Management for Professionals

CorporateSustainabilityin Practice

Paolo TaticchiMelissa Demartini Editors

A Guide for Strategy Developmentand Implementation

Management for Professionals

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

Paolo Taticchi • Melissa DemartiniEditors

Corporate Sustainabilityin PracticeA Guide for Strategy Developmentand Implementation

123

EditorsPaolo TaticchiUniversity College LondonLondon, UK

Melissa DemartiniUniversity of GenoaGenoa, Italy

ISSN 2192-8096 ISSN 2192-810X (electronic)Management for ProfessionalsISBN 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 NatureSwitzerland AG 2021This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whetherthe whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse ofillustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, andtransmission or information storage and retrieval, electronic adaptation, computer software, or by similaror dissimilar methodology now known or hereafter developed.The use of general descriptive names, registered names, trademarks, service marks, etc. in thispublication does not imply, even in the absence of a specific statement, that such names are exempt fromthe 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 thisbook are believed to be true and accurate at the date of publication. Neither the publisher nor theauthors or the editors give a warranty, expressed or implied, with respect to the material containedherein or for any errors or omissions that may have been made. The publisher remains neutral with regardto jurisdictional claims in published maps and institutional affiliations.

This Springer imprint is published by the registered company Springer Nature Switzerland AGThe registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

This book is dedicated to a number of col-leagues who have inspired my work andgiven me opportunities: Aldo Taticchi (whohappened to be my father too!), Piero Lunghi,Paolo Carbone, Lawrence Chiarelli andKashi R. Balachandran.

It is also dedicated to my mother for herunconditional love;and to Manuela, William Paolo, Derek Man-uel and Jackson Vittorio who give meaning tomy 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 fortheir love and support and keeping me fedand watered!

Melissa Demartini

Preface

Sixty-seven years have passed since American economist Howard Bowen (1953)published his book Social Responsibilities of the Businessman, remarking theimportance of a fundamental morality in the way a company behaves towardsociety and the relevance of ethical behaviour toward stakeholders.

Since then, the topics of Corporate Social Responsibility and Corporate Sus-tainability have received a lot of attention, up to the point that corporations havecreated departments and functions to address these matters and academics builtscientific disciplines and courses on those topics.

In the last twenty years only, we have seen a number of notions becomingpopular in the business jargon such as Triple Bottom Line, ESG and Purpose thathave shaped the modern definitions and practices of Corporate Sustainability.

Indeed, the matter of integrating corporate sustainability strategies with businessstrategies has emerged as a key one, and it is often mentioned by executives,practitioners and consultants as a priority. In fact, a fully integrated corporatesustainability strategy can help organisations to better manage risks, to win businessopportunities and to ultimately strengthen reputation.

Building on the experience of renowned strategists, sustainability and financeleaders and academic experts, this book offers practical tools and approaches thatcan be used to develop and implement fully integrated corporate sustainabilitystrategies.

Among many practical and innovative things, the reader will also find an updatedefinition of Corporate Sustainability (in Chap. 4) and a detailed framework todevelop and implement corporate sustainability strategies (in Chap. 9).

The book is organised in three sections, so as to highlight the drivers of thecorporate sustainability debate (part I), the building blocks of modern corporatesustainability and the business case from a strategic and financial perspective(part II), and the concepts and tools relevant for the development and implemen-tation of corporate sustainability strategies (part III).

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We invite executives, consultant and practitioners to use the concepts and toolspresented 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 learnwith passion from the following chapters, as sustainability thinking is a key skill ofmodern leaders of business and society.

London, UK Paolo TaticchiMelissa Demartini

x Preface

Acknowledgements

We would like to gratefully acknowledge a number of friends and colleagues fortheir 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 Busi-ness 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 themanuscript.

Finally, we would like to thank Christian Rauscher and Nitza Jones-Sepulveda atSpringer thanks to whom this project was brought to fruition.

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Contents

Part I Corporate Sustainability: The Big Picture

1 How Environmental and Social Issues Affect BusinessStrategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Melissa Demartini and Paolo Taticchi

2 The Sustainable Development Goals: A Frameworkfor Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Valérie Amato

3 Thinking in Systems: The Long-Term Impacts of Short-TermBusiness growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Roberto Pasqualino

Part II The Business Case for Corporate Sustainability

4 A Modern Definition of Corporate Sustainability . . . . . . . . . . . . . . 65Paolo Taticchi and Melissa Demartini

5 Sustainability Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Melissa Demartini and Paolo Taticchi

6 The Link Between Sustainability Investing and FinancialReturns: An Asset Management’s Perspective . . . . . . . . . . . . . . . . 97Daniel Ung

7 Sustainable Finance––Integrating Sustainabilityinto Corporate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Laura Maida

Part III Definition and Execution of Sustainable Strategies

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

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9 How to Approach the Development of a CorporateSustainability Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Sally Taylor

10 Sustainability Transformations—From Theory to Practice . . . . . . . 165Diana L. Copper

11 The Evolution of Sustainability Reporting: Integrated Reportingand Sustainable Development Challenges . . . . . . . . . . . . . . . . . . . . 191Cristiano Busco and Elena Sofra

12 Sustainable Supply Chain Management . . . . . . . . . . . . . . . . . . . . . 207Marco Formentini

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

xiv Contents

Editors and Contributors

About the Editors

Prof. Paolo Taticchi (Editor and Author) is Professor (Education) in Strategy andSustainability & Deputy Director (MBA and International at UCL School ofManagement.

He teaches modules on sustainability and competitive advantage, strategy,consulting, and the future of cities. Before UCL, Paolo spent six years at ImperialCollege London where he led top-ranked programmes such as the MSc Manage-ment and the Global Online MBA.

Alongside his work at UCL, Paolo is regularly invited to teach on internationalMBA and EMBA programs in Europe, Africa, Asia, and the Americas. In the recentyears he has visited and hold teaching appointments in top universities like EADA,ESAN, and NYU.

Paolo’s research on performance measurement and management, business net-works, and corporate sustainability is internationally recognised. He has authoredover 50 published academic journal articles, and edited and co-authored threebooks.

Outside of the academy, Paolo has significant consultancy experience in thefields of strategy, operations, and sustainability and today he serves in the advisoryboard of influential organisations in the UK, US, Canada, Italy and India.

Paolo is also active in the entrepreneurial space, co-founding three firms in thefields of engineering and consultancy. His projects, quotes and opinions have beenfeatured over 200 times in media outlets like The Financial Times, Forbes, TheTelegraph, Semana Sostenible, La Republica, Inspire, Sole 24 Ore, La Nazione,Corriere della Sera, La Stampa, RAI, Sky News, Sky News Radio, Mediaset, andCNN.

In 2018, Paolo was chosen as one of Poets & Quants’ top 40 business schoolprofessors under the age of 40. In the same year, Paolo received the title of Knightof the Order of Merit of the Italian Republic. In 2019, Paolo received the “TalentedYoung Italian Award” from the Italian Chamber of Commerce and Industry in theUK.

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Dr. Melissa Demartini (Editor and Author) is an Adjunct Professor of OperationsManagement and Sustainability at the Department of Mechanical and IndustrialEngineering, Faculty of Engineering, University of Genoa (Genoa, Italy). She holdsa M.Sc. in “Industrial Engineering” and a Ph.D. in “Industrial Engineering” fromthe 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, oper-ations management, and modelling. She has co-authored nearly 20 papers publishedin international indexed journals. She currently teaches undergraduate, graduate,and MBA students, with teaching activity covering general management, operationsmanagement, and sustainability. So far, she has taught in universities in Italy andthe UK.

Melissa Demartini has worked as a project manager for the EU’s AdvancedManufacturing in Central Europe (AMiCE) project since 2017. She is also industrialsustainability coordinator for the Intelligent Factory Cluster’s Roadmap Project—anItalian government initiative which aims to develop a national strategy to improvethe international competitiveness of manufacturing companies. Outside of theacademy, Melissa has significant consultancy experience, she is a consultant forAnsaldo Energia’s ‘Lighthouse Plant’ project. She has also worked as a consultantfor Siemens, gaining experience in strategy, operations, internationalization, andbusiness 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 Sustain-ability, University of Genoa, Genoa, Italy;SDU Centre for Sustainable Supply Chain Engineering, Dept. of Technology andInnovation, University of Southern Denmark, Odense M, Denmark

Marco Formentini Department of Information Engineering and ComputerScience (DISI), University of Trento, Trento, Italy

Laura Maida Intesa Sanpaolo, Milano, Italy

xvi Editors and Contributors

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 aGlobal Asset Manager, London, UK

Charlotte Wolff-Bye Surbiton, UK

Editors and Contributors xvii

Part ICorporate Sustainability: The Big Picture

1How Environmental and Social IssuesAffect 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. Greateremphasis is given to three phenomena (climate change, population growth andwealth disparity) that are particularly relevant for both business and society andoffer interesting insights into understanding the link between sustainabledevelopment at large, the sustainability challenges faced by business and theimplications for business strategy. The aforementioned challenges, which arealready complex when analysed individually, become increasingly morecomplex when analysed together.

Keywords

Sustainability drivers � Sustainable development � Climate change � Worldpopulation growth � Wealth disparity

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, Denmarke-mail: melissa.demartini@dime.unige.it; m.demartini@imperial.ac.uk

P. TaticchiUCL School of Management, University College London, Level 38 One Canada Square,Canary Wharf, London E14 5AA, UKe-mail: p.taticchi@ucl.ac.uk

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice,Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_1

3

1.1 Introduction

The topic of corporate sustainability, which is central in today’s agenda for cor-porate executives around the world, is of course linked to the wider topic ofsustainable development and the role played by business in society.

The most frequently quoted definition of sustainable development is from theUnited Nations’ ‘Our Common Future’ report 1982 (Imperatives 1987), also knownas the Brundtland Report: ‘Sustainable development is development that meets theneeds of the present without compromising the ability of future generations to meettheir own needs’.

The entire issue of sustainable development centres around inter- and intra-generational equity anchored essentially on three-dimensionally distinct but inter-connected pillars, namely the environment, economy and society. Decision-makersneed to be constantly mindful of the relationships, complementarities and trade-offsamong these pillars and ensure responsible human behaviour and actions at theinternational, national, community and individual levels in order to uphold andpromote the tenets of this paradigm in the interest of human development (Mensahand Casadevall 2019).

The big challenges faced by society are indeed summarised by the SustainableDevelopment Goals (United Nation 2015) set by United Nations which are pre-sented, and critically discussed, in the next chapter.

Interestingly, and relevant to corporations, is the work of the World EconomicForum which annually publishes the ‘Global risks report’. The report relies on aglobal survey in which nearly 1,000 decision-makers from the public sector, privatesector, academia and civil society assess the risks facing the world. The risks arecategorised in the following categories: economic, environmental, geopolitical,societal and technological. The key findings of the Global risks report 2019 arepresented in Fig. 1.1.

The risks identified by the World Economic Forum, which are already complexwhen analysed individually, become increasingly more complex when analysedtogether as presented in Fig. 1.2. Hence, the importance of a system thinkingapproach in the effort of addressing these challenges as highlighted in the thirdchapter of this book.

A number of ‘mega forces’ will be key drivers for business change to 2035 andbeyond (KPMG International 2012). These include climate change, populationgrowth, energy and fuel, material resource scarcity, water scarcity, urbanisation,wealth, food security, ecosystem decline and deforestation. Each of these individ-ually is predicted to have a significant impact on the way we do and can-dobusiness, 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 forbusiness and society with the goal of explaining the link to corporate sustainabilityand impact on business strategies.

4 M. Demartini and P. Taticchi

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

1 How Environmental and Social Issues Affect Business Strategy 5

1.1.1 The Impact of a Changing Climate on Business

Climate change is considered by many the greatest challenge faced by modernsociety. Indeed, this is confirmed by the unremitting attention of media andgovernments.

Extreme weather events are nowadays more frequent and more devastating.Examples of major disasters that took place in 2019 include (Masters 2020)

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

6 M. Demartini and P. Taticchi

• the 3.4 million people who were evacuated from their homes in India andBangladesh before Cyclone Fani barrelled over the Bay of Bengal;

• the high-water levels seen 5 times in a week in Venice, recording the highest tideever, flooding its historic basilica and leaving many of its squares and alleywaysdeep under water;

• the second strongest Atlantic hurricane on record (Dorian) that hit the Bahamaswith winds of 185 mph, causing $150 million in damage;

• tropical cyclone Idai (it affects Africa and the Southern Hemisphere) which leftthousands of people stranded on rooftops in an ‘inland ocean’ up to 30 mileswide and killed 964 people;

• the record heat and drought in Australia that produced some of the mostapocalyptic fire activity ever witnessed in the country, with at least 21 peoplekilled, 15 million acres burned and 3500 structures destroyed.

• typhoon Hagibis that unleashed unprecedented rains and catastrophic floodingacross much of Japan, killing 98 and causing over $15 billion in damage, makingit 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, todaythe projections are that they will occur once every 16 years. In drier areas, droughtswill be more enduring and severe, this can have a negative impact on the fire seasonwhich in turn will be more extreme, disruptive and costly.

According to scientists, these events will not only be more powerful and frequentbut will also expose more people to sufferance and unsettling situations. In thiscontext, some interesting scientific evidence is the positive correlation betweenclimate change and migration of people (Fig. 1.3). Experts predict that by 2050 onein 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 con-sequence of growing CO2 (carbon dioxide) emissions resulting in a rise intemperature.

Current economic and production systems are based on carbon and fossil fuelconsumption which generate a huge amount of CO2 emissions driving the globalwarming problem (Fig. 1.4). In 2014, the Intergovernmental Panel on ClimateChange (IPCC) which is the leading scientific body informing policymakers,published a ground-breaking report (IPCC 2014) that gave clarity to a number ofissues that had caused debate in the scientific community for decades:

• Human influence on the climate system is clear, and recent anthropogenicemissions of greenhouse gases are the highest in history. Recent climate changeshave had widespread impact on human and natural systems;

• Continued emission of greenhouse gases will cause further warming andlong-lasting changes in all components of the climate system, increasing thelikelihood of severe, pervasive and irreversible impacts for people and ecosys-tems. Limiting climate change would require substantial and sustained

1 How Environmental and Social Issues Affect Business Strategy 7

reductions in greenhouse gas emissions which, together with adaptation, canlimit climate change risks;

• Adaptation and mitigation are complementary strategies for reducing andmanaging the risks of climate change. Substantial emissions reductions over thenext few decades can reduce climate risks in the twenty-first century and beyond,increase prospects for effective adaptation, reduce the costs and challenges ofmitigation in the longer term and contribute to climate-resilient pathways forsustainable development;

• Many adaptation and mitigation options can help address climate change, but nosingle option is sufficient in itself. Effective implementation depends on policiesand cooperation at all scales and can be enhanced through integrated responsesthat link adaptation and mitigation with other societal objectives.

In 2015 under the Paris Agreement, 197 countries committed to cut greenhousegas emissions with the objective of limiting the global average temperature tobelow 2 °C above pre-industrial levels. The global temperature is currently risingby about 0.2 °C per decade and it achieved 1 °C above pre-industrial levels in2017. Projections say that if warming continues to increase at this frequency, the1.5 °C increase in temperature will be achieved by 2040 and potentially up to a5 °C increase reached by the end of the century. This could be potentially

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

8 M. Demartini and P. Taticchi

disastrous. The increase in temperature would result in the melting of ice caps andglaciers and lead to a rise in sea level, damaging coastal communities and infras-tructures. Entire island nations could face the possibility of submersion. Moreover,the population could be exposed to extreme heat, losing many ecosystems andspecies such as coral reefs and marine fisheries.

It is interesting to note that, what could be at first sight classified as an envi-ronmental problem, has in fact impacted on several other systems, includingbusiness and industry. Virtually, all industries may be affected by climate-change-related impacts with some being particularly vulnerable. Good examples include thewide concern in the insurance industry (which is expected to be one of the mostaffected, as companies in this industry pay for the damages caused by extreme

Fig. 1.4 CO2 emissions trends (Source IPCC 2014)

1 How Environmental and Social Issues Affect Business Strategy 9

weather events and the difficulties inflicted on business activities), disruption in theoil and gas sector (oil and gas are limited natural resources in any case, but theswitch to alternative sources of energy is accelerated by climate action), transfor-mation of the automotive industry (with electric mobility and business modelsbased on sharing) and of course major impacts on the agriculture and food industry(as extreme weather events and global warming are impacting heavily on pro-ductivity and capacity).

The case of Illy

Hotter temperatures and droughts make coffee supplies less stable, leading toprice spikes and shortages. In particular, the ‘Arabica’ variety, which is ofsuperior quality and the most consumed, is particularly sensitive to climatechanges. This situation affects the economy of entire countries in South andCentral America (e.g. Brazil and Colombia), Africa (e.g. Ethiopia) and Asia(e.g. Vietnam). With coffee consumption increasing every year at a ratearound 2.5%, this is a massive problem for coffee producers.

Illy is a global coffee brand that is sold in 140 + countries and employs1200 + people globally. In 2018, the chairman of Illy, Andrea Illy, declaredto journalists that climate change is the biggest risk to the business: avail-ability of coffee and volatility of prices are major issues for the firm which hasthe ambition of growing steadily in international markets. Based on researchcarried out with the Earth Institute, Illy forecasts that only half of the currentsuitable land for coffee plantations will remain suitable by 2050.

In order to address the issue of supply chain vulnerability, Illy has decidedto re-think the business strategy in light of sustainability needs. As part of thisprocess, the supply chain management strategy was reviewed and strategiccollaborative partnerships with suppliers established with the goal beingbetter control of quality, quantity and price. New initiatives were launched asa consequence of this new strategy, including for example the ‘Ernesto IllyQuality Award for Espresso Coffee’ which aims to encouraging the sustain-able 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 andageing of world population. Population grew close to eight times in the last twocenturies (from 1 billion in 1800 to 7.7 billion in 2019). The world population couldreach a peak of 10 billion people by the end of the century (Fig. 1.5).

10 M. Demartini and P. Taticchi

A larger population means a larger virtual demand of everything: food, energy,cars, buildings, etc. Without a well-planned decarbonization of the economy and/orindustrial activities, the sapient use of technology, and more efficient industrialsystems, carbon emissions could boom and global warming and climate changeaccordingly. In this regard, in its ‘Landmark 2018 Report’, the IPCC specificallyidentified high population growth as a ‘key impediment’ to hitting the critical targetof limiting global warming. The implications of a growing population have stim-ulated 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 contributedto the popularity of systems theory and system thinking (an overview is provided inChap. 3).

The world population is growing, but there are clear differences between worldregions and countries (Fig. 1.6).

Some countries like India, China and Nigeria are growing very fast while othercountries will continue to see decreasing population rates. The world populationdepends on the balance between births and deaths; therefore, it is essential toanalyse this data to understand what is happening. The improvement of lifeexpectancy and the reduction of child mortality is without doubt a top priority ofeach country; however, it is also important to focus on the fertility rates ofdeveloped 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,

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

1 How Environmental and Social Issues Affect Business Strategy 11

the average world fertility rate was 5 children per woman, while today it hasdropped to around 2.3. The top 20 countries with the highest fertility rankings areall African. In the countries where the fertility rate is high, population growth isincreasing, but it is important to note that there is also a positive correlation betweenhigh birth rate and increased child mortality (Fig. 1.8).

In light of the above, there will be a so-called ‘Africa boom’ phenomenon. Aswe can see from Picture 8, there is a huge difference between African and Europeanpopulation projections. The population of Europe is forecasted to remain static,

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)

12 M. Demartini and P. Taticchi

while the population will explode in countries like Nigeria which will be ranked inthe ten most populous countries by 2030.

With population growing, PwC’s report ‘The World in 2050’ (Hawksworth andChan 2015) projected the world economy to grow at an average of just over 3% perannum 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. Some87% of the additional middle-class population will be Asians. This is anunprecedented opportunity for business growth. However, it is unlikely that theplanet can support the level of exploitation associated with a rising populationconsuming at the same level as occurs in post-industrialised countries today. Globalmanufacturers, and business in general, need to find ways of delivering the sameproducts with vastly reduced impacts and also to shift to different modes of

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

1 How Environmental and Social Issues Affect Business Strategy 13

consumption, including selling performance and service provision instead of goods.Consumer behaviour change is a critical dimension in this debate and effectiveprogrammes for change will require that social scientists be given equal footingwith scientists and engineers so that the issues can be tackled in an informedmanner (Tennant 2013).

The Case of Unilever

At the 2019 Deutsche Bank Global Consumer conference in Paris, Unilever’sCEO Alan Jope said ‘the combination of quite a big population, strong GDPgrowth and rapid consumption in the categories we sell means that countrieslike Vietnam, Pakistan, Bangladesh, Myanmar and even Ethiopia will be ourgrowth stars over the next few years’.

Unilever, which makes household goods ranging from Dove soaps toKnorr packet soups, is indeed a great example of a company that fullyunderstands the opportunities given by a growing and wealthier population indeveloping countries.

The company keeps growing in developing markets, where it already gets58% of its sales (mainly from China, India and Brazil). To do so, they keepintroducing innovative business practices that try to reduce the environmentalimpact of operations and amplify the positive impact on the local commu-nities where they operate. Mahajan (2016) has closely analysed the modusoperandi of Unilever and identified several of these practices, such as

• The concept of training local women in India as rural sales agents who sellUnilever products door to door in their communities (70,000 sales agentsserving 165,000 Indian villages when they started in 2015)

• The use of large stores as sub-distributors in the Philippines which allowedUnilever to double its rural coverage whilst also reducing distribution costs

• The use of low-cost, single-use packets to make its products affordable forlower income consumers who often shop daily for necessities.

Since the Unilever Sustainable Living Plan (USLP) launched in 2010, ithas received great recognition in industry and academia for reflecting thefirm’s ambitious vision to grow the business, whilst decoupling the envi-ronmental footprint from growth and increasing positive social impact. Thethree pillars of the plan include

• By 2020 to help more than a billion people take action to improve theirhealth and well-being

• By 2030 to halve the environmental footprint of production and use oftheir products as they grow the business

• By 2020 to enhance the livelihoods of millions of people while growingthe business.

14 M. Demartini and P. Taticchi

The USLP is allowing Unilever to address market opportunities indeveloping countries, to cut business costs, to reduce business risks and togenerate long-term value for multiple stakeholders. Therefore, it is a greatexample of an approach to corporate sustainability which is fully integratedinto business strategy.

