that align with the organization’s desired outcomes.

• Accountable Leadership: Ensure success metrics are held by every leader of the organization. Swedish furniture company and sustainability leader, IKEA, made each country leader a CSO. Pia Heidenmark, Chief Sustainability Officer, said this action forced leaders and their teams to become sustainability experts, drive broader engagement and own the results across their region.
• Clear Workstreams and KPIs: Build diverse, cross-functional teams driven toward outcomes as opposed to capabilities. They should have the collective knowledge and skills to deliver the complete mission outlined in the workstream.
• Regular, Visible Progress Reporting: Outline the cadence for performance reporting with a broad set of stakeholders, offering visibility to various intersecting workstreams. Ensure progress is communicated by the department, training managers to translate direct actions toward broader goals.

Align Resources to Plans

Allocate foundational resources to fuel the work.

• Human Capital: Carve out space for sustainability initiatives that fall outside the normal management structure, intentionally build workstreams and steering committees with diverse skill sets and shared metrics.
• Financial Capital: Leaders need to anticipate that the projects that require investment may fall outside the strict payback periods governed by finance. These projects will yield other sources of nonfinancial value. To send the right signals to the organization, they must align capital accordingly and minimize barriers to quickly leverage it.

Create Cultural Touchstones to Celebrate Milestones

Build excitement within the organization by communicating the vision. Celebrate successes, particularly early ones. Encourage leaders to focus on these symbolic acts to elevate successful teams and initiatives among their peers.

Embed Feedback Loops

To move quickly, project plans must build in structures to learn from what’s working. However, there is often a disparity between leaders’ perceptions of successful implementation and that of their teams. When asked whether culture is an important leadership agenda 71 percent of C-suite agreed while only 48 percent of non-management employees did. Designate informal leaders that can take the pulse of ongoing initiatives and provide feedback to leaders to make the needed adjustments.

The challenges posed by climate change are vast and there is indeed a high risk associated with transformation. Yet, within that risk lies significant opportunity. With the right fundamentals in place, companies that move quickly and invest wisely will emerge as leaders in an increasingly volatile climate.

Don’t miss the latest content from our sustainability consultants. Subscribe for our Sustainability Transformation updates.