1.1.3 The Impact of Wealth Disparity on Business

The objective of reducing inequality within and among countries is one of themodern challenges of today’s society (SDG number 10). The international com-munity has made significant steps towards lifting people out of poverty, but dis-parity persists, and large differences remain regarding access to health, educationservices and quality of life in general. The United Nations (2020) estimates that40% of the world’s population receives less than 25% of the overall income (bottomof the pyramid), while according to Credit Suisse (Shorrocks et al. 2019) theworld’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 onlyabout economic growth. In fact, following the principles of sustainable develop-ment, 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 fantasticprogress in reducing poverty in the last decades. In fact, the World Bank estimatesthat 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 inChina (Source Poverty &Equity Databank andPovcalNet)

1 How Environmental and Social Issues Affect Business Strategy 15

66.2% in 1990 to 0.5% in 2016 (measured by the percentage of people living on theequivalent 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 isstill only about a quarter of that of high-income countries, and about 373 millionChinese 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 measuresinequality among values of a frequency distribution, e.g. levels of income; a GINI

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 WorldBank)

16 M. Demartini and P. Taticchi

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 environmentalcost of economic growth (Fig. 1.11).

Reducing these environmental and social imbalances requires a profoundre-thinking of the structure of the economy itself. China today needs to evolve froma low-end manufacturing country based on exports and cheap labour to a high-endmanufacturing country competing on services too.

Inequalities around the world combined with the growing globalisation ofbusiness have significantly impacted the strategy of many firms, who when seekinga cost advantage, have moved manufacturing and supply chain activities tolow-income developing countries. This movement has been further enhanced withthe incentives offered by local governments seeking direct foreign investments, byproviding land, infrastructure and tax relief. As documented by Crane et al. (2019),the establishment of these global production networks led to ethical and sustain-ability problems falling into four categories: issues associated to different ways ofdoing business, issues associated to the impact of multinational firms on indigenousbusinesses, issues associated to different labour and environmental standards andissues associated to the increased level of responsibility of companies with exten-ded global chains.

The case of Foxconn Technology Group

Founded in 1974, today, Foxconn Technology Group is the world’s largestprovider of electronics manufacturing services supplying well-known brandslike Apple, Nokia and Sony to name but a few.

Originally from Taiwan, the company operates a huge industrial park inShenzen, China where it employs more than 400,000 people (hence the nameFoxconn City).

In 2010, Foxconn became unpopular in the media as 14 employeescommitted suicide, jumping from the roofs of the factory’s buildings. The keydrivers of such extreme actions were attributed to low wages (about$130/month at the time for new hires), long working hours above the legallimit, poor working and living conditions in the dormitories and the little levelof integration for migrant workers (Eccles et al. 2013).

In reaction to this alarming situation, the management at Foxconn raisedsalaries (a decision that impacted directly on the profitability of the business),hired psychiatrists and took the controversial measure of installing 1.5 millionsquare metres of suicide nets.

What happened at Foxconn raised the attention of the problem of fair payand working conditions of an entire industry. In fact, Foxconn was not par-ticularly a ‘bad’ company, as it was probably above the average in terms ofsalaries and working conditions (Msnbc.com news services 2010).

1 How Environmental and Social Issues Affect Business Strategy 17

With Foxconn on the news daily, the attention soon shifted to Apple whichwas attacked by media, customers and industry bodies alike, for not con-trolling (and caring) about the situation in Shenzen. Similarly, the role playedby the Chinese government was debated as labour practices were poorlydefined and monitored in China.

Problems like the one described above are unfortunately still very commonin many industries, especially when operations are in low-cost developingcountries. Addressing these types of problems is not easy, as many stake-holders with conflicting interests are involved. Moreover, addressing theproblem very often calls for re-thinking the distribution of economic value inthe 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. Itis important that practitioners are aware of these challenges as they often shape thesustainability 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 corporatecitizenship and sustainability in the age of globalization. USA: Oxford University Press.

Eccles, R. G., Serafeim, G., & Cheng, B. (2013). Foxconn Technology Group (A). HarvardBusiness 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 powercontinue?. 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: Ourcommon future. Accessed 10 Feb 2020.

IPCC (2014). Climate change 2014: Synthesis Report. Contribution of Working Groups I, II andIII 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 businessreview. https://hbr.org/2016/12/how-unilever-reaches-rural-consumers-in-emerging-markets.

18 M. Demartini and P. Taticchi

Masters, J. (2020). The top 10 weather and climate stories of 2019. Scientific American, a Divisionof Springer Nature America, Inc. https://blogs.scientificamerican.com/eye-of-the-storm/the-top-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 SocialSciences, 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 ofpopulations 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 SuisseResearch 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-and-manufacturing.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 greencoffee to the cup: Logistics as a competitive weapon. In A. F. Toni (Ed.), Internationaloperations 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 theUniversity of Genoa and Visiting researcher at Imperial College Business School. Her researchinterests are mainly in the areas of corporate sustainability, operations management, andmodelling. She has co-authored nearly 20 papers published in international indexed journals. Shecurrently teaches undergraduate, graduate, and MBA students, with teaching activity coveringgeneral management, operations management, and sustainability. So far, she has taught inuniversities in Italy and the UK. She has worked as a project manager for the EU’s AdvancedManufacturing in Central Europe (AMiCE) project since 2017. She is also industrial sustainabilitycoordinator for the Intelligent Factory Cluster’s Roadmap Project – an Italian governmentinitiative which aims to develop a national strategy to improve the international competitiveness ofmanufacturing companies. Outside of the academy, Melissa has significant consultancyexperience, she is a consultant for Ansaldo Energia’s ‘Lighthouse Plant’ project. She has alsoworked as a consultant for Siemens, gaining experience in strategy, operations, internationaliza-tion, 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 onsustainability and competitive advantage, strategy, consulting, and the future of cities.Before UCL, Paolo spent six years at Imperial College London where he led top-rankedprogrammes such as the MScManagement and the Global Online MBA. Alongside his work atUCL, 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 appointmentsin top universities like EADA, ESAN, and NYU. Paolo’s research on performance measurementand management, business networks, and corporate sustainability is internationally recognised. He

1 How Environmental and Social Issues Affect Business Strategy 19

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 organisationsin 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 andopinions have been featured over 200 times in media outlets like The Financial Times, Forbes, TheTelegraph, Semana Sostenible, La Republica, Inspire, Sole 24 Ore, La Nazione, Corriere dellaSera, La Stampa, RAI, Sky News, Sky News Radio, Mediaset, and CNN. In 2018, Paolo waschosen as one of Poets & Quants’ top 40 business school professors under the age of 40. In thesame 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 andIndustry in the UK.

20 M. Demartini and P. Taticchi

2The Sustainable Development Goals:A Framework for Business

Valérie Amato

Abstract

The Sustainable Development Goals (‘SDGs’ or ‘Global Goals’) were adoptedby the international community in 2015 as a universal, integrated andtransformative set of ambitions designed to address 17 key interlinkedchallenges facing people and the planet. Despite some positive intentions andencouraging efforts on the part of business and other key actors to contributepositively towards their realisation, there has only been to date some slowprogress in the critical implementation phase. The very nature and ambition ofthe SDGs requires new ways of thinking and acting, with systems andmulti-stakeholder collaboration approaches representing key success factors.The acceleration of the positive transformation process on multiple andsimultaneous fronts can only happen through a meaningful engagement ofbusiness, working in close partnerships with a wider circle of stakeholders andrethinking its own purpose and contribution to human progress.

Keywords

Sustainable development � Systems thinking � Complexity � Strategicalignment � Transformation � Multi-stakeholder partnerships

Copyright Note: The content of this publication has not been approved by the United Nations anddoes 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, UKe-mail: valerielondres@aol.com

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice,Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_2

21

2.1 Introduction

This chapter draws and further builds on the thoughts and ideas first presented at aseminar 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 theencouragement of Arts, Manufactures and Commerce (RSA), and then by othercollaborative platforms (including UKSSD (UK Stakeholders for SustainableDevelopment), SDG Philanthropy, The Practitioner Hub for Inclusive Business,The Partnering Initiative, UNDP (United Nations Development Programme) andthe IIRC (International Integrated Reporting Council)). The author is immenselygrateful for all the support she has received from colleagues and partners, whoencouraged and invited her to develop and share these thoughts among a diverseand dispersed audience.

Five years following the adoption of the Sustainable Development Goals, thisChapter is an attempt to address the following questions:

(a) To which extent can businesses draw inspiration from the framework presentedby the Global Goals (or SDGs)?

(b) Where should business attention and efforts be more strategically and effec-tively placed to accelerate the implementation of this ambitious agenda?

2.2 Setting the Scene: How a New Universal Agendafor Sustainable Development Came to Light

The Sustainable Development Goals (‘SDGs’), also referred to as the ‘Global Goalsfor Sustainable Development’ or ‘Global Goals’, were adopted by all UN MemberCountries in September 2015 as the successors to the Millennium DevelopmentGoals (‘MDGs’). As per Fig. 2.1, the SDGs represent a global vision of the 17 keysustainable development priorities to be met by 2030.

This new approach to development by the international community represented aradical change from the way the MDGs had been formulated, and which hadinvolved a much closer, exclusive circle of international development experts. Bycontrast, the new sustainable development agenda was the result of a very intensiveand extensive consultation, running over a period of more than three years, andinvolving a large and diverse range of stakeholders. The new approach wasintended to be more participative, inclusive and universal, with citizens around theglobe being invited to imagine and design the ‘world [they] want[ed]’.

From this crucial point in history onwards, development has, therefore, becomeeveryone’s concern, with the Global Goals representing a universal framework for abetter future, for people, but also the planet. Whilst the MDGs focused on devel-oping countries, the SDGs are aimed at a global audience, calling for both individualand collective action. The Global Goals, therefore, differ from their predecessors

22 V. Amato

both in terms of scope and scale. 17 Sustainable Development Goals and 169 relatedtargets replaced 8 Millennium Development Goals and 21 targets, and now covernew areas. ‘Designed to integrate the three key dimensions of sustainable devel-opment (social, economic and environmental)’, the SDGs include ‘cross-cuttingissues like peace, inequality, sustainable consumption and production patterns, citiesand climate change’ (Amato 2017). ‘Ambitious in nature’, they ‘envisage theeradication (not only the significant reduction) of key human development chal-lenges such as hunger, poverty, and preventable child deaths’ (ibid). Businesses havebeen expected to play a key role in this transformative process. They are particularlyinvited to contribute significantly to the Global Goals 7 (Affordable and CleanEnergy), 8 (Decent Work and Economic Growth), 9 (Industry, Innovation andInfrastructure) 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 SustainableDevelopment (or Sustainable Development Goals (‘SDGs’)), an urgent call fortransformation has succeeded to an initial and repeated call for action. As per the

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

2 The Sustainable Development Goals: A Framework for Business 23

Sustainable Development report 2019 (Sachs et al. 2019), no country (out of the193 UN Member States who originally adopted and formally committed to theGoals) is on track to meeting all the goals.

Indeed, Climate Change and Inequality are widely recognised as being two keystubborn global issues that our humanity as a whole continuously fails to address.

In the latest Sustainable Development Goals Report (UN 2019), AntónioGuterres, UN Secretary General, draws a mixed picture of the advancement of theGoals. Whilst certain areas have seen some encouraging and promising progress,(for example, in terms of reduction of extreme poverty and child mortality rate, andoverall access of the world’s population to electricity, the UN General Secretaryrecognises the need to ‘reposition [] the United Nations development system to bebetter equipped to meet the needs of governments to respond to this integrated andtransformative agenda’. The issues requiring ‘urgent collective action’ include thesevere and continuing deterioration of our natural environment, human suffering,global hunger, lack of access to essential health services by a majority of the globalpopulation, and low literacy and numeracy standards achievement by a majority ofchildren. In its report, the UN invites targeted efforts at key identified solutions suchas ‘financing; resilience; sustainable and inclusive economies; more effectiveinstitutions; local action; better use of data; and harnessing science, technology andinnovation with a greater focus on digital transformation’. Taking a ‘holistic viewof the 2030 Agenda’ ‘identify[ing] the highest impact areas’ are considered ascritical.

Sachs et al. (2019) identify six key transformations required from governments,businesses and other stakeholders to organise and align efforts towards an effectiveimplementation of the Global Goals. These include 1. Education, Gender andInequality; 2. Health, Well-being and Demography; 3. Energy Decarbonisation andSustainable Industry; 4. Sustainable Food, Land, Water, Oceans; 5. SustainableCities and Communities and 6. Digital Revolution for Sustainable Development.This organisation around distinct but synergistic, regrouped categories reflects boththe diverse scope and integrated nature of the Global Goals Agenda, and thenecessity to consider individual challenges as interlinked and forming part of awider 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 makeit virtually impossible to achieve the SDGs. Pursuing the six transformations willrequire deep, deliberate, long-term structural changes in resource use, infrastructure,institutions, technologies and social relations, which have to happen in a relativelyshort time window’ (IIASA, 2019).

Recognising and reminding us of the critical role of business in positivelycontributing to the achievement of the Global Goals, the World Business Councilfor Sustainable Development (‘WBCSD’) has also organised six work programmesto help businesses translate this transformative agenda into tangible actions andsolutions. They are specifically inviting a focus from the private sector on circular

24 V. Amato

economy; cities and mobility; climate and energy; food and nature; people andredefining value (Sachs et al. 2019:11). The call is for a strategic alignment ofbusinesses around these areas.

This theme of Transformation is also echoed by the World BenchmarkingAlliance (an organisation driving the private sector’s engagement in the SDGsthrough benchmarks) in their July 2019 report, entitled ‘Measuring what mattersmost: Seven systems transformations for benchmarking companies on the SDGs’(World Benchmarking Alliance 2019).

Whilst these various initiatives advocating for and promoting the action ofbusiness around the Global Goals are both commendable and necessary, their veryexistence and relevance four years after the adoption of the Global Goals demon-strates the difficulties in realising the desired and critically required transformativechange.

Indeed, the very nature of the SDGs Agenda (being universal, integrated andtransformative), but also the current state of our world, both call for new ways ofthinking and acting.

2.4 Embracing Complexity, Diversity and Connectivity:The Need for Systems Thinking and Multi-stakeholderPartnerships

Our increasingly complex, uncertain, fast-changing and interconnected worldinvites 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 andaffordable access to food, water, energy (which increasingly represent scarceresources for a growing population), increasing urbanisation with its impact onhealth and strain on infrastructure.

These challenges are not only complex but interconnected. This means that wecan 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 theimplications or unintended consequences of a specific action. For example, theglobal financial and refugee crises have had systemic causes and long-term con-sequences. They cannot be ring-fenced, they affect us all, wherever we are, andimpact multiple (economic, political and social) areas of our lives.

Indeed, as suggested by the scientific community, whose views were invitedduring the wide consultative process leading to the formulation of the new SDGsframework, these challenges (translated into Global Goals) should, therefore, beconsidered as a complex, interlinked system (as illustrated by the picture below).

As represented in Fig. 2.2, links between two goals indicate the number ofconnections between their individual associated targets (or measures of success).

2 The Sustainable Development Goals: A Framework for Business 25

It is worth noting that SDG 17 (Partnerships for the Goals), is not represented inthe picture, as it represents the means of implementation of the other 16 SDGs, andis, therefore, linked to all of them.

SDG 1 (No Poverty) is otherwise the most central node for the system, as it iskey to and impacted by all other goals, given the multiple dimensions of poverty (interms of access to essential needs and rights), but also its extreme sensitivity toclimate change and war conflicts.

This picture, therefore, illustrates the extent to which actions on a specific goal ortarget are intrinsically linked to other goals and targets. Scientists involved in thisreview, however, recognised that they did not have a comprehensive ‘map’ of thesystem underlying the new goals, and that there was a need for a better under-standing of the dynamics of the system, which is highly complex, as goals andtargets interact differently over time, in both positive and negative ways (UN 2015).

This observation of the strong and complex linkages and connections betweenthe Global Goals naturally requires us to revisit our traditional ways of thinking andaddressing the key issues and challenges adversely affecting our environment andoverall well-being.

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

26 V. Amato

Indeed, in its review of the MDGs (or predecessors to the SDGs), the High-LevelPanel appointed by the UN Secretary General had identified the fragmentationnature of the efforts directed at achieving the Millennium Development Goals (setup to run over a period between 2000 and 2015). The panel reported that ‘theMDGs fell short by not integrating the economic, social, and environmental aspectsof sustainable development as envisaged in the Millennium Declaration’ and that‘The result was that environment and development were never properly broughttogether. People were working hard—but often separately—on interlinked prob-lems’ (UN 2013). This criticism, therefore, influenced the new (integrated)approach to delivering the SDGs, emphasising the need for the multiple stake-holders in a better, more equitable, prosperous and sustainable future, to workclosely 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 transformativechange (and, therefore, sustainable development). This includes the mobilisation ofand widened access to key resources (specifically through trade, finance andtechnology). Beyond this, the goal, together with its proposed associated targets,however, also recognise and seek to address capacity-building through internationalco-operation, and make specific reference to three key systemic issues relating tothe means of implementation: Policy and Institutional coherence, Multi-Stake-holder Partnerships and Data, Monitoring and Accountability (UN SustainableDevelopment 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 integratedambition of the SDGs, what is meant by ‘Multi-Stakeholder Partnerships’?

In a Chapter of a Development Co-operation Report entitled ‘the Promise ofpartnerships in a post-2015 world’, the OECD (2015) offers the following defini-tion: ‘Multi-stakeholder partnerships’ designate ‘groupings of civil society, theprivate sector, the public sector, the media and other stakeholders that cometogether for a common purpose, pooling their diverse resources, expertise andexperience to achieve common goals’.

If such a cross-boundary collaboration approach is clearly considered as a key toachieving the Global Goals, it, however, raises some important questions on howthese actors, stakeholders and partners, driven by they own values and agendas, cancome 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 oftheir scope, scale and strong interlinkages, what are the key skills and competencesrequired to implement this ambitious and transformative agenda?

Ahead of the adoption of the SDGs, the author of this Chapter conducted aconsultation among existing and potential new stakeholders in a postgraduateglobal development programme to address this specific question. This involvedinterviewing 40 leaders from a wide range of organisations, across various sectors(public, private and not-for-profit) and functions, and inviting their own views onthis issue.

2 The Sustainable Development Goals: A Framework for Business 27

According to the research participants, the ability to operate effectively in acomplex, interconnected and fast-changing environment required the following:

1. Strategic and critical thinking2. Capacity-building of local staff and partners3. Contextualising an issue and defining and understanding it from multiple

perspectives4. 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 data6. Adapting to and embracing change: being agile, creative and innovative7. 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 andcomplexity characterising the Global Goals transformative and integrated agenda.

2.5 Creating a Shared Vision for Cross-SectorCollaboration Effectiveness: How to ReconcileConflicting Values and Interests

Bearing these skills and competences in mind, the difficulty of building andmaintaining effective Multi-Stakeholder Partnerships through the joined-up effortsof a multitude of partners pooling their resources towards a common vision shouldnot be underestimated.

Having conducted some research on NGO-business collaboration effectiveness(to maximise the impact of long-term development action benefiting children), theauthor would like to share some key findings that (only partially) shed some lighton the perceived barriers to multi-stakeholder partnerships, and how these may beovercome.

The main challenges of cross-boundary collaboration identified through someliterature and field research related to conflicting goals, values and interests on thepart of collaborators or partners not speaking the same language and driven bydifferent agendas. The challenge of managing these tensions is particularly acute inthe case of NGO-business collaboration.

Semi-structured interviews revealed that differences and imbalances could rep-resent key barriers to collaboration. These exist both at the strategic level (withdifferences in ‘objectives’, ‘agendas’, ‘worldviews’, ‘priorities’ being mentioned),but also at the operational level (with NGOs and businesses perceived to adoptdifferent approaches, ways of working and mechanisms).

The focus of the author’s research was to address the How to? question: iden-tifying keyways of overcoming such barriers and achieving effectiveness (in termsof both scale and sustainability).

28 V. Amato

As part of the research methodology, the interviewees of organisations repre-senting the two sectors (NGO and business) were also invited to create sharedmeanings of cross-sector collaboration effectiveness at a workshop.

The idea behind this approach was to test this very form of cross-sector col-laboration by convening people with different perspectives in the same room,inviting them to generate ideas around a common issue. Creative problem-solvingtechniques were used to generate new ideas and build a common vision aroundcross-sector collaboration mechanisms. For the participants, the common issuebringing them together, and which they reframed, was ‘How to capture, create andpromote sustainable enabling mechanisms and best practice’.

Dialogue, Diversity and Learning emerged as key themes underlying effectivecross-sector collaboration.

Dialogue should be encouraged and facilitated for the purpose of creating sharedmeanings and a mutual understanding among actors working across different sectors.The focus of such an encounter and exchange of perspectives should be on a specificissue (to establish some common ground at the outset), and on appreciating andmanaging the risks and required resources throughout the process of collaboration.

Diversity involves embracing differences through open-mindedness (beyondsuspicions and prejudices), driven by the willingness to achieve mutual benefits.

Learning was identified as a requirement for adopting and sharing best practiceand sustainable enabling mechanisms.

Last but not least, the role of Trust was considered as key, as being expected toincrease with the breadth and depth of the relationship/partnership.

It is worth noting the resonance of these themes with those outlined by theGlobal Partnership for Effective Development Co-operation as being at the ‘core ofeffective partnerships’ and underpinning the Principle of ‘Inclusive DevelopmentPartnerships’: Openness, Trust, Mutual Respect and Learning (Global Partnershipfor Effective Development Co-operation 2019).

However, the absence of a universal model of effective collaboration (asacknowledged by the participants in the author’s own research workshop) can beexplained through the complex web of conditions required to maximise impactwhilst reconciling cross-sector differences and interests.

On this basis, which key lessons can we learn from the various parties (includingbusinesses) that have been committed to and engaged inMulti-Stakeholder Partnerships?

2.6 Working Towards the Global Goals: Multi-stakeholderPartnerships in Practice

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

2 The Sustainable Development Goals: A Framework for Business 29

Systemic change is also quite difficult to deliver and measure in the short-term. Asbusinesses only know too well, one tends to manage (and, therefore, focus attentionand deliberate efforts on) what one can measure. Indeed, this is illustrated (andimplicitly acknowledged) by the fact that both the Indicators chosen to measure theachievement of Multi-Stakeholder Partnerships (a distinct ‘systemic issue’ identifiedas such under SDG17 (UN Sustainable Development Goals—Knowledge Platform,2019)) only relate to quantitativemeasures. Indicator 17.16.1 refers to the ‘Number ofcountries reporting progress in multi-stakeholder development effectiveness moni-toring frameworks that support the achievement of the sustainable developmentgoals, whilst Indicator 17.17.1 refers to the ‘Amount of United States dollars com-mitted to public-private and civil society partnerships’ (ibid).Whilst we can of coursepraise the intention to promote the wide adoption of and investment of money andenergy in these initiatives, none of these Indicators is particularly helpful in terms ofassessing the quality and long-term impact of such Multi-Stakeholder Partnerships(‘MSPs’). Arguably, both the notions of ‘progress’ and ‘effectiveness’ should also bedefined, particularly when they apply to complex, systemic issues. The 2018 ProgressReport on the former Indicator (ibid) reveals that only 51 of 114 countries reportedoverall progress towards strengthening multi-stakeholder partnerships and the meansof implementation of the Global Goals.

Despite the inherent complexity of tracking and reporting on cross-boundarypartnerships, inspiration and learning can, however, be taken from someindustry-and system-wide initiatives, to demonstrate the intent and impact of col-laborative journeys to this date.

The following examples of (human and financial) capital mobilisation initiativeshave been selected on the basis of their scale, scope and stated ambition to promotethe required systemic change envisaged by the actors and institutions advocating fora strengthening of the ‘Global Partnership for Development’ (UN Task Team on thePost 2015 Agenda 2013).

European Commission Initiative on Sustainable FinanceContribution to SDGs:

‘Alignment of one of the world’s largest financial systems with globalobjectives 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 (startingwith China) to cover specific areas of co-operation.

30 V. Amato

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 intoa 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 Exchangesand Financial Centres, Investment Consultants, Financial Industry Associa-tions, International Institutions, Retail Investors, EU Member States, CivilSociety; Recommendations to the European Commission were made by anappointed High-Level Expert Group on Sustainable Finance representingthese multiple perspectives.

Initial Action Plan:

Legislative and non-legislative measures (including harmonised EU-wideclassification system—or ‘taxonomy’—on what can be considered an envi-ronmentally sustainable economic activity, disclosure obligations on howinstitutional investors and asset managers integrate Environmental, Social andGovernance (ESG) factors in their risk processes, EU Ecolabel for greenfinancial products…).

Next Steps Envisaged:

All financial entities that manage investments on behalf of their clients orbeneficiaries will now have to inform them about how their activities areimpacting 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/sustainable-finance_en; https://ec.europa.eu/info/sites/info/files/180131-sustainable-finance-final-report_en.pdf

Better Cotton InitiativeContribution to SDGs:

SDG1 (No Poverty); SDG2 (Zero Hunger); SDG3 (Good Health andWell-being); SDG4 (Education); SDG5 (Gender Equality); SDG 6 (Clean

2 The Sustainable Development Goals: A Framework for Business 31

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 intocotton production around the globe.

Intended Systemic Change:

‘BCI’s Theory of Change calls for transformation of the cotton productionsector, catalysing movement toward sustainability in two spheres: Farm andMarket, with changes amplified and sustained by supportive production andconsumption policies’.

Vision: Make Better Cotton a mainstream sustainable commodity.

Mission: ‘Transform cotton production from the ground up by helping cottonfarmers 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 productionworldwide.

2.2 million licensed cotton farmers in 21 countries in 2018 (19% of GlobalCotton).

Key implementing partners (National or regional cotton producers’ organi-sations, Governments and governmental bodies related to cotton production,marketing, processing and trading, Entities created to grow, promote and sellBetter Cotton, Initiatives working to promote sustainability in the cottonsector, Different Implementing Partners all over the world, who work withfarmers at field level to ensure that they are producing cotton according to theBetter Cotton Standard); Retailer and Brand Members; Funding Partners.

32 V. Amato

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 cottonproduction.

2. BCI will reach and train five million cotton farmers on more sustainablepractices.

3. 10% of all cotton produced globally will be sourced as Better Cotton.4. Nine countries will take direct responsibility for funding and imple-

menting 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 FoundationWorld Alliance for Efficient SolutionsContribution to SDGs:

SDG6 (Clean Water and Sanitation); SDG7 (Affordable and Clean Energy);SDG9 (Industry, Innovation and Infrastructure); SDG11 (Sustainable Citiesand 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 Feasibility2. Environmental And Socio-economic Benefits—‘the solution has a direct pos-

itive impact on the environment combined with at least one direct or indirectsocio-economic benefit, without any significant negative impact transferred’.

3. Profitability

2 The Sustainable Development Goals: A Framework for Business 33

Intended Systemic Change:

Protecting the environment through clean technologies and efficient solutions.

Key Stakeholders Involved:

Main actors (Innovators, investors and solution seekers) involved in devel-oping, financing or promoting products, services, processes and technologiesthat protect the environment in a profitable way; start-ups, companies, insti-tutions, NGOs and investors to create synergies, share knowledge and buildrelationships that ultimately speed-up the implementation of clean and prof-itable solutions; governments, businesses and institutions benefiting fromthese solutions, which encourage them to adopt more ambitious environ-mental targets and energy policies.

Initial Action Plan:

‘Innovative and profitable solutions having been awarded the Solar ImpulseEfficient Solutions Label’.

SDG6 ðClean Water and SanitationÞ : 64 solutionsSDG7 ðAffordable and Clean EnergyÞ : 128 solutionsSDG9 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 SolarImpulse Efficient Solutions Label, and be included in the portfolio of 1,000Efficient Solutions to be presented to decision-makers.

Source: https://solarimpulse.com.

Mars Sustainable in a Generation PlanContribution to SDGs:

‘Accelerate sustainable growth in alignment with the UN SDGs’, focusing onthree key areas: Healthy Planet (linked to Climate Action, Water Steward-ship, Sustainable Packaging and Land Use), Thriving People (focusing onIncreasing Income, Respecting Human Rights and Unlocking Opportunitiesfor 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 millionpeople in Mars value chain); customers; leading global organisations.

Initial Action Plan:

Launch of the Farmer Income Lab, ‘an open-source “think-do-tank” that willenable Mars and others to leverage […] unique human, social and financialresources to identify and activate solutions needed to increase farmer incomeand 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 increaseincomes and demonstrate what factors are most successful’.

Efforts across plastic packaging, renewable thermal and a new Next Gener-ation Supplier program, ‘an enhanced approach to supplier sustainability’.

Source: http://www.businessfor2030.org/goal-17-moi; https://www.mars.com/sustainability-plan.

Whilst the above examples can certainly be considered as examples of bestpractice, particularly in view of their ambition to deliver positive change at scaleand genuine efforts to address the needs of multiple stakeholders, working in closepartnership, the real impact of these can only be measured in the long-term. Theseinitiatives, however, share some common features, in terms of their attempt toestablish new and bold standards of sustainability, question the status quo, andbring 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 supplychain), with positive change and impact intended on a global scale.

By their very nature, these Multi-Stakeholder Partnerships do not reveal the trueand distinct contribution of business in an isolated manner. They clearly highlightan advanced and sophisticated stage of engagement in the SDGs. They also suggestinnovative models and new ways of thinking and working, striking a fine balancebetween long-term societal impact and short-term financial considerations.

Recognising the important role and expected increased contribution of the pri-vate sector in the overall sustainable development agenda (as mentioned above), letus now consider the specific shifts required for business to engage meaningfully andeffectively in the Global Goals, and drive and accelerate their overall implemen-tation process.

2.7 How Can Business Can Best Contribute to SystemsChange: Towards a Strategic Alignment of Businessand Social Goals

Purposeful businesses will be essential contributors to solving the global challenges of the21st century, best expressed in an integrated way by the UN Sustainable DevelopmentGoals. (British Academy 2019)

Just under eighteen months following the launch of the Global Goals Agenda,the international development organisation Oxfam published a discussion paperentitled ‘Raising the Bar: Rethinking the role of business in the SustainableDevelopment Goals’ (Oxfam International 2017), which was already invitingbusinesses to consider the SDGs as an opportunity to ‘embrace their widerresponsibilities to the societies in which they operate[d]’—beyond profit. In par-ticular, Oxfam International (2017) recognised ‘business [as] an important stake-holder on account of its resources, its ability to innovate and its scale and reach’.According to the international NGO, ‘meaningful engagement’ from business hadto include three steps: (1) a focus on those goals where a given company could havethe ‘greatest potential impact, either positive or negative’, (2) an ‘integration ofsustainable development concerns into their core operations’ and (3) ‘transforma-tive ways of thinking about the future role of business in sustainable development’(ibid).

More recently, in an interactive session on ‘Transforming Business for theSDGs’, as part of the 18th Annual Colloquium convened by the Academy ofBusiness in Society (ABIS 2019), insights from the UN Global Compact-AccentureStrategy 2019 CEO Study on the engagement of business with the SDGs wereshared. According to the survey, leaders recognised that ‘market constraints and anever more challenging business environment and set of pressures continue to slowbroad-scale transition to sustainable business—and that unless broader business isforced by a shift in economic incentives, action will stall’ (ibid). Key suggestionsmade by CEOs to accelerate progress included:

36 V. Amato

1. ‘An urgent need to raise corporate ambition within their own organisationsthrough ‘threshold’ actions and also lead systems transformation more broadlyagainst the 17 Global Goals’;

2. ‘The need for business, governments, regulators and nongovernmental organi-sations to come together to shape realistic science-based solutions to the globalchallenges’;

3. ‘A new definition and emphasis on disruptive responsible leadership, as CEOspinpoint what is needed from this generation of leaders to drive action andimpact’ (ibid)

As alluded to and discussed in more details in relevant sections of this Chapter,ambition, scale, strategic alignment, integration, transformation and new ways ofthinking are indeed recurrent themes to be considered by any actor envisaging aserious and deep engagement with the Global Goals, due the very nature of theAgenda.

In order to gauge and assess the likelihood of a more effective engagement ofbusinesses in the SDGs agenda (in terms of their positive and meaningful contri-butions becoming mainstream and embedded in their core strategies), it might beworth stepping back and looking at the context in which the corporate world iscurrently operating. In particular, recent and repeated signs of transformativechange seem to apply to businesses themselves, as capitalism under its current formcomes under increasing scrutiny, in a renewed momentum.

In September 2019, less than a month after the Business Roundtable redefinedthe Purpose of the Corporation to Promote ‘An Economy That Serves All Amer-icans’, with 181 CEOs of US large corporates committing to ‘lead their companiesfor the benefit of all stakeholders—customers, employees, suppliers, communitiesand shareholders’ (Business Roundtable 2019), the Financial Times launched itsNew Agenda of ‘Resetting Capitalism’, challenging ‘leaders in the boardroom andbeyond—to protect the future of free enterprise and wealth creation by pursuingprofit 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-termgrowth and profitability’, states that ‘profits and purpose are inextricably linked’,emphasising a company’s need to ‘serve all of its stakeholders over time—not onlyshareholders, but also employees, customers, and communities’, and calling oncompanies’ leadership to commit to ‘issues central to the world’s prosperity’. Asthe world’s largest asset manager, BlackRock strives for what they define as‘Investment Stewardship’, advocating for the creation of long-term value, andcorporate strategies ‘clearly founded on an articulated purpose’ (BlackRock 2019b).

This long-term, purposeful investment and strategy mindset designed to meet theneeds of multiple stakeholders is now increasingly presented as a much requiredalternative to and replacement of the prevailing shareholder supremacy which hasdriven and influenced corporate decision-making and behaviour since MiltonFriedman’s 1970 article entitled ‘The Social Responsibility of Business is toIncrease its Profits’.

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Arguably, business organisations, which have traditionally focused on short-term productivity and financial measures of success, being strongly influenced bythe prevailing scientific management approach and under intense pressure to meetshort-term quantitative targets, have clearly favoured profit over a higher, sociallyuseful purpose. The two are, however, not incompatible, and should be strategicallyaligned 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. Itrequires our full humanity—our rationality, our ability to sort out truth from falsehood, ourintuition, 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 theBerlin Wall, we are reminded of the human capacity to transform dreams (be theyflying machines or reunification process) into inspiring, history-defining, sustain-able achievements. The past architects of human beauty, freedom and progresscontinue to earn our respect and admiration, through the distinct core values theybelieved in and embodied.

Leonardo’s combined scientific and artistic approaches to innovation should alsoincite us to question and revisit the boundaries artificially drawn between sciencesand humanities in our education systems, so far as these continue to define ourworking lives, but also our ways of thinking and capacity to tackle challengescharacterised by both complexity and scale. Such disciplinary silos are particularlyunhelpful when understanding and tackling the interconnectedness defining today’sworld. They restrict our imagination and ability to make some vital links betweenseemingly unrelated issues.

In view of the very rapid succession of events and crises, we need to think, actand behave differently—now and together.

The Global Goals offer a thinking and living framework for doing so. It istransformative, universal and integrated. It calls for collective responsibility andmeaningful and impactful action, inviting new ways of thinking about and organ-ising business and other resources around a shared and aligned purpose.

References

ABIS (2019). 18th ABIS Annual Colloquium 2019 - Business in Society: Measuring impact andcreating 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. ThePartnering Initiative . https://thepartneringinitiative.org/news-and-views/tpi-blog/the-global-goals-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-termstrategy, purpose, and culture. https://www.blackrock.com/corporate/literature/publication/blk-commentary-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 topromote ‘An Economy That Serves All Americans’. https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-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-operationprinciples. http://effectivecooperation.org/about/principles/.

International Institute for Applied Systems Analysis (2019). Deep transformations needed toachieve 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 coalitionsfor 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 SustainableDevelopment Goals, February 2017.

Sachs, J., Schmidt-Traub, G., Kroll, C., Lafortune, G., & Fuller, G. (2019). SustainableDevelopment Report 2019. New York: Bertelsmann Stiftung and Sustainable DevelopmentSolutions Network (SDSN). https://s3.amazonaws.com/sustainabledevelopment.report/2019/2019_sustainable_development_report.pdf.

Sustainable Development Global Goals Partnerships Platform (2019). European Commissioninitiative on sustainable finance. https://sustainabledevelopment.un.org/partnership/?p=29794.

UN (2013) A new global partnership: eradicate poverty and transform economies throughsustainable development - The report of the high-level panel of eminent persons on the post2015 development agenda. https://sustainabledevelopment.un.org/content/documents/8932013-05%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 Goal17- Strengthen the means of implementation and revitalize the global partnership forsustainable 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 transfor-mations for benchmarking companies on the SDGs Retrieved November 4, 2019 from https://www.worldbenchmarkingalliance.org/wp-content/uploads/2019/10/WBA-sevensystemstransformations-report.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 marketsexperience with major international banks, including Citibank and HSBC. She subsequentlytransferred her business skills to the social and international development sectors, both in anadvisory and leadership capacity. She was a member of the Steering Committee for the evaluationof the International Finance Facility for Immunisation (IFFIm), and the first CEO of aninternational NGO focusing on maternal and child health in Afghanistan, Eastern Europe andCentral Asia. She has also served on the Board of Trustees of a charity and as Governor of aprimary school and a college in West London. As an external consultant, Valérie has been advisingacademia, businesses and international NGOs on their stakeholder engagement and cross-sectorcollaboration strategies. Being passionate about education and highly committed to life-longlearning, Valérie contributes her international cross-sector expertise to the design and delivery ofhigher education programmes for business schools and other academia based in Europe, focusingon international business and transformative leadership. Valérie studied and/or worked in fourdifferent countries (including in Europe and South Africa), holds a Masters in Management fromESCP Europe (Paris, Oxford, Berlin) and an MSc in Development Management from the OpenUniversity.

40 V. Amato

3Thinking in Systems: The Long-TermImpacts of Short-Term Businessgrowth

Roberto Pasqualino

Abstract

Short-term business growth is the main paradigm governing business activitiestoday. This is important for employing workers, servicing debt and beingcompetitive in a complex world among others. In 1972, the Limits to Growth(LtG) demonstrated how short-term business as usual behaviour could causelong-term global risks, including the possibility of overshoot of the globaleconomy to environmental limits and economic collapse within the twenty-firstcentury. This chapter first gives a definition of complex systems, system thinkingand sustainability. Then it explains the nature of financial risk assessmentpractices and exponential growth. Thus, it reviews the LtG model and comparesit to historical data. The major drivers for growth and the state of planetaryboundaries are then assessed showing the relationships between risk, economicgrowth and environmental pressures. Potential leverage solutions to reducelong-term risks and directions for businesses to support a sustainability transitionare highlighted.

Keywords

Sustainability � Limits to growth � Planetary boundaries � Financial risk � Energytransition � Climate change � Sustainable development goals

R. Pasqualino (&)Global Sustainability Institute, Anglia Ruskin University, 183 East Road,Cambridge CB11PT, UKe-mail: roberto.pasqualino@exoshock.com; roberto.pasqualino@anglia.ac.uk

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 licenseto Springer Nature Switzerland AG 2021P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice,Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_3

41

3.1 Introduction

Short-term business growth is the main paradigm governing business activities inthe indefinite long-term. This is important for paying salaries, employing newentrants in the job market, paying debt, coping with inflation, as well as beingcompetitive in a complex world among others. In 1972, the Limits to Growthexplored scenarios of long-term business growth in a finite planet, demonstratinghow short-term business as usual growth, could generate long-term risks, includingthe possibility of overshoot of the global economy to global limits and possibilityfor economic collapse within the first half of the twenty-first century (Meadowset al. 1972, 2003). These trends are partially confirmed today in the Intergovern-mental Panel of Climate Change, exploring how climate change effects are creatingdifficulties and chaos all over the world (IPCC 2014).

Growth is generally planned within businesses as a goal towards the future, oftenadopting forecasting technology and risk assessment as a means to explore futurepossibilities. For example, a company might project sales towards the next quarter,and assess possibilities to meet projections. First, they would build expectations forthe future (average sales), assess a possible variability from ideal expectations(variance), and consider those factors that have the potential to bring their plansaway from expectations (risks). As a result, growth implies risk assessment andmanagement as part of planning for the future.

Risk assessment is the core of the business model of financial institutions such asbanking and insurance industries. For example, banks’ lending activities need toassess the risk of creditors to repay their debt back over a certain time. The basicmetric that summarizes the risk of a debtor is the interest premium calculated as afraction of the debt that is necessary to service the cost of loans based on thelikelihood capabilities to return it. The lower the likelihood to return the debt, thehigher the risk, thus the interest rate and the cost of debt. At the same time, thehigher 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 begranted cash for cheaper costs, thus supporting them to grow even further. Thisimplies important dynamics of inequality between those who own capital and thosewho do not. In addition, the higher the risk, the higher the expected growth of acompany to be able to make enough money to pay for their debt, thus creatingpressures to boost growth even further.

But what are the long-term dynamics of the short-term goals of business leadersand managers? And most importantly, what if growth is the inherent cause ofsystemic risk increase over time? Is the forecast provided in the Limits to Growthconsistent with reality today? These questions are complex and must be addressedusing system thinking. In this chapter, we first give a definition of complex systems,system thinking and sustainability, and we demonstrate the most basic businessmethods employed today to manage future risks, providing a practical example ofthe dynamic of long-term exponential growth at the level of aggregated globaleconomy. Thus, we briefly review the Limits to Growth model, and recent literature

42 R. Pasqualino

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

3.2 System Thinking and Complexity

A complex system can be defined as a “set of mutually dependent elements whichinteract one to another towards a purpose”. “System thinking” is the approachrequired to understand and analyze complex systems. Whereas mechanistic,reductionist or atomistic views give emphasis to the elements that compose sys-tems, system thinking (or organic, or holistic) gives emphasis to the whole. Whensystems are complex, their essential properties emerge from the interaction andrelationships 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 followingterms:

1. Feedback loop—a closed path relationship between an element and itselfthrough the other elements of the system

2. Non-linearity—the typical behaviour of changing response to a perturbationthat was recorded in the past, but with the unprecedented final outcome

3. Path dependency—the tendency to lock in systems into paths that are dependenton the initial conditions, presenting difficulty to invert the path once taken

4. Emergency—The formation of aggregate system dynamics dependent on theinteraction between components and often not intuitive a priori

5. Self-organization—the potential change in system connections dependent ontheir evolution over time

6. Hierarchy—the tendency to structure systems with particular elements havemore importance than others, and generating a dynamic of cascading effects ofsome elements to the others

In such a context, the sustainability challenge requires a mutual synergy betweenmarkets and governments to lead the world towards long-term prosperity. In orderto approach sustainability with a chance of success, it must be seen as a multi-disciplinary challenge involving different systems interconnected through mutualfeedbacks. One of the earlier definitions of sustainable development was providedby the Bruntland report in 1987, as: “development that meets the needs of the

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 43

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

3.3 Short-Term and the Long-Term Exponential Dynamicsof Growth

When we seek information about the state of a national economy, it is hard to comeacross the absolute values of metrics that can assess its performance. These includethe Gross Domestic Product (GDP) (i.e. total output), the total employed, or totalassets within an economy. Most often, we find relative measures of these absolutevalues, such as GDP growth in the past period (i.e. the relative increase in GDP in acertain 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, whentheGDP grows, it shows that an economy is capable of producingmore in comparisonto that measured by past data. This has benefits such as increased potential foremployment, value increase and wealth creation. In fact, if we assume no change inthe state of technology, population size, or variation in the pensionable age, therationale can be made simple. For example, if we assume stagnation (growth equalszero) we could imagine that the retirement of those in old age, will leave space for newentrants in the jobmarket after completing their studies and degrees, whereas negativegrowth would make us expect that less people than those who retire could find jobs inthe economy, generating unemployment. On the other hand, with growth, it could beeasier to create new jobs and employ those new graduates to the economy.

Increasing the complexity, it is possible to assume that while the populationgrows, the only way to generate employment for those people is to create moreeconomic growth than the growth rate in the population. The more health servicesimprove and life expectancy increases, the more workers must accumulate theirpensions 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 forlonger creating additional friction to those new entrants to the job market. Seen inthese terms it appears that persistent, short-term business growth is the answer to alleconomic problems we will face in the indefinite long-term.

But what are the long-term dynamics of short-term growth? The observation thatmade Limits to Growth (Meadows et al. 2003) such an influential piece of work isthat, when projected towards the longer term, short-term growth will have adynamic of exponential growth. If business and population growth are coupled withthe non-sustainable exploitation of ecosystems services, exponential growth canrepresent a dangerous threat to humanity. The best way to feel the power ofexponential growth is to do the calculation. For example, assuming economic

44 R. Pasqualino

growth maintains a constant real growth rate at 3.6% per annum (this is the case ofthe average growth rate of the global economy from the 1960s), it takes about20 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 yearsfor two centuries would correspond to an economy that is 1024 times bigger than itsinitial value, as shown in Table 3.2. Another example, to appreciate the power ofexponential growth, can be found in Box 3.1.

While the population and the economy become bigger, the rate of resourcedepletion and emissions would rise proportionally. Even relatively small initialvalues of an economy and population living non-sustainably on the finite planetwould become impossible to contain without a fast transition towards anon-material extractive and non-polluting economy. Considering that the globaleconomy has already passed the point of no return, it appears how thinking about adoubling in economic size from today’s state in the next two decades, is no morethan 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, followedby a description of the major elements in our economic and financial system thatconstrain the system’s growth, a review of the state of environmental resources andglobal limits, and provides an indication on how business development couldevolve 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 exponentialgrowth is to ask the learner to estimate how thick they think an ordinary sheetof paper can be. It is easy to realize it can be about 0.1 mm thick. As a secondstep, 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 anintuitive 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 thecorrect response at the end of this chapter.

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 intwo 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

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 45

3.4 The Exponential Dynamics of Material GrowthIs Non-sustainable in a Finite World

The Limits to Growth’s thesis was proposed as a scenario analysis using the ad hocdeveloped World3 System Dynamics model. The main message of the Limits toGrowth is that indefinite exponential growth of the global economy is not possiblein a finite planet. If we employ technology and innovation as tools for reducing theimpact of growth on ecosystems’ depletion, then the major outcome will be topostpone (not remove) the time of overshoot to global limits, and the thesis ofeconomic downturn (with the potential collapse of global society) will persist in aworld governed by the growth paradigm. Most importantly, at the level ofsocio-political systems, it normally takes about two decades from the time aproblem is understood by scientists to the actual implementation of policies andtechnologies that can potentially solve that problem. This means that we, as humansociety, will always lag behind the risks caused by growth. The demand for asystem change to assure the economy can operate in a safe space in the indefinitelong-term is likely to emerge and it is too late to act. While monitoring the state ofglobal systems over the past fifty years, the team re-proposed the same thesis in theyears 1991 (Meadows et al. 1992) and 2003 (Meadows et al. 2003), performingsmall adjustments on the World3 model parameters to calibrate correctly with thehistorical 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 from1995 to 2012. The study both confirmed some aspects of truth in the Limits toGrowth, as well as revealed some elements of today’s economic system that couldnot have been predicted in 1972. These include:

• Our world population and economy is growing on a finite planet, and the World3model can be used to assess such a dynamic of growth;

• The pattern for economic growth has shifted to a service driven economy ratherthan mere industrial growth. This compares favourably to what was expected bythe Limits to Growth indicating lower pollution emissions and less harm topeople and the environment;

• Growth still remains the main paradigm the world society relies on, and suchgrowth remains, based on the finite available resources of the planet. Resourcescarcity, as well as negative effects of the system, such as pollution, cannot beexcluded in shaping the future possibilities of our world;

• Additional elements that characterize today’s world were not included in theWorld3, such as possibilities for energy transitions, and climate change. Thesewould need to be addressed separately.

As a result, the thesis of the Limits to Growth could not be rejected, despite thepositive differences between today’s world and what was expected by the team ofscientists in the 1970s. The next section provides insights on the structure of the

46 R. Pasqualino

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

3.5 The Drivers of Economic Growth and Constraintsto 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 governsthe dynamics of money creation and lending in a capitalistic economy. Lendingactivity comes into play when a business (or whatever economic entity) needs to raisetheir cash to allow purchase of assets while de-risking uncertain investments. Theprocess consists of a lender who owns liquidity and provides finance to borrowers inthe form of a loan at a certain fractional cost (i.e. interest rate) normally calculated at amonthly or annual rate. The resulting contract obliges the borrower to pay back thedebt on a periodic fractional basis, while being charged with the interest premium forthe service received. The interest rate represents a measure of the risk of the borrowerto return their debt andmust account for the uncertainty inherent in the market, as wellas the historical capabilities of the debtors to redeem their liabilities. The higher theprobability of failing to repay the debt, the higher is the interest rate, the cost offinancing and the pressure for growth to pay the loan back.

In general, a business uses loans as a financial leverage to invest in the expansionof productive assets that are expected to generate revenue over time. In so doing, aloan increases the resiliency of a firm mitigating their risk of failure in the marketsthey operate in, and has become normal management practice to keep a fraction offinancial assets via borrowing to approach new markets without risking the defaultof their entire business. From the perspective of a lender, the risk of default of theborrower has to be assessed a priori to reduce losses. The default of some producerscan increase the interest rate for all participants in the same sector, thus increasingthe barrier for new entrants. Larger firms, that have access to financial resourcestend to record lower default rates, supporting the dynamic reduction of interest ratesover time. This is an important balancing feedback loop used by banks to stabilizethe economic system today.

Since all business requires debt to operate, then the long-term dynamic at theaggregated system level is the one of exponential growth, where the interest rateimposed to each loan corresponds to the minimum exponential growth rate of theeconomy. This is the fundamental requirement for the stability of an economytoday. When businesses fail in attaining exponential growth rates sufficiently torepay their debt, creditors can renegotiate their contracts for debt return, or applycompound on the financial assets of the borrower. While losses increase interestrates, the job of the financial sector is to avoid such a situation by means of a carefulinterpretation of risks and supporting exponential growth in financial terms andvalue created.

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 47

3.5.2 Financial Markets and Pension Funds Require Growth

If debt can be considered as an unbalancing force towards growth, financial marketscan be seen as the attraction point of such a disequilibrium to sustain growth evenfurther. Financial markets rely on a reinforcing feedback loop which lies at thefoundation of most of the economic activities today. In fact, more money providesliquidity for more investments, which, in turn, lead to more profit, supporting theaccumulation of more money and so on. Their role is to distribute funding from theinvestor to corporations and to the public sector, which must grow to honour theirinvestments. Financial markets operate based on different products, including thetrading of government and household debt (bond or credit market), corporate equity(stock market), primary commodities such as coffee, wheat or oil (commoditymarket), and, since the abandonment of gold standard in 1970s, currency (foreignexchange market). The use of information technology to operate financial trans-actions supported its detachment from the real economy, operating at a much higherspeed without the inertia of real systems. In so doing, speculative behaviour intrading platforms and short-termism to gain high return as fast as possible tookdominance in the system, often with no concern about the possible effects on thereal economy (Capra and Luisi 2016).

An interesting case for the use of financial instruments for long-term sustainabletransitions is represented by the pension funds (or household long-term savings)managed within risk assessment firms. A pension fund represents the withdrawal ofa small portion of a household’s income to be returned to their owners after theyretire. As a result, a pension fund represents the perfect pot of money that can beinvested in the time frame of a sustainable transition due to the long-term invest-ment return. As explained in Silver (2017), pension funds tend to be invested inlow-risk stable growth opportunities, often represented by large private firms andgovernment bonds. Interestingly, the main principle that underpins a successfulpension fund is also the ability to grow exponentially. An economy with zerogrowth would be able to return to workers as much money as that which waswithdrawn, and most likely be insufficient to provide subsistence spending capa-bilities as enjoyed during working life. Thus, slow growth would imply lowerreturns to pension funds. In fact, a major concern for the sustainability transition isin relation to what is called stranded assets, that is valuable assets that might not beusable due to the sustainable transition. In the past forty years, a vast majority ofpension funds were invested in large energy companies, based on coal, oil and gas,which could promise sustainable growth. As explained in the following section, atransition away from fossil fuels is a necessary requirement for a sustainable world,implying disinvesting from those resources, and risking a low return of pensionfunds for the future generations.

48 R. Pasqualino

3.5.3 Productivity and Technology Growth

One of the main arguments against the thesis of the Limits to Growth was in theunderestimation of the potential of technology and productivity growth whenassessing the power of growth in the global economy (Nordhaus 1973). Economistslong established the importance of productivity growth as the most importantdeterminant of long-term economic growth and rising living standards for all(Schwab 2017; Maxton and Randers 2016; Jackson 2016). Productivity growth canbe defined as incremental changes in the ability of one person to produce a certainunit of economic output over time. The relation between productivity growth andeconomic growth was first proposed by Adam Smith in the Wealth of Nations(1776). Smith observed that international trade could support the specialization offirms and cost reduction of output, with the potential to make goods and servicesaffordable for the vast majority of people. At that time, widespread poverty could befound in every corner of the world, mainly because it was not possible to produceenough output for all. Such a thinking could take off thanks to the invention of thesteam engine by James Watt in 1781. Its main benefit gradually allowed the sub-stitution of human and animal muscles with machine systems powered by coal,increasing the productivity of workers over time, and giving birth to today’s cap-italistic economy led by growth (Pasqualino and Jones 2020).

The first and second industrial revolution is characterized by the widespreaddiffusion of technologies in every field, including metallurgy, mechanics, andcement. The second industrial revolution was heavily impacted by the discovery ofcrude oil in 1859, which found applicability due to its cheap price and versatility incomparison to coal. The discovery of crude oil is probably the most importantfactor explaining the well-being and wealth generated in our global economy todate. This was followed by the electrification of machines and the development oftelecommunication technologies, with the expansion of transportation systemsincluding train, airplanes and the automobile. An important innovation in agricul-ture is represented by the Haber-Bosch process in the early 1900s, that allowsfertilisers to be obtained with the use of natural gas, supporting land productivitygrowth.

Starting in the 1950s, the advent of internet, transistors and computers allowedfor the gradual digitalization of human society leading to the cusp of the fourthindustrial revolution which is characterized by the use of disruptive technologies.These include artificial intelligence, robotics, 3D printing, cloud services, internetof things and many more. These allowed an industrial era to move into a servicesera, transforming both human lives, as well as the financial sector. The overall effectof these innovations was a general reduction in the cost of production whileemploying the same amount of people, or, in other words, the ability of producingmore output employing the same people. For example, the resources extractionindustry has seen a gradual cost reduction in extraction of resources despitedepleting in the past fifty years. As we will see in the following section, this trendmight not last forever.

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 49

Alongside productivity growth, innovation has always brought concerns inrelation to the transformation of labour, systemic inequality and the possibility ofreducing employment in the long-term. In fact, a capitalistic economic system mustrely on consumption to support growth. But without the assurance of highemployment demand may fall, generating a downturn on the global supply side(Jackson 2016). According to Capra and Luisi (2016), financial networks conservethe power on the real economy today, with unskilled labour remaining locallyconstrained. On the other hand, in an economy that is driven by information pro-cessing, knowledge creation and innovation, the skilled workers are often involvedin share option schemes as an incentive to retain their loyalty and assure that theirtacit knowledge is passed along the organization. Despite the innovation of the last70 years, historical data shows that labour productivity growth has been fallingglobally (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 from1950 to 2100, divided into six world macro-regions (Asia, Africa, Europe, NorthAmerica, Latin America and the Caribbean, Oceania). Today’s global population isapproximately 7.7 billion people, expected to reach between 9.4 and 10.3 billionpeople by 2050, and between 9.6 and 13.2 billion by 2100 (UNPD 2018).Approximately 800 million people are undernourished mostly concentrating inSub-Saharan Africa and Southern and Eastern Asia (FAO 2015). Population growth

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50 R. Pasqualino

increases global demand for food and commodities, even though the distribution ofgrowth and income is uneven between world regions. In fact, approximately 1.8billion people live in the most developed regions where the population is expectedto remain stable or decrease. This is due to the expectations that highly educatedwomen, involved in professional careers and living in urban areas would find itmore difficult to have large families.

A large portion of population growth is expected to be recorded in Asia, thattoday accounts for approximately 4.5 billion people. It is expected that the Asianpopulation will surpass 5.2 billion people by 2050, and then slowly decrease until2100. The most populous countries in Asia are China and India, at approximately1.4 and 1.3 billion people, respectively, today. While China’s per capita con-sumption is way lower than the one in most developed economies, it is expectedthat it will find benefit from the economic transition, economic growth and wealthcreation. The result will be to bring approximately 300 million people to thethreshold of high income which is experienced in the most developed parts of theworld. This will most likely generate pressures to demand growth (for example, viathe substitution of rice consumption with meat) and determine a slow-down inpopulation growth leading to a similar dynamic experienced in the western world(IIASTD 2009). On the other hand, India, that will not benefit from the samepositive trend as China, is expected to remain mostly poor with continuousexpansion in population growth, becoming the most populous country in the worldwith about 1.6 billion people by 2050. African countries will register the largestincrease in the human population, moving from today’s 1.2 billion people to 2.8billion in 2050, and above 4 billion by the end of the century. Among those, Nigeriais expected to record exponential growth over several decades, becoming the thirdmost 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 pressuresto supply enough output to feed people and the economy. The energy system istoday 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 and2015, 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 extractedmore cheaply have priority over those that are harder to extract. When the cheaperoptions get depleted, prices will start to increase, justifying investments to developthe technology necessary to extract the more expensive ones. The era of cheap oiland coal have found great benefit from these dynamics over history. While an oilwell 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

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 51

injecting liquid into subterranean rocks and extracting oil with the help of a longpipeline and systems of pressures. Of course, the capital intensity of the secondmethod is more expensive to that people enjoyed a century ago. Today, geologistshave found most of the reserves, and no major oil wells have been found since the1970s (Wijkman and Rockstrom 2013), thus assuming that the only dynamic goingforward will be the one of resource depletion and increasing cost of energy.

Two common indicators used to measure the availability of resources in theground are the RP ratio (resources to production ratio) and the EROEI (energyreturn on energy invested). The RP ratio is well established but not very good wheninterested in the dynamics of depletion. It consists of calculating the ratio betweentotal economic known reserves in the ground and present yearly production. Theratio is an intuitive measure that expresses the number of years that it is possible toassume 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 between1880 and 2000, and aligns it with the relative RP ratio calculated at each year by theauthor. For simplicity in the calculation, it is assumed that geologists would haveknown the total amount of reserves since 1880. As Fig. 3.2 shows, the shape of coalproduction followed a bell shape curve, growing during the nineteenth century,slowing growth and peaking around the 1930s, and then declining all the waytowards the end of the twentieth century. The reserves to production ratio indicated160 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 productionleft by 1930 (50 years later). On the other hand, after the peak is reached, theproduction declines because cheaper ores are depleted, and it requires more effortand 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 GovernmentDepartment of Business, Energy and Industrial Strategy 2018)

52 R. Pasqualino

provide a distorted metric to assess the time an industry can keep operating bothduring the growth and decline of the industry.

A better indicator than the RP is the EROEI, which allows to assess how manyunits of energy can be obtained by employing every single one of them. Followingthe same perspective of depleting resources, higher EROEI sources would beextracted before the low EROEI resources. In general, a source is economical forproduction 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 toextract than the energy obtained. For example, in the case of crude oil, EROEI hadbeen between 50 and 100 for the most of the twentieth century, decreasing to 15 to20 during the last decades due to depletion (Bardi 2014; Wijkman and Rockstrom2013).

3.6.2 Agriculture

Similarly, to fossil fuels, population and economic growth require more food to beproduced. Most importantly, the relationships between fossil fuels and food outputdescribe a physical dependency mostly due to the technology adopted today toincrease land productivity while injecting fertilisers into the land. In fact, it isestimated that 30% of the cost of production of crops is linked to oil and gas, whichare fundamental to extract nitrogen from ammonia and subsequently produce fer-tilisers (IIASD 2009). In other words, it is possible to say that every calorie ofenergy contained in our daily food requires seven to eight calories of energy fromfossil fuels to be produced (Wijkman and Rockstrom 2013). As a result of all theabove, a decrease in EROEI of oil will increase the cost of energy extraction, andthis will impact the price of food directly.

Agriculture consumes approximately 70% of all freshwater we use for foodproduction as well. When analyzed from the sustainability perspective, agricultureremains the most complex sector of our economy. When accounting for defor-estation linked to agricultural land expansion, agriculture is the first sector ofanthropogenic emissions, and thus, the first cause of climate change. Together withfossil fuel production, they account for 50% of total emissions globally (IPCC2014). On the other hand, agriculture is the major source of employment and wealthcreation in developing countries, employing 40% of the worlds labour force andbringing hope for poverty reduction. The next section reveals the relationshipbetween agricultural production, demographics and climate change.

3.6.3 Climate

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

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 53

direct consequence of growth. Global concern with climate change today relates tothe variety of systemic risks linked with the imbalance in the climate system sta-bility, 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 beuneven across the world, impacting more, those countries that influenced it theleast. In particular, agriculture represents both the first cause, as well as the mostvulnerable sector to climate change. Temperate regions are expected to be lessimpacted, with short-term increase in crop yield due to the increase in carbon in thetopsoil and a more humid climate. However, medium to long-term projectionsexpect a productivity fall due to increased diseases and infestation (Wijkman andRockstrom 2013; IPCC 2014). In addition, short-term shocks such as shifts inweather patterns, extreme weather events and rising sea levels will have negativeconsequences for food output over the medium to long period.

IPCC (2014), predicts a reduction in available freshwater in several regionsincluding southern Europe, northern Africa, parts of western Africa, southernAfrica, southern Australia, the north-eastern parts of Latin America and parts ofwestern North America. Extreme weather events, such as hurricanes, floods, or heatwaves (Wijkman and Rockstrom 2013), are becoming more frequent and violent inthe Tropics than in the past decades, increasing food loss and land erosion whichultimately will impact on food availability and international prices (Stern 2006;IPCC 2014; Lloyd, 2015).

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54 R. Pasqualino

Aware of these issues, 196 country representatives met in Paris, in 2015, at the21st Conference of Parties (COP21), as part of the United Nations FrameworkConvention on Climate Change (UNFCCC) to set a climate target at +2 degreesCelsius of global temperature increase, and commit to implementing policies toachieve this goal. Such a target could be met by keeping the average carbonconcentration in the atmosphere below 450 ppm (parts per million) of carbon. It isworth noting that such an objective would imply an 80% reduction in greenhousegas 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 astable condition. Rather ecological feedback loops could be activated leading theworld systems towards the path of +5 degrees (the so-called Hothouse effect)without the requirement of any human additional emission, causing irreversibledamages to ecosystems and economy. Global scenarios addressing the impact ofHot 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 inthe areas of the world that will be most impacted by climate change, and charac-terized by food poverty and undernourishment. This will create pressures frommigration from poor to rich countries, and the potential cause for conflicts andpopulist sentiment across the borders. On the other hand, it is worth noting that theproblem of food security today is not a matter of producing enough food for all thepeople, but rather a matter of economic systems and supply chain inefficiency indistributing food output. Today’s supply chains waste approximately 30% of theentire food product from land, one-third of which could suffice to satisfy the fooddemand 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, theplanetary boundaries framework (Fig. 3.4), shows that climate change representsonly one of the nine thresholds that, as humanity, we are supposed to not overpassto 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 isolationbut looking at the full picture. The global challenge of climate change is in anuncertain risk zone. However, thresholds that are far beyond safety relate to agri-culture. These include the continuous increase of production via the use of fertilisersand genetic biodiversity. The first has already unbalanced the phosphorus andnitrogen cycles (both standard fertilisers), and started to negatively impact oceanecosystems and fisheries through eutrophication of poisonous algae, whereas thesecond was mostly led by the use of pesticides to protect the food we eat anddecrease food production loss.

Among the thresholds, climate change, ocean acidification and stratospheric ozonedepletion are all global in nature. Biosphere integrity, land-system change, freshwateruse, biochemical flows, and atmospheric aerosol loading remain regional in natureand solutions must be approached within countries or specific areas of the world.

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 55

3.7 Current State of the Energy Transition

Given the above picture, it appears how the transition towards sustainability mustaccount for constraints in the ecological sphere and rely on system thinking to besuccessful. Whereas each of the planetary boundaries might require specific skillsand know-how, in this chapter, we focus on just one of the elements that can beconsidered a fundamental leverage point for the sustainability transition. That is theenergy transition towards clean tech and green finance economy. In so doing, in thissection, we provide an overview of the state of global green energy.

Table 3.3 shows the current energy mix of fossil fuels, renewables and nuclearenergy divided between electricity generation, heating and transportation at theglobal level (REN21 2018). As it is possible to see, the green energy sector is waybehind 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 is70% supplied via hydroelectric, that is a mature technology. Wind energy repre-sents 15%, bioenergy 8.4%, solar photovoltaic 5% and geothermal 1.6% of totalgreen energy (IRENA 2018). Most of the hope for green energy transition relies onthe exponential growth of solar and wind energy technology to supply the elec-tricity necessary to also sustain the global transportation and heating energy supply.

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

56 R. Pasqualino

As these data show, these two sectors represented 0.8% of the total energy supply in2016.

In fact, 26.2% of total heating energy consumption is represented by renewableenergy. However, 90% of this latter comes from the combustion of traditionalbiomass and of timber in developing and underdeveloped countries (IEA 2017a, b).The sustainable development goals (UN 2019), show that indoor air pollution inlow-income countries is the second largest cause of death after HIV due to theinadequate ventilation for cooking and heating. The rest of heating supply fromrenewables is represented with 2.1% coming from solar finding applications inhousehold heating at low temperatures, 0.5% from geothermal, and 6.1% frommodern biomass plants (REN21 2018).

The transportation sector is mostly run with oil, and a tiny 3% divided between2.85% in modern biofuels and 0.15% in electric vehicles (IEA 2017a, b). Thetransportation sector can be further divided into 76% represented by road vehicles,12% marine, 11% avionic and 2% rail sector. (REN21 2018). The transportationsector being responsible for approximately one-third of total emissions fromenergy, 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 toeconomic sustainability, the exponential growth of the green energy sector seems tobe a major hope on the way to sustainability. Of course, exponential growth willalways find limits, coming both from the social and the environmental sphere,making it an unprecedented challenge to be faced by businesses seeking profitwhile addressing environmental sustainability.

3.8 Sustainable Development Goals and Growth

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

Table 3.3 Global energy mix in 2016

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18 53 29 100

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 57

transition towards a sustainable economy. The aim of the SDGs is to providebalance in the world society, demanding governments, businesses and citizens toact in synergy toward the best performance of all of them. Ideally, each organi-zation should target the larger number of SDGs simultaneously, since targetingsingle 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 tosustainability at all. In fact, targeting growth without considering the others wouldcorrespond to act in business as usual condition along the way. While, on the otherhand, approaching simultaneously indicators 13, 14 and 15 (climate action, lifebelow water and life of land respectively), this would require thinking carefullyabout the maximum synergy possible between the planetary boundaries frameworkand economic growth, leading towards a more meaningful use of the indicators.

3.9 What Should a Corporate Do for Runninga Sustainable Business Today?

Short-term focused business as usual growth of the past fifty years has graduallycreated wealth in the global economy, while causing concern for the future gen-erations that must deal with sustainable challenge as a short-term issue today. Theway of thinking of the past must be changed to perform well in this challenge, andmust be approached in synergy between managers, policymakers and scientistsalong the way. System thinking and appreciation of complex systems science toapproach these problems is a way to change the mindset required to deal with sucha set of issues.

Pasqualino et al. (2015) has shown that the concern of the Limits to Growth withexponential growth in a finite planet could still hold true today. However, Pas-qualino et al. (2015), also showed that the overall economic system has developedbetter than expected creating more wealth with the services sector rather than justmaterial industrial growth. This is a positive trend of growth, and businesses shouldaim to outperform on this activity in the future.

On the other hand, constraints to the limits to growth mission are also presentedas elements that form the foundation of our economic and financial system. Theseinclude 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 shapinglong-term investment towards global sustainability. Productivity growth and tech-nology development in the past fifty years have partially helped in dealing withworld limits, and still remain an engine for wealth creation, despite not beingsufficient to stop damaging ecosystems to date. While the population grows in theareas of the world that will be most impacted by the negative consequences ofapproaching global environmental limits, concerns emerge around the areas of foodsecurity and mobility of people in the safe areas of the planet. These include the riseof social response with a likely increase in populism and conflicts worldwide.

58 R. Pasqualino

The limits of fossil fuels and agriculture have been proposed in light of recentliterature, together with the climate problem, and the overall frame of the planetaryboundaries report. These show how the challenge ahead is a complex issue, thatrequires an important synergy between the public and private sectors. The Sus-tainable Development Goals have been presented as a good complex system tool toapproach this transition, and corporate biases to support the correct use of theseindicators 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 collaborationbetween businesses and government can provide. It is worth noting that if youcannot measure it, you will never be able to improve it. A great challenge of thesustainable transition is that problems are hard to measure, and thus are mostdifficult to approach with clarity. The SDGs help in this context, even though eachorganization should develop and create indicators that fit to them, linking, forexample, their balance scorecard or accounting metrics with complex systemmetrics such as planetary boundaries and SDGs. Implementation of practices thatsupport this transition at the micro scale could provide benefits as well, whilealigning business objectives with the larger sustainability frameworks as providedin this chapter.

Over the long run, continuous development of novel technologies that improveproductivity will be an important factor, in particular, when they can generate morejobs throughout the supply chain than the ones they directly substitute. This trend isimportant for reshaping the entire economic system, in particular, where theexponential growth of the green sector should be supported and incentivized aspossible. Alternatives to the standard energy framework might include the decen-tralized approach of creating local solutions of green energy rather than employinglarge energy plants. Transportation sector could be improved by giving moreemphasis to rail when distance allows, and substituting air travel with video con-ferencing tools when possible. Food security can be supported with novel tech-nology that aims at improving the match between supply and demand and targetedto the reduction of food waste in the global supply chains. A service economyshould take a dominant role, creating value beyond the mere material consumptiongoing forward.

Short-term business as usual growth, while creating wealth and eradicatingpoverty along the way, has also caused concerns for environmental limits. The sizeof the challenge appears not to be a simple solution to be tackled by the freemarket alone, and the constant and persistent collaboration between governmentsand businesses will be an important element for the success of this transition goingforward.

Solution to Box 3.1 problem

The answer is 439.804 km, that is in proximity of the distance between the Earthand the Moon.

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 59

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 onClimate 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 globalfood supply. Lloyd’s Emerging Risk Report 2015, London.

Maxton, G., & Randers, J. (2016). Reinventing prosperity: Managing economic growth to reduceunemployment, inequality and climate change. Vancouver, Canada: Greystone Books.

Meadows, D. H., Meadows, D. L., & Randers, J. (1992). Beyond the limits: global collapse or asustainable 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/vital-signs/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 ofSciences, 115(33), 8252–8259.

Stern, N. (2006). Stern review on the economics of climate change, 2006. London: Government ofthe United Kingdom.

United Nations Population Division Report. United Nations, department of economic and socialaffairs. 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 RuskinUniversity, UK and Chief Innovation Officer of Exoshock Ltd, a global risk analysis companybased on Roberto’s research. With background and culture in industrial engineering, Roberto’sresearch interest is in system dynamics modelling of industrial policies for the analysis of financialrisk and sustainability. Roberto developed his own Economic Risk Resources and Environmentsystem model to quantitatively capture the financial risks emerging from the interaction betweenthe dynamics of growth and global ecological constraints during his Research Fellowship, underthe Economic and Social Research Council CUSP project. This allowed him to create his owncompany Exoshock Ltd to help businesses to deal with those environmental and economic shocksthat 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, RoutledgeOxford” co-authored with Professor Aled Jones. Roberto’s expertise encompasses sustainablesupply chain management, business practices, risk assessment, circular economy, energytransitions, 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, MScand MBA levels since 2013.

3 Thinking in Systems: the Long-Term Impacts of Short-Term … 61

Part IIThe Business Case for Corporate

Sustainability

4A Modern Definition of CorporateSustainability

Paolo Taticchi and Melissa Demartini

Abstract

In the last 70 years, the topic of sustainability in business has been defined inmany different ways. This chapter provides a review of the relevant concepts andframeworks, 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 shouldcontribute to a ‘sustainable development’ has been debated for decades. As aconsequence, 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, UKe-mail: p.taticchi@ucl.ac.uk

M. DemartiniAdjunct Professor of Operations Management and Sustainability, University of Genoa,Via all’Opera Pia 15, 16145 Genoa, Italye-mail: melissa.demartini@dime.unige.it

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 licenseto Springer Nature Switzerland AG 2021P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice,Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_4

65

with it have shifted over the years. In order to provide an overview of ‘modern’Corporate Sustainability, this chapter summarises the evolution of the relevantliterature and practice in the twentieth and twenty-first centuries. To do so, three keyperiods 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 Sustain-

ability 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 theimportant role played by business in society).

Based on the above, the concept of ‘sustainable value’ is debated and an updateddefinition 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 ofCorporate Social Responsibility (CSR) was forged in 1953 by American economistHoward Bowen in his publication ‘Social Responsibilities of the Businessman’. Inhis book, Bowen remarks the importance of a fundamental morality in the way acompany behaves towards society and the relevance of ethical behaviour towardsstakeholders. Moreover, he highlights the importance for business executives andacademics to consider CSR as a subject part of strategic planning and managerialdecision-making.

However, it wasn’t until the 1970s that CSR truly became widespread. Thisdevelopment was favoured by economist and Nobel Prize winner Milton Friedman,who is famous for his ‘Social Responsibility of Business’ theory elaborated in1970. This theory is one of the most debated still today. Friedman argues that ‘In afree-enterprise, private-property-system, a corporate executive is an employee ofthe 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 tothe basic rules of the society, both those embodied in law and those embodied inethical custom’. Friedman claims that companies should not have social responsi-bilities per se and if individual managers follow the principle of social responsibilitythen, by following this principle the company does not have the interest ofstockholders at heart. For example, if a manager decides not to increase productprices for the good of society (i.e. not increase inflation), this could have a negativeimpact on the company’s profits and employee wealth. Or a company that workstowards reducing pollution beyond what is necessary for the corporation, is not

66 P. Taticchi and M. Demartini

acting in the interest of stockholders, as this could have an impact on costs andproductivity. Friedman asserts that in these cases, corporate executives are spendingsomeone else’s money for a societal interest, in fact these actions have a negativeimpact on stockholders. Stockholders should decide by themselves how to spendtheir money. Friedman’s view, which was built on the principles of popular AgencyTheory (Eisenhardt 1989), was reflecting a view of business and society which istoday 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 1990sand the Triple Bottom Line Concept

As a general statement, it should be observed that very few unique contributions tothe definition of CSR occurred in the 1990s, but in spite of that, the topic receivedgreat attention in this decade due to a number of corporate scandals that raised theattention of business practices, such as the one faced by NIKE in 1996. Carroll in1979 developed a popular CSR model which is based on four categories of businessperformance: economic, legal, ethical and discretionary. Carroll argues that eco-nomic responsibility is first and foremost, as companies have the responsibility toproduce goods and create profits. Legal responsibility relies on the concept thatcompanies have to create profits by fulfilling society rules. While ethical respon-sibility represents additional behaviours that are not necessarily codified into lawbut that companies are supposed to fulfil. Finally, discretionary responsibilities ‘arethose about which society has no clear-cut message for business […] they are left toindividual judgment and choice’ (Carroll 1979). In 1991, Carroll reviewed his CSRmodel, adjusting the definition of the discretionary element as ‘philanthropic’ andsuggesting that it embraced ‘corporate citizenship’. Therefore, the model becamecomposed 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 inthe 1990s started engaging with philanthropic activities and CSR initiatives with thegoal of being recognised as ‘good corporate citizens’. Firms and a variety ofindustry stakeholders also started valuing the importance of ethical approaches inbusiness and the positive role firms can play. However, very often, the driver of thiscommitment was the desire to improve the reputation of the business (hence nosurprise that this approach led to many scandals and cases of greenwashing), andnot the real objective of minimising the negative impacts of business activities onsociety and/or the environment. The main limitations of Caroll’s CSR frameworkcan be today identified as

4 A Modern Definition of Corporate Sustainability 67

– The logic of ‘giving back’ is not enough. For large corporations that are highlyprofitable, it is relatively easy to engage in philanthropic actions (e.g. by sup-porting social and/or environmental projects with a percentage of revenue orprofit). While this type of CSR creates a positive impact on theenvironment/society, it doesn’t help organisations to change their mindset and tore-think their business strategies and value creation processes. This explainswhy, still today, many firms look at CSR/sustainability as ‘another cost’ of doingbusiness or a ‘another tax’.The framework is not explicit in that the CSR initiatives developed by corpo-rations 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 thebusiness.

In 1994, the concept of ‘triple bottom line’ (TBL) coined by John Elkingtonstarted changing the narrative on CSR. In fact, at the core of his thinking was theidea that ‘A sustainable development involves the simultaneous pursuit of eco-nomic prosperity, environmental quality, and social equity’ (Elkington 1998). Thetriple bottom line approach argues that a company has to take simultaneous accountof profit, planet and people which represent the economic, environmental and socialdimensions of responsibility. Only, if a company truly manages all these dimen-sions of performance can it be considered sustainable. First and foremost, profit isthe precondition for a healthy company and, therefore, an enabler of the positiveimpact a business can have on society and the environment. Secondly, the socialdimension of the TBL covers the health and safety of customers, the well-being ofemployees and the protection of society at large. Finally, the third dimension of

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

68 P. Taticchi and M. Demartini

TBL, the environment, is related to the protection of the planet. The planet is host toboth people and companies. If companies do not learn to focus their attention moreon the planet and prevent the pollution of the environment, they will damage notmerely the earth, but also themselves. The environmental dimension of TBLaddresses not only the problem of pollution, but additionally the consumption ofmaterials, limited natural resources and energy.

The TBL framework undoubtedly represents the foundation of what we describeas ‘Modern Corporate in this chapter. In fact, Elkington’s work made a dent in thebusiness world, changing the narrative on sustainability, emphasising the impor-tance of long-term economic, environmental and societal goals rather than ashort-term view of business. Moreover, the TBL framework created an importantstimulus for the practice of sustainability reporting that started emerging in thoseyears (Fig. 4.2).

However, the TBL received criticism too, the main limitation being that the threedimensions are very broadly defined, hard to measure and perceived as discon-nected dimensions of performance rather than the result of an integrated approach.Moreover, the TBL framework wasn’t clearly connecting or disconnecting from theCSR theories previously developed, therefore, creating confusion in terms ofpositioning 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 anumber of concepts/practices that have emerged since the early 2000s and dominatethe latest thinking today. In particular, we refer to three concepts: the ‘ESG’(Environmental, Social and Governance) concept, largely popular in the financialworld; the ‘Shared-Value’ concept proposed by Porter and Kramer and the conceptof ‘Purpose’ lately promoted by several leaders in business and society.

Fig. 4.2 Elkington’s triplebottom line framework

4 A Modern Definition of Corporate Sustainability 69

4.1.3.1 Environmental, Social and Governance (ESG)The concept of ESG refers to the integration of environmental, social and gover-nance factors into investment processes and more widely into decision-making.This might include how corporations respond to climate change, how efficient theyare with water management, how effective their health and safety policies are in theprotection against accidents, how they manage their supply chains, how they treattheir workers and whether they have a corporate culture that builds trust and fostersinnovation (Kell 2018).

The ESG concept was heavily promoted by the late UN secretary general KofiAnnan, who pushed environmental, social and governance issues to the forefront ofthe 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 Principlesfor Responsible Investment (PRI).

The PRI is today, the world’s leading proponent of responsible investment, withover 2000 members representing over $80 trillion assets under management(Fig. 4.3).

The ESG framework and the PRI movement has transformed the world offinance. Today, more and more evidence indicates that asset owners who integrateESG considerations into investment decisions, not only promote environmentalprotection, healthier societies and good governance, but have a positive andrecognisable impact on their beneficiaries’ bottom lines too (Brigandi et al. 2018).

Indeed, the popularity of the ESG framework is built on the Socially Respon-sible Investment (SRI) movement that has been around much longer. But unlikeSRI, 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 theassumption that ESG factors have financial relevance and, therefore, should beintegrated in all investment decisions, used in the design of strategies and a qualitycriterion to assess the management of a company.

Fig. 4.3 PRI signatory growth (Source PRI)

70 P. Taticchi and M. Demartini

The growth of ESG has resulted in the creation of specific ESG rating indexessuch as the Dow Jones Sustainability Index, the FTSE4Good Index, BloombergESG data, the MSCI ESG Indices and the GRESB benchmarks.

All this has pushed corporations to integrate sustainability and ESG factors intotheir decision-making processes, business strategies and business models.

4.1.3.2 The Concept of Creating Shared ValueStill in the 2000s, the concept of ‘Creating Shared Value’ (CSV) introduced byPorter and Kramer (Porter and Kramer 2006, 2011) gained credibility, legitimacyand momentum as a new way of doing business. The two academics argue thatcompanies should look at sustainability based on the principle of shared value,which involves creating economic value in a way that also creates value for societyby addressing its needs and challenges. (Porter and Kramer 2011). Shared value isnot social responsibility, philanthropy or even TBL sustainability, but a new way toachieve economic success by reconnecting business to social progress. Hence, thedifference with CSR is clear: while CSR initiatives focus mainly on ‘giving back’ tosociety and reputation, CSV pushes organisations to re-think managerial practicesand business models so as to create a competitive advantage and ultimately prof-itability. CSR is usually felt as a cost, not as a value, while, CSV lies at the core ofnew business opportunities (e.g. establishing new markets, improving profitability,increasing brand reputation and enhancing competitive positioning). With theconcept of CSV, sustainability is fully integrated into business strategy as com-panies aim to create economic value by creating social value. Moreover, Porter andKramer (2011) also argue that capitalism is an unparalleled vehicle for meetinghuman needs, improving efficiency, creating jobs and building wealth, but a narrowconception of capitalism has prevented business from harnessing its full potential tomeet society’s broader challenges.

4.1.3.3 A Sense of Purpose in BusinessThe need for purpose is one of the defining characteristics of human beings andtoday there is a movement towards employees seeking a job that gives them a senseof purpose and customers looking to buy from companies whose brands are basedon values they can identify with. Whether viewed from the employee or consumerperspective, purpose has become a powerful force giving companies a competitiveadvantage (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 sustainabilityhas emerged both in companies and people. In this context, a particular loud voiceis the one of millennials (or Generation Y—which identifies people born approx-imately between the years 1981–1996) often referred to by the media as the

4 A Modern Definition of Corporate Sustainability 71

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

4.1.4 Defining Sustainable Value and ‘Modern’ CorporateSustainability

As highlighted in 4.1.3, our ‘modern’ understanding of ‘Corporate Sustainability’ isthe result of the diffusion and acceptance of a number of principles that describesustainability in business and the role played by companies in society. Indeed, theneed for a better definition of ‘value’ in the modern world is becoming increasinglycritical (Freeman et al. 2018). Today, attention has turned towards sustainable valuecreation, or co-creation with stakeholders over a longer period of time (Chandler2016). In a recent literature review, Cardoni et al. (2020) identify the most populardefinitions of ‘sustainable value’. The one from Hart and Milstein (2003) stands outin the list:

‘The global challenge associated with sustainable development, viewed throughthe appropriate set of business lenses, can help to identify strategies and practicesthat contribute to a more sustainable world while simultaneously driving share-holder 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 tolink the topic of sustainable value creation to business models and proposed theso-called ‘‘value mapping tool’’, which aims at supporting companies in theexercise of creating sustainable value.

Building on the latest thinking of corporate sustainability, and the emergingliterature on sustainable value creation, we propose, therefore, the following defi-nition of Corporate Sustainability.

72 P. Taticchi and M. Demartini

Corporate Sustainability

Corporate sustainability is an integral approach to business aimed atenhancing competitive positioning and profitability through the sustainedcreation of shared value, co-creation practices with stakeholders and theintegration of ESG factors in decision-making.

© Taticchi and Demartini (2020).

4.2 Conclusions

This chapter has provided a review of the relevant sustainability concepts andframeworks developed in the last 70 years, with the goal of describing the buildingblocks of ‘modern’ corporate sustainability and providing a comprehensive defi-nition. Indeed, a clear understanding of Corporate Sustainability is essential todiscuss practice and the integration into business strategy.

References

Bocken, N. M., Short, S. W., Rana, P., & Evans, S. (2014). A literature and practice review todevelop sustainable business model archetypes. Journal of Cleaner Production, 65, 42–56.

Brigandi, T., McCaffery, P., & Kovarsky, P. (2018). Who cares (about ESG) wins. Retrieved April17, 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 structuredliterature review. Sustainability, 12(2), 615. https://doi.org/10.3390/su12020615.

Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. Academyof 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-the-new-competitive-advantage/#4c27c027711f.

Chandler, D. (2016). Strategic corporate social responsibility: Sustainable value creation (4thed.). Los Angeles, CA, USA: Sage. ISBN 978-1-5063-1099-2.

Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of ManagementReview, 14(1), 57–74.

Elkington, J. (1998). Partnerships from cannibals with forks: The triple bottom line of 21st-centurybusiness. Environmental Quality Management, 8(1), 37–51.

Freeman, R. E., Phillips, R., & Sisodia, R. (2018). Tensions in stakeholder theory. Business andSociety, 59(2), 213–231.

Hart, S. L., & Milstein, M. B. (2003). Creating sustainable value. Academy of ManagementPerspectives, 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.

4 A Modern Definition of Corporate Sustainability 73

Lazarus, S. (2018). Deloitte’s 2018 Millennial survey: Industry 4.0, employer loyalty and businessethics. Deloitte. Retrieved April 17, 2020, from https://spendmatters.com/2018/07/16/deloittes-2018-millennial-survey-industry-4-0-employer-loyalty-and-business-ethics/.

Porter, M. E., & Kramer, M. R. (2006). The link between competitive advantage and corporatesocial 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 onsustainability and competitive advantage, strategy, consulting, and the future of cities.Before UCL, Paolo spent six years at Imperial College London where he led top-rankedprogrammes such as the MScManagement and the Global Online MBA. Alongside his work atUCL, 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 appointmentsin top universities like EADA, ESAN, and NYU. Paolo’s research on performance measurementand management, business networks, and corporate sustainability is internationally recognised. Hehas 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 organisationsin 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 andopinions have been featured over 200 times in media outlets like The Financial Times, Forbes, TheTelegraph, Semana Sostenible, La Republica, Inspire, Sole 24 Ore, La Nazione, Corriere dellaSera, La Stampa, RAI, Sky News, Sky News Radio, Mediaset, and CNN. In 2018, Paolo waschosen as one of Poets & Quants’ top 40 business school professors under the age of 40. In thesame 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 andIndustry in the UK.

Melissa Demartini is an Adjunct Professor of Operations Management and Sustainability at theUniversity of Genoa and Visiting researcher at Imperial College Business School. Her researchinterests 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 currentlyteaches undergraduate, graduate and MBA students, with teaching activity covering generalmanagement, operations management and sustainability. So far, she has taught in universities inItaly and the UK. She has worked as a project manager for the EU’s Advanced Manufacturing inCentral Europe (AMiCE) project since 2017. She is also industrial sustainability coordinator forthe Intelligent Factory Cluster’s Roadmap Project—an Italian government initiative which aims todevelop a national strategy to improve the international competitiveness of manufacturingcompanies. Outside of the academy, Melissa has significant consultancy experience, she is aconsultant for Ansaldo Energia’s ‘Lighthouse Plant’ project. She has also worked as a consultantfor Siemens, gaining experience in strategy, operations, internationalisation and business planning.

74 P. Taticchi and M. Demartini

5Sustainability Facts

Melissa Demartini and Paolo Taticchi

Abstract

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

Keywords

Sustainability facts � Sustainability challenges � Engagement challenges

5.1 Introduction

This chapter provides insights into the world of sustainable business and aims toidentify common perceptions and practices of corporate sustainability professionals.As recently reported in large surveys, realized by Globescan in collaboration withBSR 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, Italye-mail: melissa.demartini@dime.unige.it; m.demartini@imperial.ac.uk

SDU Centre for Sustainable Supply Chain Engineering, Dept. of Technology and Innovation,University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

P. TaticchiLondon, UKe-mail: p.taticchi@ucl.ac.uk

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 licenseto Springer Nature Switzerland AG 2021P. 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 onSustainability 2019 (Kingo and Lacy 2019) or the Sustainability’s deepeningimprint 2017—McKinsey & Company (Bové et al. 2017), the challenge for com-panies lies in their ability to capture opportunities and transform them into value fortheir shareholders and stakeholders. The following is an overview of the main factswhich 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 and2019, they present insight into the world of corporate sustainability and providedifferent points of view from sustainability professionals by including observationsof the changes in the social landscape. The survey included participants fromdifferent companies, they were fully carried out online, with data gathered betweenMarch and May 2018 and between June and September 2019. Different sectors andregions have been considered: (i) sectors, companies are in the field of ConsumerProducts, 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 Man-ufacturing, 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”, andOthers. 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 forcorporate. 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: sus-tainability professionals highlighted the importance and the necessity to worktowards organizational integration and introduce new approaches to strategy andgovernance. More than half of companies say that sustainability is among thetop five priorities for their CEO, with a quarter reporting that it is among the topthree priorities.

3. The frontrunner role of Sustainable Development Goals (SDGs), which aredriving companies in redesigning their strategies and goals.

4. Companies still have a limited view of the value chain impact. However, acrossa range of areas including human rights, climate, inclusive growth, and women’s

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empowerment, company efforts have intensified within their own operations andto some extent in their Tier 1 supply chain.

5. Sustainability, due to its nature, demands cross-functional collaboration.6. Need to improve sustainability communications to consumers.

Figure 5.1 highlights the main priorities which are fuelling the strive towardssustainability on behalf of companies. Particular emphasis is placed on three ofthese:

2. Climate change. With public demands for climate action at an all-time high, andwith the scope and speed with which transformation must happen, it is crucialthat companies, when building their corporate sustainability strategy, placeclimate mitigation at the forefront (as highlighted in Chap. 1).

3. Ethics. Ethical principles serve as the basis for modern concepts for work,business, and organizations pushing the priorities of both the individual and thecorporate beyond more traditional aims of profit and shareholder enrichment.The key to good business is sustainable and inclusive growth. Companies whichalign their business growth strategies to their ethics are a step ahead infuture-proofing their business.

4. Diversity and Inclusion. Companies have realized that there is more to diversityand inclusion (D&I) than just a “feel good” factor, though most still have a longway to go to achieve their goals. Employees are becoming more vocal and theyare, to a greater extent, challenging their employers when it comes to diversityissues. For investors, diversity is a signal of a company’s potential for long-termsuccess. It demonstrates their ability to attract the best talent, be more innovativeand competitive, and use their influence to push with determination for genderand racial/ethnic diversity. D&I has never been in the limelight within theworkplace in the way it is today. The most successful strategies are sustainable:

Fig. 5.1 Corporate sustainability priorities (Source Globescan The State of Sustainable Business2019)

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they are supported by the entire organization, measurable overtime, andembedded into existing processes.

Harmonizing sustainability and business means redesigning and redefiningstrategy and operative processes to deal with the changes and meet the needs andexpectations of both the market and society. The ultimate goal being that ofincreasing competitiveness and supporting lasting profitability. Today, more thanever, it is necessary to integrate sustainability into business practices in order tofutureproof business (Fig. 5.2). Organizations are becoming ever more aware of theneed to plan for and address global megatrends (Chap. 1)—drivers which canradically change how they operate in the future. It is imperative for businesses to gobeyond their own challenges and take into account wider global pressures that arechanging the way the world works.

Another key finding from the survey realized by Globescan (Fig. 5.3), is thatcompanies 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 rele-vance of reputation and, more in general, of intangible value. These activities,such as reputation, trust, and goodwill, need to be managed in order to createvalue, but the evidence is that their management is more complicated thanphysical management. Therefore, today, the value of a company is strictlyconnected to the value of its intangible assets. In the last few years, there weremany cases of losses related to reputation because of the power of social mediaand the internet, such news can go viral and reach global proportions in minutes.

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

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Examples of recent cases include: (1) Uber that in 2018, was hit by hugereputational damage due to claims of sexual harassment resulting in a $1.9million settlement. (2) Wells Fargo that in 2016, created fake customer accountsto modify mortgages without customer authorization and charged customers forinsurance they didn’t need. (3) The Cambridge Analytica scandal in 2018,involving Facebook, which caused the violation of privacy of 87 millionFacebook users and the unethical use of data to influence political elections inseveral countries. Reputational risk is the result of different malpractices directlylinked to the topics of ethics, integrity, and sustainability. This explains whycompanies and investors are paying greater attention to Environmental, Sus-tainable, and Governance (ESG) factors. Companies with a strong ESG per-formance are less risky to invest in and subject to less reputational risks andscandals that could affect financial performance.

• Customer demand: the demand for more sustainable products and services is aclear trend in recent years. Companies are subject to the pressure of customers,among other stakeholders. In this regard, the millennial generation has demon-strated great interest in environmental and societal problems, pushing manybusinesses around the world to address the challenge of corporate sustainabilityin a serious and meaningful way.This had led companies to rethink their products and services, and very often theentire business model, up to the point that now “Sustainability Oriented Inno-vation (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 ofcircular economy, in which product materials are kept in play for as long asproductively possible, then recovered, and reused at the end of life. Dell adoptsalternative, recycled and recyclable materials in its product and packaging design,

Fig. 5.3 Drivers of Sustainability efforts (Source Globescan The State of Sustainable Business2019)

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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 onewhich is based on offering a service package whereby customers pay by the houraccording to the amount of time an airplane’s engine is used.

• Investor interest: in the last few years, investors are pursuing strategies that arebased on ESG factors. According to Bloomberg, in 2017, assets managementtowards sustainability has been increased by 37%. Companies start to understandthe fact that integrating sustainability into their business strategies can provide acompetitive advantage in operational performance, stock price, and costs. Thistopic will be deeply analysed in Chaps. 6 and 7.

• Operational risks: as highlighted in Chap. 1, environmental and social problemscan lead to the disruption of operations and supply chain activities. Accordingly,companies who invest in sustainability and improve their operations from anESG perspective, become more resilient, and therefore, less risky.

What has been emerging is that companies mainly work towards sustainabilitydue to risk purposes. However, they should also put more effort into the creation ofdynamic synergies between internal functions and stakeholders, and externalstakeholders and the whole supply chain. This greater focus on risks is becausemany economic and business risks are strictly related to environmental and socialissues. This is clearly related to reputation, but innovation capability related to thedesign and manufacture of new products and services including legislative changeshave resulted as equally important. Additionally, companies need to understand thatsustainability is not only a vehicle to reduce risks but also a means to generate newforms of value and competitive advantage.

Figures 5.4 and 5.5 show the importance of integrating sustainability into thecore functions. It is interesting to note that if we look at the first top 5 positions, thetwo surveys agree with two main functions: strategic planning and operations.Additionally, the role of supply chain management is particularly relevant (rankedfirst 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 insustainability issues:

• Communications;• Supply chain procurement;• Public affairs.

Communications

Transparency is a requirement for good corporate governance and should representthe dominant quality of all the firm’s activities. In external relationships, trans-parency should find expression in communication processes. For a long time,corporate governance has aimed at satisfying shareholder expectations concerningprofit 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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stockholders according to their importance. In this regard, the financial communi-cation consisting of the financial statements, and if necessary, the consolidated onesused to be considered essential. In the last quarter of the twentieth century, firmsstarted to recognize the value of interacting with all major stakeholders. Since then,they have adopted a broader concept of responsibility, which stresses the stronginterdependencies among economic, social, and environmental goals. Such achange has taken place slowly and differently in diverse countries and firms and ithas involved modifications in the governance approach. Moreover, it has alsoemphasized the importance of corporate communication and it has promoted themost adequate contents and ways of dissemination to meet stakeholders’ needs forinformation and evaluation (Fig. 5.7).

To this purpose, the firm’s communication—traditionally based on the financialdisclosure—has been enriched over the years, in order to improve transparency oncorporate governance by means of new types of documents, such as the corporategovernance statement, the directors and chief officers’ remuneration report, thesocial report, the environmental report, the sustainability report, and the report onintangible assets. Furthermore, the information contained in these documents hasbecome more and more detailed, and sometimes abounding and overlapping. Theincrease of information required for a more transparent governance has beenaccompanied by new methods for content dissemination, connected to the use ofmore and more appropriate tools to facilitate both the access to the information andthe timeliness of it. ICT development has made communication more effective,thanks to the reduction of costs and time for preparing and disseminating infor-mation; moreover, ICT has knocked down space barriers, accelerating the fulfilmentof information symmetry and international uniformity. The transformations in the

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

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socioeconomic background during this century (progressive diffusion of ICT,globalization, social inequality, climate change, corruption, etc.) have inspired anincreasing interest in an advanced concept of sustainable development as a guidingcondition for all the players operating in the economic system. Global markets callfor new and complex processes of corporate governance, aimed at a generalizedrecovery of effectiveness in relation to the growing dynamism and the progressivelyrising complexity of the firm-environment relationships. In this regard, sustainabledevelopment is a prominent issue, whose implementation involves a proper ori-entation of governance policies, the sharing of ethical principles and values withinthe corporate network and the adoption of effective processes of corporate com-munication. Active participation in a more efficient, environment-oriented, andcompetitive economy determines huge modifications in the complexity of therelations between the firm and its significant stakeholders. Meanwhile, the diffusionof knowledge stresses the possibility for the latter to be informed and to carry outcomparisons. Nowadays, successful firms are expected to adopt, maintain, andstrengthen governance systems that should comply with the international bestpractices to manage the complexity of the business and the major conditions forsustainable development (Perrini and Vurro 2014).

In this sense, the effectiveness of governance is mainly influenced by theadoption of policies that aim to emphasize the principles of global responsibility,positive and equitable interaction with the stakeholders, and environmentalprotection.

Supply chain procurement

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

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Sustainable Supply Chain can be described as complex network systems thatinvolve diverse entities that manage the products from suppliers to customers andtheir associated returns, accounting for social, environmental, and economicimpacts (Barbosa-Póvoa 2014). The engagement of such systems has recentlygained noticeable importance, as companies face the challenge of dealing withsustainability issues caused by society’s growing awareness towards environmentaland social problems.

In recent years, a rising number of multinational corporations have pledged towork only with suppliers that adhere to social and environmental standards. Typ-ically, these companies expect their first-tier suppliers to comply with those stan-dards, and they ask that those suppliers, in turn, ask for compliance from theirsuppliers—who ideally ask the same from their suppliers. And so on. The aim is tocreate a cascade of sustainable practices that flow smoothly throughout the supplychain; however, it’s been hard to realize in practice. Consider the embarrassingscrutiny that Apple, Dell, and HP endured not long ago for sourcing electronicsfrom overseas companies that required employees to work in hazardous conditions,and the fallout that Nike and Adidas suffered for using suppliers that were dumpingtoxins into rivers in China. All those scandals involved first-tier suppliers, what’smore, the practices of lower-tier suppliers are almost always worse, increasingcompanies’ exposure to serious financial, social, and environmental risks.

Public affairs

As previously stated, companies face growing external pressures to address an arrayof environmental issues from their greenhouse gas emissions and energy use to theirimpact on the water supply. NGOs, the media, civil society and increasinglyshareholders demand transparency and commitments, which are often communi-cated as part of a company’s overall public relations program. The uncertain leg-islative and regulatory environment, however, suggests the opportunity for closerintegration of sustainability programs with a corporation’s public affairs activities.Corporate public affairs teams have long been engaged in helping companies fendoff legislation or regulation they deem both anti-business or anti-competitive. Butthe sustainability movement offers an opportunity for some proactive repositioning.Given that corporate sustainability programs are usually voluntary efforts taken onbehalf of the company to serve community interest, public relations, and financialgoals, these programs can be a valuable tool in the public affairs toolkit. Companiesthat engage constructively in policymaking with regard to environmental man-agement and energy efficiency issues stand to enhance their reputation amonglawmakers and decision-makers.

Finally, Fig. 5.8, depicts the evolution in the corporate adoption of SDGs. TheSDGs explicitly call on all businesses to apply their creativity and innovation tosolve sustainable development challenges. Figure 5.8 represents an increasing trendin the number of companies using or intending to use SDGs. According to thissurvey—this is also confirmed by the Accenture survey—the top SDGs used bycompanies are 58% Goal 13—climate action, 53% Goal 8—decent work and

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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), theseactions have the potential to impact multiple Goals. For instance, if a companychose to impose a living wage throughout its supply chain, this would directly aidthe attainment of Goal 8 on decent work, but it would also have a knock-on effecton the advancement of other Goals. Such as Goal 1 to end poverty, Goal 2 to reducehunger, Goal 3 to improve health and well-being, Goal 4 on quality education forworkers 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 Studyutilized data gathered through two principal strands of research. First, through anonline survey translated into 9 languages, it conducted a quantitative assessment ofover 1,000 CEOs. In parallel, additional insights of more than 1,500 businessexecutives were taken from the annual UN Global Compact implementation survey.Second, the study conducted more than 100 in-depth one-to-one interviews. Inter-viewees were selected from around the world, they included CEOs, chairpersons,and presidents of UN Global Compact companies, with the aim of understanding thewider strategic context—from geopolitics to investment in technologies to chal-lenges and opportunities on sustainability—for business.

Fig. 5.8 Corporate adoption of SDGs (Source Globescan The State of Sustainable Business2019)

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In the study, interviewees describe how they face a progressively more com-petitive and challenging business environment and set of pressures. These pressuresvary from global trade uncertainties to activist investors, to the pace and scale of thetechnology 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 theUN Global Compact Progress Report

– 21% feel the business is currently playing a critical role in contributing to theSDGs

– 71% of CEOs believe that—with increased commitment and action—busi-ness 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 stepup action and course-correct the private sector contribution to the SDGs. Toaccelerate 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 morebroadly against the 17 SDGs, mindful that not all Goals will apply to allbusinesses in the same way.

– The need for business, governments, regulators, and non-governmentalorganizations to come together to shape realistic, science-based solutions toglobal challenges.

– A new definition and emphasis on disruptive responsible leadership, as CEOspinpoint what is needed from this generation of leaders to drive action andimpact.

These facts are confirmed by Fig. 5.9, nearly all (99%) of the CEOs of theworld’s largest companies believe sustainability issues to be important when itcomes to the future success of their businesses. Over the past six years, a rise inconcern for sustainability has been observed in North American and Asiancompanies:

• 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 companiesincreased from 52% in 2013 to 63% in 2019.

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It is clear that CEOs who are serious about sustainability have brought it into themainstream of their businesses, as sustainability continues to become embedded inoverall 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). Theyrepresent the key groups when it comes to pushing companies towards a moreefficient economic and productive system. Customers prompt companies toimplement sustainable strategies in order to provide sustainable products and ser-vices. This occurs particularly in the case of business to consumer (B2C) and directto consumer (D2C) (Fig. 5.11), for example, retail, and personal and householdgoods. There is no doubt sustainability has become a must-have. Consumers todayare significantly more conscious of global issues in a way they were not in therecent past. If consumers are to become aware that a company or brand cannot betrusted, those brands will be heavily damaged. Employees, especially the youngerones, are guiding and influencing companies to adopt standards in sustainabilitynorms, moreover, they strive for purpose-driven careers. Investors represent anotherimportant class of stakeholders (20%). It is critical for companies to be aware oftheir investors’ top priorities in order to lead the company in that direction. So, ifexecutives were to believe that their investors prioritized short-term profits, theywould likely organize sales, cost management, and research and developmentactivities which maximized near-term gains rather than long-term investments.

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

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With the numbers of investors making investment decisions based on sustainabilityperformance rising, corporate leaders have to acknowledge that an increasingnumber of shareholders are invested in whether a company’s ESG activities connectwith its financial success. Though improving board engagement on sustainabilityissues is no easy task and they face several hurdles, these include the unclearfinancial impact of developing sustainable business practices, competing priorities,a lack of knowledge regarding sustainability among board members, andshort-termism.

For business leaders, the link between business value and sustainability hasprogressed, and companies that are ahead, display better results in their corebusiness. The percentage of CEOs citing “no clear link to business value” as abarrier to sustainability has steadily fallen from 37% in 2013 to 31% in 2016 to26% in 2019. CEOs recognize that sustainability stimulates competitive advantage(see Fig. 5.12). When asked to what extent sustainability and trust are currentlycreating business value, 58% of CEOs responded brand increase, 40% revenuegrowth, 37% risk mitigation, and 35% cost reduction. When asked the samequestion but in relation to the future, there is a rise in the numbers of CEOsclaiming 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 costreductions in the same time period. Over the next five to ten years, when comparedto B2B companies, D2C companies foresee sustainability delivering greater value:58% of CEOs from D2C companies think sustainability will drive revenue growthcompared to 53% of CEOs from B2B companies (see Fig. 5.11). From the survey,

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

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it becomes apparent that, as interest in sustainability makes its way upstream in thevalue chain, the sustainability demands on B2B companies will intensify.

However, sustainability seems to be an unreachable prospect, exception madefor a small group of advanced companies. For instance, many leaders continue tolook towards the future for an “unlocking” of mainstream value as market forcesalign in favour of sustainability.

5.4 Sustainability’s Deepening Imprint 2017—McKinsey &Company

“Sustainability’s deepening imprint” was developed by McKinsey & Company in2017. It was based on data gathered through an online survey in May 2017. A totalnumber of 2,711 participants responded to it and they represented the full range ofregions, industries, positions, company sizes, and functional specialities. Almost90% (2,422) of them responded that their companies were pursuing sustainabilityprograms 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 globalGDP. The key findings of the survey are summarized as follows:

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

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• Environmental, social, and governance matters are of increasing concern tocustomers and employees, organizations have to a greater extent taken on sus-tainability 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 alignmentbetween an organization’s practices and its goals, missions, or values as a topreason for implementing a sustainability agenda.

• The results elucidate how company sustainability agendas are managed andsupported through various technologies.

• Many organizations still struggle to capture financial value from their sustain-ability efforts. Integrating sustainability into one or more core business func-tions, for instance, is a practice that can help. The integration of sustainabilityinto functional work doubles the likelihood that a company will report financialvalue from these efforts.

When asked what are the top reasons for their companies to address sustain-ability, 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 somestakeholders are becoming more important. Meeting consumer expectations is nowranked in the top five reasons. And the share citing the attraction, motivation, orretention of employees has also grown since 2014. This fact was also confirmed inthe 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 importanttopics, and it is a top three issue in financial services and high tech. When five years

Fig. 5.12 The potential value of sustainability (Source Accenture—CEO study on sustainability2019)

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ago respondents were asked what the most important issues would be today wastemanagement and renewable energy were rated as top priorities. Though renewableenergy, in relation to other topics, has fallen in importance over the same period—during which installations of renewable energy sources also increased. Nor is wastemanagement still among the top five topics that matter most to respondents’organizations. Companies which present a high level of sustainability engagementbelong to the chemical, energy and utilities, industrial goods and services, andmachinery sectors. The reason for this match lies at the core nature of theseindustries which are highly regulated with substantial environmental and health andsafety concerns, as well as significant resource needs or constraints. Therefore,these companies must work towards sustainability as its involvement is practicallymandatory. 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 socialissues. Indeed, this sector is seen as one of the most culpable in the profound crisisrelated to climatic change and environmental global issues.

Furthermore, some additional challenges for the oil and gas industries in movingtowards sustainability are as follows:

• Price fluctuation;• Complexity of drilling and production process;

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

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• 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 includethe concept of sustainable development, particularly they have adopted the tech-nological leverage to implement it by using solutions such as PerformanceAssurance and Operation Risk Management, Contaminated Site Management andAir Quality and Climate Change.

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

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

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

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value potential in managing the business portfolio to capitalize on trends in sus-tainability, but in only 28% of the cases organizations actually do so.

Not only do companies struggle to pursue sustainability activities with the highestpotential value but they also find measuring the financial implications accurately achallenge. 20% of respondents do not know the financial impact of sustainabilityprograms on their organization. And those whose companies have measured thefinancial impact are just as likely to say that sustainability is a cost as they are to sayit creates value. Furthermore, about 25% of respondents do not know how much, ifanything, is spent on sustainability-related initiatives by their organizations. A sim-ilar share claims that the benefits of sustainability are clearly understood throughoutthe organizations. The results suggest that a starting point may be integrating sus-tainability into core business functions—especially in finance. The survey askedhow integrated sustainability is into 11 core business functions, and respondentsindicate 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 & CompanySustainability’s deepening imprint 2017)

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strategic planning, integration with the finance function appears to yield the greatestvalue (Fig. 5.16). Positive financial impact is twice as likely to be reported byrespondents when sustainability is integrated into at least one of the businessfunctions—regardless of which. Finance isn’t the only function where integrationcan be improved: less than 25% of respondents stated that sustainability is formallyintegrated into the sales and marketing function. What’s more, only 18% say thatemployee compensation is linked to sustainability performance at their organiza-tions. And despite respondents considering both customers and employees to bepowerful players for acting on sustainability, only one-third report that employeesacross the organization understand how sustainability efforts align with the overallstrategy. With technology, we see similar results. Despite respondents identifyingtechnological advances as a key reason for the growing commitment to sustain-ability, only 25% report the formal integration of sustainability into IT. The mostcited technologies which support sustainability work are digital platforms andenergy-efficient equipment. But stronger integration with IT could foster strongerstakeholder engagement with customers, employees, and suppliers.

5.5 Conclusions

This chapter has presented insights into the world of sustainable business andidentified common perceptions and practices of corporate sustainability profes-sionals. A picture of sustainability in business today has been provided by analysingthree of the most recent surveys to understand the reason why companies engagewith sustainability and the key sustainability challenges in different industries.

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The State of Sustainable Business 2019. GlobeScan and BSR. Available at https://globescan.com/wp-content/uploads/2019/11/BSR-GlobeScan-State-of-Sustainable-BusinessSurvey-FinalReport-12Nov2019.pdf

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Melissa Demartini is an Adjunct Professor of Operations Management and Sustainability at theUniversity of Genoa and Visiting researcher at Imperial College Business School. Her researchinterests are mainly in the areas of corporate sustainability, operations management, andmodelling. She has co-authored nearly 20 papers published in international indexed journals. Shecurrently teaches undergraduate, graduate, and MBA students, with teaching activity coveringgeneral management, operations management, and sustainability. So far, she has taught inuniversities in Italy and the UK. She has worked as a project manager for the EU’s AdvancedManufacturing in Central Europe (AMiCE) project since 2017. She is also industrial sustainabilitycoordinator for the Intelligent Factory Cluster’s Roadmap Project – an Italian governmentinitiative which aims to develop a national strategy to improve the international competitiveness ofmanufacturing companies. Outside of the academy, Melissa has significant consultancyexperience, she is a consultant for Ansaldo Energia’s ‘Lighthouse Plant’ project. This projectaims to introduce Industry 4.0 technologies to all production lines in this prominent Italian powerengineering organisation. She has also worked as a consultant for Siemens, gaining experience instrategy, 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 onsustainability and competitive advantage, strategy, consulting, and the future of cities.Before UCL, Paolo spent six years at Imperial College London where he led top-rankedprogrammes such as the MScManagement and the Global Online MBA. Alongside his work atUCL, 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 appointmentsin top universities like EADA, ESAN, and NYU. Paolo’s research on performance measurementand management, business networks, and corporate sustainability is internationally recognised. Hehas 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 organisationsin 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 andopinions have been featured over 200 times in media outlets like The Financial Times, Forbes, TheTelegraph, Semana Sostenible, La Republica, Inspire, Sole 24 Ore, La Nazione, Corriere dellaSera, La Stampa, RAI, Sky News, Sky News Radio, Mediaset, and CNN. In 2018, Paolo waschosen as one of Poets & Quants’ top 40 business school professors under the age of 40. In thesame 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 andIndustry in the UK.

96 M. Demartini and P. Taticchi

6The Link Between SustainabilityInvesting 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 thatsustainability investing, and financial returns are fundamentally incompatiblewith each other and investors have to cede financial return potential in order toinvest sustainably. However, before examining the merit of this view, it isimportant to clarify the definition of ESG investing, which encompasses adiversity of investment styles; and each style is likely to lead to distinctinvestment outcomes. Of similar importance is the quality of ESG data, especiallyin light of the many different ESG data providers in the marketplace, each usingits own approach to compile sustainability scores. The chapter starts by reviewingthe reasons for which there is an increased adoption of ESG investing in the assetmanagement 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, UKe-mail: daniel.ung@btinternet.com

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. 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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6.1 Introduction

Ever since the launch of the first ethical investment fund by Friends Provident in1984, socially responsible investing has continued to grow in popularity around theworld, particularly in Europe. According to the Global Sustainable Alliance, sus-tainable 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 wit-nessed a shift in how this category of investing is viewed, from a fringe concept to amainstream approach that expressly recognises the importance of environment,social and governance factors for the investor as well as for the long-term stabilityand 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 undesirablesectors (e.g. pornography, tobacco and arms trade). However, as interest in thisinvestment style continued to gather pace, the nature of socially responsibleinvestment also broadened, and investors have moved from a purely social moti-vation to a financial objective when considering ESG in portfolio allocations.

This widening of scope in sustainable (ESG) investing, coupled with a lack ofstandardisation 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 discussionof the relationship between sustainability and financial performance, it is importantto clarify a few important topics.

First, ESG investing is a broad term and encompasses a diverse number ofapproaches. Second, the existence of a wide variety of ESG data providers and alack 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 thereis a link between sustainability and financial performance. Before turning to thisevaluation, the reasons why ESG investing has become more widespread in theinvestment management industry are reviewed.

6.2 Drivers of ESG Adoption in the Asset ManagementIndustry

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

1Global Sustainable Investment Review 2018, Global Sustainable Investment Alliance

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For example, the Swedish parliament approved reforms that mandate the maingovernment-run pension funds to be ‘exemplary’ in the area of sustainableinvestment. In the UK, the government updated its definition of fiduciary duty fortrust-based pension funds to include ESG issues and not view them as matters ofpersonal ethics2. An example of this is climate change, which is increasingly seenas an important driver of portfolio risk and return, and a scientific advisory com-mittee to the European Systemic Risk Board recommended that future stress tests ofthe pensions sector should include climate-related risks.

• Managing negative externalities: Given the amount of money that institutionalinvestors manage, they effectively own a slice of both the global economy andcapital markets through their holdings. The size of the holdings may mean thatthese investors cannot mitigate system-level risks through just investing in‘quality’ assets (such as gold). Related to this, asset owners often have to takelonger term views because of the long-term nature of their liabilities. They mustbe more attentive to situations where their investments generate uncompensatedcollateral costs for unrelated third parties. Briand et al. (2011) posit that mostuniversal owners have a fiduciary duty to ensure the multigenerational sustain-ability of their investments. These ‘universal owners’ should therefore encouragethe protection3 of the natural capital necessary to maintain the economy andinvestment returns over the long term (UNEP Finance Initiative 2011).

• Increased investor activism: In the past, investors have been reluctant to activelyintervene in the managements of the companies in which they invest. Butinvestors who intend to hold an investment for a long time are incentivised tomake sure that material ESG issues, which can improve financial performance,are fully addressed. In 2018, shareholder activist campaigns increased to a recordnumber with about 250 campaigns initiated; and activists won 50% more boardseats than in 2017.

• Growing investor demand: Institutional investors’ demand for integration oflong-term investment issues is driving sustainable-investing growth. Nowadays,asset owners do not need to be convinced on the benefits of sustainability as theyfocus on both financial, as well as nonfinancial outcomes, rather than justfinancial ones (Eccles and Klimenko 2019). Research also shows that millennialsare also expected to drive much of the growth of the ESG investing market.According to a Morgan Stanley study, when compared with non-millennialinvestors, millennials are nearly twice as likely to invest in companies or fundsthat target social or environmental outcomes and twice as likely to invest incompanies that use high quality ESG practices.

2Swedish Parliament Oks sustainable investment reforms for AP funds, November 20183Universal Ownership: Why environmental externalities matter to institutional investors? UNEPFinance Initiative (2011).

6 The Link Between Sustainability Investing and Financial Returns … 99

6.3 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 intothe management of financial assets, which signatories agreed to implement.

Among the most important principles for the asset management industry are thecommitment to incorporate ESG considerations in their financial analysis anddecision-making processes, and to incorporate ESG issues in their ownershippolicies. However, although the UNPRI has provided guidance on how institutionalinvestors can integrate ESG into their asset management processes, the industry stilllacks best practice standards and, as a result, there is often inconsistency andincoherence in both the terminology used by market participants as well as howESG integration is being implemented.

ESG investing is an evolving field, and it is challenging to condense all thedifferent approaches in one chapter. That said, there are currently three general ESGinvestment approaches that market participants adopt, each of which is linked to adifferent investment objective (see Fig. 6.1). Differences in investment objectivesmean 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 valuesand have sought to avoid companies that do not align with their ethical, religious orpolitical 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 thecarbon footprint as financially material, while others believe that removing high-carbon intensitycompanies 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-basedinvesting focuses mainly on achieving positive effects for society.

6.3.2 Using ESG to Improve Financial Performance (ESGIntegration)

An increasing body of research suggests that ESG factors can be used to identifycompanies that are well managed as well as those whose business models are likelyto face headwinds through shifting regulatory, environmental and technologicaltrends. Institutional investors increasingly employ ESG factors to both minimisethese risks and achieve sustainable financial performance over the long run. Theaim 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 directingtheir investment capital towards companies that provide solutions to environmentalor social challenges. These investors also monitor the extent to which theirinvestments generate positive social or environmental impacts alongside their fi-nancial returns, using frameworks such as the UN Sustainable Development Goals(SDGs).

6.4 Importance of ESG Data––Data Qualityand Materiality

6.4.1 Data Quality

High quality data is the mainstay of investment analysis. While ‘quality’ can bedefined in numerous ways, most investors would agree that data consistency andcomparability are part and parcel of a sound data set. However, because there is sofar no uniformity in the regulations on the amount as well as the type of ESGinformation that companies have to report on, companies are left to decide forthemselves what ESG information is relevant to their business performance andwhat should be disclosed to investors.

In the meantime, investors increasingly consider ESG factors as critical driversof a company’s ability to generate sustainable performance over the long term. Tothis end, investors rely on ESG data providers to assess information about com-panies’ ESG practices. As of the end of 2016, more than 125 ESG data providerswere in operation, according to the Global Initiative for Sustainability Ratings.This collection includes both well-established global data providers like MSCI,

6 The Link Between Sustainability Investing and Financial Returns … 101

Bloomberg and FTSE as well as ESG specialists like Sustainalytics, Vigeo Eiris andTruValue 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. Thismeans that the rating for any given company can vary significantly depending onthe data provider. Figure 6.2 shows the correlation of ESG scores across two dif-ferent providers. Kumar et al. (2019) assert that the divergence of ESG scores canbe attributed to three main causes: differences in how data is gathered and esti-mated, which issues are considered as material and how different ESG issues areaggregated to provide summary ESG scores. According to the authors, whenchoosing a provider, investors are effectively aligning themselves with that ESGrating agency’s investment philosophy in terms of data acquisition, materiality andaggregation methods.

6.4.2 Data Materiality

The notion of data materiality emanates from financial accounting and relates toinformation that would be ‘considered relevant to an investor’. In evaluating therelationship between a company’s ESG performance and financial performance, notall ESG issues matter equally. Much work in this area has been carried out by theSustainability Accounting Standards Board (SASB), one of the agencies that hasled the way in devising standards for sustainability reporting.

SASB adopts the US Supreme Court’s definition of information materiality andaims to establish ‘industry-specific disclosure standards across environmental,social and governance topics that facilitate communication between companies andinvestors about financially material, decision-useful information’.4 instance, pro-duct quality and safety can have a substantial impact on the bottom line for theconsumer goods sector, whereas selling practices and product labelling is a far moreimportant criterion for the financial sector.

Research, such as Khan et al. (2015), shows that firms with good performance onmaterial sustainability issues significantly outperform firms with poor performanceon these issues, suggesting that investments in sustainability can enhance

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)

4www.sasb.org/governance.

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shareholder value. On the other hand, investments in immaterial sustainabilityissues have limited value implications (Steinbarth 2016). The first generation ESGscores, which do not take into account the materiality of information, contain a hugeamount of non-material ESG information, and this may be one of the reasons whythere is conflicting evidence on whether ESG scores can lead to financialoutperformance.

6.5 The Link Between ESG and Financial Performance

A common perception among investors is that investing in ESG inevitably meanssacrificing financial returns. The increased focus in this field has also brought asignificant rise in the number of research articles that examine the relationshipbetween the ESG profile of companies and their financial performance and riskcharacteristics. Indeed, the high volume of studies has led to meta studies seeking tosummarise the findings of different analyses (for example, Friede et al. (2015)).

Overall, the results were not conclusive, with the existing literature findingpositive, negative and, indeed, non-existent correlation between ESG and financialperformance. That said, most researchers did find an overall positive relationshipbetween the two. There are several explanations for the inconclusiveness of theresults. For one, some studies do not appreciate the different approaches to sus-tainable investing, such as values investing, ESG integration or impact investing.These different investment styles are likely to produce vastly different financialoutcomes, as they can have very different objectives. Therefore, drawing conclu-sions between these different approaches is an issue.

Even when focusing solely on ESG integration, the vast differences in the wayrating agencies score a company’s ESG profile can lead to different conclusions onwhether a better company ESG profile is associated with improved financial per-formance. In addition, researchers studying the link between ESG and financialreturns do not make clear distinctions between correlation and causality. AsKrueger (2015) points out, the observation of a positive correlation can either bebecause higher ESG firms tend to be more profitable or that more profitable firmstend to expend more resources into projects that increase the welfare ofstakeholders.

For this reason, a discussion on whether there is a link between ESG andfinancial performance is meaningless without acknowledging the existence of dif-ferent approaches to ESG investing and the issues surrounding ESG data qualityand data materiality.

6.5.1 Values Investing: A Word on ‘Sin Stocks’

Values investing is about aligning investments to beliefs. These beliefs can rangefrom religious to environmental and ethical beliefs. Here, ‘sin stocks’ are examined,

6 The Link Between Sustainability Investing and Financial Returns … 103

which is the most common grouping that investors exclude. Sin stocks are typicallycompanies that make money from human vice, such as those in the alcohol,tobacco, gambling and weapons industries. Various research studies have examinedthe historical performance of sin stocks and found significantly positive abnormalreturns. In the meantime, an increasing number of investors exclude these stocksfrom their investment portfolios, as they would not want to be associated with thecontroversial activities of these firms. On the other hand, there are also investmentvehicles that specifically target particular types of sin stocks, such as gaming andcannabis-manufacturing stocks, to name a few.

To explain the apparent abnormal returns of sin stocks, some researchers (suchas Hong and Kacperzyk (2009)) affirm that institutions that shun these stocks pay afinancial cost in abstaining from them; moreover, investors who are disposed todefy social norms earn a risk premium for doing so.

Other explanations for why sin stocks outperform can be found in the research ofauthors such as Fabozzi, Ma and Oliphant (2008). In this instance, the researchersprovide various explanations for this apparently paradoxical phenomenon. First,they suggest that those industries tend to have significant barriers to entry. They areeffectively monopolies, and because of this, they should be compensated withexcess ‘rent’ in their returns. Second, they propose that there is often a ‘cost’associated with having principles. One of these costs involves foregoing returnsbecause applying any level of exclusions or constraints, which is what investorsoften do with sin stocks, means that investment portfolios are likely to underper-form 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 sinstocks. In other words, there is no premium associated with these stocks. The apparentlevels of ‘abnormal positive return’ vanish when the classic factors5 that drive equityreturns are fully accounted for. Indeed, the performance of sin stocks matches fullywith their exposures to factors included in the latest asset pricing models.

From a financial perspective, Blitz and Fabozzi explain that sin stocks often havehigh exposure to the financial quality factor as such companies are often highlyprofitable, cash-generative companies. Excluding them from the universe wouldhave a negative impact on expected return; however, this issue can be addressed byincreasing exposure to companies of high financial quality outside of the companiesthat have been excluded.

Obviously, the specific financial impact of abstaining from an entire category ofstocks is likely to vary, depending on the financial characteristics of the excludedstocks. The main purpose behind ‘values investing’ is that investors do not want tobe connected to certain types of business activity that conflict with their values.Particularly where the values are widely accepted, such as the harmful effects oftobacco, there may be risks, in the form of litigation risks, associated with

5These factors are size, value, momentum and quality (which comprise profitability andinvestment).

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

6.5.2 ESG Integration

6.5.2.1 Targeting Companies with a Good ESG ProfileThe principal aim of integrating ESG into financial analysis is to achieve financialobjectives in investment portfolios. This approach should incorporate informationthat is material and germane to both the company in question as well as the widerindustry.

Whereas older studies have often examined the potential connection betweenESG and future financial returns, more recent studies have widened their scope andinvestigated the financial characteristics of strong ESG companies. They suggestthat companies with robust ESG practices often displayed a lower cost of capital,lower volatility and fewer instances of bribery (Oikonomou et al. 2012). Con-versely, companies with weak ESG practices have had high costs of capital, highervolatility owing to controversies and other incidences as well as other governanceirregularities.

In a recent study, Giese et al. (2017) discussed how information embeddedwithin stocks is transmitted to the equity market. The authors examined the dif-ference in financial characteristics between highly and lowly rated ESG companiesand suggest that ESG information is imparted to equity markets by means of‘transmission channels’.

More specifically, they posited there were three transmission channels throughwhich ESG information can be spread to the equity markets within a standardDiscounted Cash Flow (DCF) model, a standard valuation model that is often usedto determine the fair value of equities (1.1).

DCF ¼ CF

1þ rð Þ1 þ CF

1þ rð Þ2 þ CF

1þ rð Þ3 þ . . .þ CF

1þ rð 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 tothe entire market (the so-called ‘systematic transmission channel’).

In regard to the idiosyncratic transmission channel, ESG information can bespread in two ways: via cash flow generation ability or via the degree of tail risk. Asthe information is linked solely to the company, the risk associated with the cashflow can be diversified away, which is consistent with the principle behind theCapital Asset Pricing Model (CAPM). In respect to cash flows, companies with astrong ESG profile are more competitive than their peers and, as a result, theygenerate higher profits. By extension, these companies also offer a higher dividendpay-out to shareholders.

6 The Link Between Sustainability Investing and Financial Returns … 105

An increase in a company’s ability to generate cash flow and profits can lead to ahigher equity valuation. Separately, strong ESG companies typically haveabove-average risk control and compliance standards. For this reason, they are lesslikely to suffer from severe incidents such as fraud, corruption or other scandals thatcan seriously undermine the value of the company. Fewer scandals will ultimatelyresult in lower stock-specific risk and lower downside tail risk.

As for the systematic transmission channel, ESG information can also manifestitself through the discount rate. Given that the information is related not just to thecompany itself but also to the wider market, the associated risk cannot be avoidedor diversified away. This means that strong ESG companies can be expected to havelower discount rates (and costs of capital) than poor ESG companies. Lower costsof capital can also translate into higher equity valuations when viewed through adiscounted cash flow framework. In addition, strong ESG companies can also beexpected to have a lower sensitivity to market (beta) risk as they are less vulnerableto systematic market shocks, such as commodity price shocks, because they aremore efficient in managing their businesses.

In sum, empirical evidence shows that strong ESG companies seem to suffer lessfrom lower idiosyncratic and systematic risks than poor ESG companies. Therefore,information from ESG may be used as a risk management tool, alongside othertraditional financial risk management tools. As for whether strong ESG character-istics have led to stronger stock returns, the jury is still out.

6.5.2.2 Targeting Companies with an Improving ESG ProfileAnother aspect of ESG integration involves looking at companies that managed toimprove their ESG profile over time. From a conceptual point of view, Gregoryet al. (2014) argue that since ESG characteristics can affect a company’s valuationthrough systematic risk, a change in a company’s ESG profile should predict achange in the valuation and return of that company. This thesis was supported byempirical research conducted by Khan et al. (2015). The researchers performed aregression 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. Theyfound that there was statistically significant predictive power of changes in ESGscores for stock returns.

6.5.2.3 Corporate Engagement and Shareholder ActivismShareholder activism and direct institutional investor engagement on environmen-tal, social and governance issues has become increasingly prevalent in financialmarkets (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 challengemanagement decisions. Shareholder activism can take various forms (Bekjarovskiand Briere 2018) and these generally encompass (1) divestment of the companyshares, (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) initi-ating takeovers through acquiring a sizeable amount of equities.

According to a survey conducted by McCachery et al. (2016), engagementbehind the scenes and voting are the preferred methods by which institutionalinvestors deal with companies. In the study, some 63% of the participants in thesurvey had held direct discussions with company management over the past fiveyears while 53% had voted against management in shareholder proposals. Besidesthis, it was also common for institutional investors to express disapproval ofcompany management through divesting company shares and there was evidencethat long-term investors were more disposed to intervene than short-term investorson matters of corporate governance or strategy.

A wealth of literature assessing the impact of shareholder engagement oncompany financial performance exists. Generally speaking, whether companyengagement leads to positive outcomes depends largely on the execution strategy aswell as the costs associated with that engagement. More recent research shows thatvoting on specific issues, such as the adoption of governance proposals, can beeffective and has improved shareholder value by an average of 2.8% (Cuñat et al.2012). Other forms of exercising influence on management, either throughengagement behind the scenes or hedge fund activism, have also led to the targetcompanies generating higher overall financial returns as well as improving ESGscores. In respect of the financial risk profile of the companies with which there isshareholder engagement, Hoepner et al. (2018) show that engagement can reduce acompany’s downside risk. Although risk reduction effects of ESG engagement varyacross engagement themes and, where governance or strategy topics are addressed,the risk reduction effects tended to be magnified. In all, there appears to be evidenceto 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 allocatingcapital to specific companies or sectors that offer solutions to pressing issues facingthe world. Alongside making a positive social impact, this type of sustainableinvesting also seeks to make a material financial return. What sets impact investingapart from other sustainable investing styles is that it unambiguously targets tan-gible beneficial outcomes. However, which motive is more important is likely tovary among investors.

Impact investing encompasses a wide variety of asset types and strategies. It canincorporate investments in a variety of sectors, from renewable energy andmicrofinance to more traditional areas such as housing, education and healthcare.While the Global Impact Investing Network talks of the wide range of returnprofiles and asset types available in this segment, it also stresses the importance ofbeing 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

6 The Link Between Sustainability Investing and Financial Returns … 107

investing overall. That said, there is some evidence to suggest that certain categoriesof impact investing, such as gender diversity, can be advantageous. For example,companies that embrace workplace gender diversity may perform better than thosethat reject it. One expression of this view is the SPDR SSGA Gender DiversityIndex ETF, a fund that seeks to promote gender-diverse senior leadership.Empirical research shows that the return on equity of companies with strong femaleleadership 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 theirobjectives.

One way for investors to begin ESG investing is to ensure that their investmentsdo not conflict with their beliefs. For example, investors could remove all thecompanies engaged in producing tobacco products or controversial weapons. Theymay then opt for an approach that selects the companies with both healthy financialmetrics as well as a robust ESG profile.

According to data collected by the Global Sustainable Investment Alliance (seeFig. 6.3), the largest sustainable strategy globally, between 2016 to 2018, wasnegative (or exclusionary) screening. This was followed by ESG integration, whichhas risen by 69% over the same period. Applying negative screening has frequentlybeen the first step into ESG investing for many investors. The impressive growth inthe 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 financialobjective when blending ESG with other parts of their investment portfolios.

Yet, while there are more investors integrating ESG into their portfolios, manyhave done so inconsistently, incorporating ESG in some but not all areas of theirportfolios. The result of this haphazard approach means that investors may not yetbe reaping the full benefits of ESG investing. For example, an asset owner whointegrated ESG criteria into only some allocations may take advantage of the riskmitigation benefits associated with removing poor ESG companies. However, theexcluded companies may reappear elsewhere in the investment portfolio where thesame type of exclusion has not been applied.

In other words, ad hoc approaches to ESG integration––using incoherentapproaches or only in select portfolios––are likely to achieve below par results.Therefore, investors should move to an ESG policy benchmark to ensure consistentapplication across the whole investment portfolio.

In closing, the relationship between sustainability investing and financial returnsis a fairly nascent field of research. Sure enough, there were past attempts thatexamined this link, but they did not distinguish the different styles of ESG investingand focussed nearly exclusively on values investing, which involves ridding of‘undesirable’ sectors, such as stocks in ‘sin’ sectors. Moreover, they also failed toaddress issues, such as the financial materiality of data, and ignored the fact thatdifferent ESG issues are relevant for different sectors. Even with the availability ofESG information more readily available now, it is important to appreciate that thereis still much subjectivity in the compilation of ESG scores, and by selecting for aESG data provider, investors are effectively aligning themselves to the ‘investmentphilosophy’ of that provider.

Whether investing in stronger ESG companies produces stronger investmentreturns remains a bone of contention. To start, it is important to appreciate there aredifferent types of ESG investing styles: values investing, ESG integration andimpact investing. These investment styles follow distinct investment approaches,and for this reason, they are likely to yield very distinct investment return and riskoutcomes. Among the different approaches, an increasingly popular approach isESG integration, whose principal aim is to achieve financial objectives in invest-ment portfolios through integrating financially relevant ESG data. The latestresearch 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.

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Hoepner et al. (2018). ESG shareholder engagement and downside risk. The Q GroupHong & Kacperczyk. (2009). The price of sin: The effects of social norms on markets. Journal of

Financial EconomicsKhan et al. (2015). Corporate sustainability: First evidence on materiality. The Accounting ReviewKrueger. (2015). Corporate goodness and shareholder wealth. Journal of Financial EconomicsKumar et al. (2019). The ESG Data Challenge, State Street Global Advisors.Lee. (2015). Women on boards: Global trends in gender diversity on corporate boards. MSCIMcCahery, 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 ManagementSteinbarth. (2016). Materiality Matters. Russell InvestmentsUNEP 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 ETFdivision of one of the largest global asset managers and has conducted and written research on theimpact of environmental, social and governance considerations in the performance of financialassets. Prior to this, Daniel was a director of the research department of S&P Dow Jones Indicesand 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 theEcole Supérieure de Commerce de Paris in France.

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7Sustainable Finance––IntegratingSustainability into Corporate Banking

Laura Maida

Abstract

This chapter describes how financial institutions are integrating sustainabilityinto their financing processes, presenting different strategies applied. First, thereis 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 additionalregulation is expected to come soon in this field. Afterwards, there is a remark tosome overarching approaches to sustainable lending, i.e. embedding ESG lensinto the whole credit value chain. In conclusion, three enabling factors are stated:(i) availability of data, (ii) training and divulgation, (iii) governance and CEOscommitment. The chapter includes also a brief account of the Intesa Sanpaolocase.

Keywords

Sustainability � Impact banking � Climate change risks � ESG � Sustainablelending � Sustainable finance

7.1 Introduction

“Sustainable finance” can be broadly defined as integrating environment, socialand governance (ESG) considerations into financing and business decisions, sup-porting directly or indirectly the framework of the United Nations’ Sustainable

L. Maida (&)Intesa Sanpaolo, via Monte di Pietà 8, 20121 Milano, Italye-mail: laura.maida@intesasanpaolo.com

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. 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 aprocess of translating their commitment on sustainability into business practices.While in some financial business lines (e.g. in the asset management), ESG stan-dards are getting consolidated, as new lexicon and metrics have been discussed andapplied 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 imple-mented already, especially by the larger international groups.

Such actions are aimed at promoting specific projects and companies thatembrace higher sustainability standards or at reducing negative impact on theenvironment and on the society, reorienting the Bank’s balance sheet accordingly.

There is a general consensus that sustainability will further take a central role inshaping the business strategy of financial institutions, at least as a response topressure coming from all the stakeholders, employees, customers, shareholders,regulators, communities, and to rebuild trust, deeply affected by the 2008 crisis andby the current Covid 19 pandemic emergency.

In translating sustainability into their financing process, banks pursue two mainobjectives:

• to manage risks stemming from social and environmental externalities, espe-cially those deriving from the climate change, in order to ensure a solid andresilient financial system;

• to reorient capital flows and banks’ financing towards sustainable investments, toachieve inclusive growth and promote environmental or social aims.

In the last years, there has been more activity around the former objective, drivenalso by the current and expected regulation. Different approaches have beenundertaken to integrate sustainability into the core corporate banking processes:some are very specific, e.g. setting exclusion on certain activities or launchingdedicated initiatives to promote specific customer segments; other approaches aremore ambitious and overarching, embedding the ESG criteria into the whole creditvalue chain (see, among others, Accenture and UN Global Compact 2019).

7.2 The “Do not” Paradigm––“Excluding” Specific Typesof Activities

Historically, financial institutions have considered to exclude specific sectors ortype of activities in their financing schemes. That is a set of rules and policies oftendiscussed and approved at Board level, inspired by the Code of Ethics of eachcorporation. A Code of Ethics is adopted by a company as a self-regulation doc-ument, for the integration of social and environmental considerations into companyprocesses, practices and decisions, beyond those required by the national

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legislation. It contains voluntary commitments in the management of relations withall the internal and external stakeholders, setting out the core values and principlesof a company.

Typical examples of “excluded” activities are

• Ammunition/weapons, military or police equipment or infrastructure, althoughwith several differences. For example, controversial weapons, such asAnti-Personnel Landmines (APLs) and cluster bombs prohibited by the Ottawaand Oslo treaties signed by numerous countries, are generally excluded; militaryequipment might be approved, with restrictions on trade finance (e.g. if thetransaction 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 AgainstClimate Change

In the aftermath of the Paris Agreement of 2015, which aims at limiting globalwarming below 2 °C, the attention of policy makers, regulators, investors and civilsociety on climate change increased dramatically. Under this new sensibility onclimate change, and in an effort to introduce ESG principles into practice, severalbanks started to develop financing (and investment) policies that pose additional“exclusion” or “limitations” to specific sectors, recognized as sensitive, i.e. thosecarrying significant risks. The sensitive sectors are generally identified by the meansof an in-depth assessment of their potential negative impact on the environment(impacts on biodiversity, natural and critical habitats and ecosystem services) andon the society (such as physical or economic displacements of people and com-munity health and safety).

The most sensitive one is coal-fuelled power, and that is why many financialinstitutions have already established––or are in the process of developing––newcoal policies. In fact, coal is still playing a key role in the world economy as one ofthe most accessible fossil fuel resources for large-scale electricity generation andwill continue to be part of the energy mix of many countries in the foreseeablefuture. Power generation from coal, with currently deployed technologies, ishowever the most CO2 intensive of power sources and significantly contributes toclimate change, through massive emissions of Greenhouse Gases (GHG). Somefinancial institutions have also introduced further specific policies, regarding otherenergy sources (e.g. oil and gas, nuclear power), mining, construction and realestate, agriculture and forestry.

All these policies––that may include a multi-year timeframe for a full adop-tion––are intended to set stricter standards on new activities (i.e. new lending or

7 Sustainable Finance––Integrating Sustainability … 113

new project finance), with generally no implications on pre-existing activities (andno consequent dismissal of current lending lines). Any request of operations that isnot fully compliant to these policies could be either rejected or it could activate anescalation process through established governance mechanisms (e.g. approval onlyby the CEO or by the Board Committee) and it might require transparency obli-gations both for the borrower and the bank.

7.3 Solutions to Promote Financial Inclusion

Banks have recognized that there are individuals, corporates and organizations ingeneral that tend to have limited access to credit and that are not adequatelyfinancially supported when adopting the standard (risk and credit) business prac-tices. Nevertheless, they might be worth investing in, as they bring environmentalor social benefits.

From a bank’s standpoint, the opportunity space to grant credit is determined bymany factors, among which there are the requirements set by the regulator (thataims at ensuring a solid and resilient banking system) and the expected return (thatshould pay off implied risks and remunerate capital). Consequently, a set offrameworks, models, policies and methodologies is applied to define whether aspecific corporate or individual customer, project or proposal, is “bankable” at areasonable interest rate.

A growing number of retail banks have developed an offer of products orsolutions for unserved or under-serviced customer segments. Typical examples aremicrocredits 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, dedi-cated marketing and comms.

In some cases, banks have designed an integrated value proposition to the thirdsector organizations, which covers also

• specific rating models developed to better suit the characteristics of customersfrom 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 streamlinedunderwriting process;

• dedicated Relationship Managers (RMs) that can help to raise the financialliteracy of non-profit organizations;

• public affairs and institutional relations to advocate for the non-profit needs andinterests.

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7.4 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 globallevel, with clear implications on the economic systems (with differences acrosssectors and asset classes), and consequently on the financial system. Since 2015 andthe Climate Change Conference in Paris (COP21), the financial sector has beensubject to special attention from the legislator. It was only more recently andbecause of an increasing pressure of Central Banks, regulators and supervisorybodies that the financial institutions started to work on ways to take these new typesof risks into account, from a risk management perspective.

In December 2015, the Financial Stability Board established a Task Force forClimate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg, todevelop 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 entailextensive policy, legal, technology and market changes to address mitigation andadaptation 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” (longerterm shifts in climate patterns––e.g. water availability or temperature increase).

As several models and scenario analysis are pointing out, although the climatechange is a global phenomenon that will impact all countries, its negative effect willdisproportionately affect sectors and geographies in a material way.

Larger and more international financial groups are considering how to includeclimate change risks into their risk management paradigm:

• Risk governance and Risk Appetite statement: very few players have alreadyembedded considerations on climate change into their Group-level risk appetiteframework, despite an increased awareness and pressure at Board level aroundclimate change and its implications on financial institutions.

• Rating models, which pose one of the main challenges to risk managers, astraditionally risk models are backward looking, and require long historical trendsto be assessed as reliable. The inclusion of climate change factors may imply thedevelopment of forward-looking approaches grounded in scenario-based anal-ysis. However, that might not be enough, as Bolton et al. say scenario-basedanalysis will not suffice to preserve financial stability in the age of climatechange: the deep uncertainty at stake and the need for a structural transformationof 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 uncertainparameters (“The green swan” Bolton et al. 2020).

• Risk policies. As mentioned earlier, many financial institutions are developingpolicies with limits and sector exclusions to appraise for climate changeimplications; often those policies address concerns on reputational risk ratherthan actual climate risk management.

That is a new and rapidly evolving field, so we are far from coalescing aroundbest practices or industry standards (Stiroh 2020). Some financial institutions haverecently activated internal climate-related working groups to develop a consistentapproach, but only a few have already thoroughly redesigned their risk managementpractices, in a quantitative manner. As a matter of fact, in a global survey run byOliver Wyman in November 2018 (Colas et al. 2019), only 2 out of 30 leadingfinancial firms affirmed that they consolidate climate risks into their credit ratingprocess (Fig. 7.1).

The starting point is to develop a comprehensive and quantitative approach forthe identification and measurement of climate risk embedded in the credit portfo-lios. Following the TCFD recommendations, a financial institution starts identifyingthe business sectors in the loan book that are potentially most affected by climaterisk, both in terms of transition and physical risks. Then, there is an assessment ofthe Group’s exposure to these risks, adopting the logic of financial materiality(impact of climate change on the value of the counterparty and consequently oncredit risk). The potential impacts, the related time horizon (short, medium, long)and the consequent mitigation actions taken for each potential risk observed shouldbe reviewed regularly. That is a challenging process, as there are no establishedcommon standards to apply.

There are several industry-led initiatives to share best practices and to develop acommon understanding across financial institutions. In particular, it is relevant tomention the work done by the United Nations Environment Programme FinanceInitiative (UNEP FI), a partnership between UNEP and the global financial sectoron 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 theEuropean Banking Federation (EBF); (iv) scenario analysis methodologies andtools reconciling environmental and financial data.

At the core, there is still a need to outline clearly how the climate change willaffect credit, market, operational risks, i.e. the primary financial risks traditionallymanaged in banking. Additionally, many financial players have concerns onpotential reputational damage, and they put in place specific actions to identify,monitor and manage climate-related reputational risks (Buranatrakul and Swierczek2017).

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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 institutionsare practically implementing those factors.

As the European Commission––with its Technical Expert Group on sustainablefinance (TEG)––clarified on December 2019, although climate change is definitelyone of the most alarming factors affecting the environment, the “E”––within thefamous ESG acronym––goes beyond that. In fact, in an effort to define the clas-sification system, reducing fragmentation of market-based initiatives and limiting“greenwashing”,1 the Commission defined (among other criteria) that an “envi-ronmentally sustainable economic activity” should provide substantial contributionto at least one of these six environmental objectives:

(1) Climate Change Mitigation(2) Climate Change Adaptation(3) Sustainable Use and Protection of Water and Marine Resources(4) Transition to a Circular Economy(5) Pollution Prevention and Control(6) Protection and Restoration of Biodiversity and Ecosystems.

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

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

1Any practice aimed to convey a false impression that a company’s products or services areenvironmentally 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 atsupporting financial institutions in determining, assessing and managing environ-mental and social risks in projects. The Framework is grounded on the PerformanceStandard (PS) of the World Bank’s International Finance Corporation (IFC) as wellas on the Environment, Health and Safety Guidelines (EHS Guidelines). It focuseson four financial products (Project Finance Advisory Services, Project Finance,Project-Related Corporate Loans and Bridge Loans) and provides a minimumstandard for due diligence and monitoring to support responsible riskdecision-making.

The EPs framework identifies ten actual principles whose relevant requirementsmust be fully embraced by adopters intending to commit to a new project. Variablessuch as the socio-environmental characteristics of the country, the industrial sectorand the characteristics of the project in question are considered, when assigning adifferent risk category (A is high, B medium and C low) to the projects to befinanced. The EPs framework was launched in 2003 by ten international BankingGroups 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 July2020.

7.5 Embedding ESG and Impact Lens into the Credit ValueChain––A Positive Approach to Sustainable Lending

A few financial institutions are actively integrating sustainability into their businessstrategy, beyond adopting only a pure risk management perspective. That comesfrom the awareness of the essential role finance can play in promoting a healthierand more inclusive economy. Leading the way on this route can also represent adistinctive factor towards corporate customers, bearing business opportunities (andnot only risks).

This approach is inspired by the principles of Positive Impact Finance, releasedby the UNEP FI in 2017, to mobilize financial players around the need to provide adirect response to the challenge of financing the Sustainable Development Goals(SDGs), delivering a positive contribution to one or more of the three pillars ofsustainable development (economic, environmental and social), once any potentialnegative 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 creditstrategies and capital allocation decisions to origination, underwriting, servicingand monitoring and collection. Some examples include:

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• Setting targets on portfolio steering: a few players are defining a strategy toshift their book loan towards the below two-degree goal of the Paris Agreement,grounding their approach upon PACTA (Paris Agreement Capital TransitionAssessment) methodology for corporate lending (provided by the 2° InvestingInitiative). Such approach takes into account materiality, focusing on the mostcarbon-intense sectors (i.e. coal, oil and gas, power, automotive, cement, steeland shipping), and it requires engaging with companies, rather than simplyexcluding them. Finance players will actively support clients in their transition,looking at their future investments to shift to low-carbon assets, in line withscience-based scenarios. With an established taxonomy on the other aspects ofthe ESG framework, a similar commitment and approach could be orientedtowards a broader concept of sustainability.

• Including impact factors into credit assessment. In addition to the usualeconomic and financial assessments, new models are developed to give an easieraccess to credit, with more favourable financial terms, by highlighting theintangible qualities of the business and positive impact to environment andsociety. Inputs of the model could vary a lot, covering both environmental andsocial aspects, such as trademarks, patents, quality and environmental certifi-cations, research and development activities, innovation and digitalisation,although the list differs significantly from player to player, and it will expandconsiderably once taxonomy around sustainability is established.

• Launching innovative finance solutions: in the last year, there has been anacceleration of the launch of Green and Sustainable Loans, i.e. loan instrumentsmade available exclusively to finance new or existing projects withenvironmental/social objectives (or a mix of both), recognized by specializedthird-party providers. In EMEA, in 2019, green and sustainable loan volumesreached €103 Bn, 3 � more than 2018 volumes (in a corporate lending marketthat has decreased by −6% from 2018 to 2019). Similarly, there is a highdemand also for Green bonds, with € 27 Bn issued in EMEA in 2019, whichrepresents a � 2.2 versus 2018, while the overall DCM Euro corporate hasincreased by +35% in the last year. Some financial institutions have also recentlyactivated credit plafond at preferred conditions for specific initiatives, e.g. tosupport innovative and transformative projects for SMEs and large companies to(re)design their business model in line with the principles of the circulareconomy.

• Undertaking special measures against crisis: in case of emergencies and crisis(e.g. catastrophic events or the recent Covid 19 pandemic), impact considera-tions might be crucial to support distressed companies, and to limit economicsevere consequences. Typical examples of initiatives adopted by financialinstitutions are corporate loan payment pause or deferral, or fee waivers.

The case of Intesa SanpaoloIntesa Sanpaolo is one of the top five banking groups in the Euro Area by marketcap 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 sus-tainability, and to the economic, social and cultural development of Italy. In thismatter, Intesa Sanpaolo dedicates a remarkable focus on Arts and Culture, as itholds one of the largest bank art collections globally, with more than 30 K art-works, and three private museums (a fourth to be open in the coming years) andcontributes to safeguard the Italian historical and artistic heritage and to the dis-semination and promotion of culture in any field.

The Bank’s commitment to sustainability is evidenced by its positioning amongthe top in many sustainability indexes (e.g. in the Corporate Knights Global 100ranking, CDP Climate A list, MSCI AAA ESG rating, among others), and by itsactive participation to all the UN initiatives on sustainable finance.

Under the 2018–2021 Business Plan, the Bank reinforced the centrality ofsustainability in its business strategy, including several dedicated initiatives andspecific measures and targets on impact, within the set of Business Plan KPIsregularly accounted and communicated to the financial community. In fact, theCEO provides periodic updates on those, during his quarterly calls on results tofinancial investors, and, on a yearly basis––a few days before the announcement ofthe yearly financial results––he holds a conference with external parties andstakeholders to present the Banks’ results of the impact actions, and to share withthe community the need of a collective effort in promoting inclusion andsustainability.

The ability to act as the engine of sustainable and inclusive development is alsosubstantiated 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 micro-finance, anti-usury loans, products and services for associations and entities in theThird Sector, loan products for the most vulnerable social groups to promote theirfinancial inclusion (e.g. of young people, female entrepreneurs, start-ups) and loansto support people affected by disasters. Similarly, as part of the Bank’s response tothe economic consequences of the Covid 19 emergency, Intesa Sanpaolo launchednew impact loans, which offer extended repayment terms, highly advantageousrates and a component of non-repayable grants, to support some of the mostaffected hospitals or municipalities. Moreover, in 2019, following the guidelinescontained in Business Plan, the Bank launched a “Fund for Impact” to promote newcredit access opportunities to groups usually unserved, with funds of €250 M tosupport the disbursement of around €1.25 Bn within the three years plan.

On the environmental side, Intesa Sanpaolo disbursed in 2019 additional €2.2Bn for Green and Circular economy. The Bank has designed specific products tosupport the corporate clients’ development of efficient energy production plants anda diversification/optimization of their energy sources (e.g. Green Revolving CreditFacilities, Green Syndicated Loans, Green/Sustainable Bonds and Project Financededicated to the world of renewable energy). Moreover, in the corporate bankingarea, there is a strengthening of internal Relationship Managers’ skills and com-petences 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 mecha-nism, 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 ofIntesa Sanpaolo on circular economy is proven by its close partnership with theEllen MacArthur Foundation, of which the Bank has been the Financial ServicesGlobal Partner since 2016, and by the creation of a €5 Bn dedicated circulareconomy credit plafond within the Business Plan timeframe. The Bank alsoestablished in 2018 a partnership with Fondazione Cariplo, to launch a CircularEconomy Lab, with the mission to disseminate the circular economy principles andsupport the transition of the Group’s client companies through partnerships withacademies 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 anycustomer, there is generally a consolidated knowledge and mutual understanding.The concept of “client intimacy” gets a different and new meaning, as the financialinstitution needs to know what the positive impact is, that a counterparty or aspecific project brings to the environment or to the society. It might also require anin-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 bythe 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 operateand their potential benefits. Moreover, for larger companies, there is a dedicatedservice level with accounted Relationship Managers (RMs); moving towardssmall/medium enterprises; the degree of knowledge available to the lender ismore limited, with also a higher ratio of# of customers per RM. Therefore, ascarcity of data on the counterparty for the appraisal of credit worthiness carriesa 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 impactfactors into the credit underwriting process might imply an extension of the setof information requested to the corporate customers (e.g. additional datarequired, expanded qualitative questionnaire for the rating models). Financialinstitutions with more granular client data collection or with a higher degree offlexibility in their info system might be advantaged. On the contrary, since thereis not yet a consolidated taxonomy on what are all the ESG elements to befactored in, some banks might postpone changes on their info systems, as theyrequire significant capital budget investments and long time to deliver.

To partially overcome constraints on data availability, banks partner with ESGdata providers to complement their customers knowledge. There are several playersin this business, each with its own methodology, scope and focus of analysis.Broadly speaking, ESG data providers could represent a convenient way to get aquick, outside-in ESG assessment of a counterparty; nevertheless, few considera-tions 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 ratingsare correlated at 0.99, due to the differences in the criteria composition and thenumber of qualitative elements factored in. In particular, on Social and Gover-nance, correlation is significantly low (Poh 2019; Li and Polychronopoulos2020).

• ESG scorings usually cover only the larger and more international companies,and therefore, a different solution is required for SMEs. Only recently a moredomestic market for ESG scoring has been developing, focusing on lower sizecorporates.

• Finally, as ESG data providers are not regulated yet, the use of unreliableinformation 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 beyondtheir direct control, in particular on customers and suppliers. In promoting a moresustainable development, they might take the opportunity to partner up with theircorporate clients to support their transition to sustainability.

That would need an extensive deployment of ESG trainings to ensure fullappropriation of new approaches, metrics and language by all the RMs and cor-porate clients as well. For specific sectors, that might also require partnerships withtechnical consultancy or engineering firms/academic institutions, to be able toassess the impact of new technologies and industrial applications adopted.

Some financial players are also taking the lead in the divulgation and spreadingof a new economic culture, more sensitive to environmental and social impacts,

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towards the corporate community. Beyond a reputational standing, that mightgenerate tangible business opportunities with like-minded companies, or withcorporates pressured by coming stricter regulations or by raised expectations fromconsumers and employees. In this perspective, some financial players have laun-ched “ESG” or “sustainable finance” advisory teams, which bring to corporatecustomers sector-specific sustainability related knowledge, coupled with financestructuring expertise.

7.6.3 Governance and CEO Commitment

An acceleration towards a more sustainable finance would derive from a strongercommitment of CEOs. The latest edition of the “CEO Study on Sustainability” fromUN Global Compact and Accenture shows that personal motivation of the topmanagement is a key driver in pushing a company towards a more sustainableapproach, and leaders who are genuine in their concerns are most effective indriving sustainability and business performance. That is also an expectation comingfrom the market, as proven by Larry Fink’s (Founder, Chairman and CEO ofBlackrock) yearly letters to CEOs, i.e. in 2020 “A Fundamental Reshaping ofFinance”. To reinforce that, some financial institutions have translated sustainabilityobjectives into the variable compensation scheme. The stewardship on sustain-ability 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 toimplement;

• Stimulate not only to make incremental improvements, but also to rethinkbusiness models towards sustainability, eventually orchestrating ecosystems,partnering with public and private institutions;

• Be the spokesperson, including sustainability and positive impact in her/hiscommunication to all stakeholders.

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Buranatrakul, T., & Swierczek, F. W. (2017). Climate Change Strategic Actions in theInternational Banking Industry. Retrieved from https://doi.org/10.1177/0972150917713371.

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Stiroh, K. (2020). Climate change and risk management in bank supervision. Remarks at theConference on Risks, Opportunities, and Investment in the Era of Climate Change, HarvardBusiness 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-Report-062817.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 ofthe ISP4ESG project. Previously, she has been in Google as Industry Head of Finance for fouryears, covering the top Italian Banking and Insurance groups and, prior to that, she has been tenyears in McKinsey & Company, that she left as Associate Principal. She holds an MBA fromInsead (July 07 class) and a degree in Economics from Bocconi University.

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Part IIIDefinition and Executionof Sustainable Strategies

8Business’ Role in a Changing Society.Key Steps to Deliver a Purpose-LedStrategy that Responds to ClimateChange and Social Inequality

Charlotte Wolff-Bye

Abstract

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

Keywords

Sustainability � Leadership � Strategy � Climate change � Paris agreement �United Nations sustainable development goals � Social purpose � Stakeholdercapitalism

C. Wolff-Bye (&)Surbiton, UK

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. 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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8.1 Introduction

“Nobody will want to work for us, work with us or invest in us.” These were thestark words aired at a recent roundtable discussion on the demise of conventionalbusiness.

The year is 2020. Wildfires and floods are interchangeably making the headlineswhile public discord is disrupting daily lives in many nations, including HongKong, Iran and Chile. All while the COVID-19, or more commonly known coro-navirus, is embracing the world in crisis.

This new context is far from the realms of standard business management lit-erature. Society is changing and somehow it seems even more profound for busi-ness. What do the perils of society mean for business and responsible leadership?

The Paris Climate Agreement and the United Nations Sustainable DevelopmentGoals provide frameworks for what success would look like in 2030—bringing anend to poverty and global warming and ensuring that all people enjoy peace andprosperity. To have a remote chance of achieving these ambitions, decisive actionover the next decade is critical. With only ten years left, how can business be trustedand 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 witha growing sense of despair and inequality, with the added concern of climatechange, 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 irreversibleeffects on nature and wildlife. Scientific bodies, such as the IntergovernmentalPanel on Climate Change and the Intergovernmental Science Policy Platform onBiodiversity and Ecosystem Services, report how our current economic systemsdisturb and degrade the Earth’s processes and deplete natural resources that lifedepends on, with potentially irreversible effects (IPCC 2018; IPBES 2019).

In November 2019, a statement declaring “unequivocally that planet Earth isfacing a climate emergency”, signed by some 11,000 scientists, raised the alarm ofhow inaction would lead to untold human suffering (Ripple et al. 2020). The World

1“The ILO Guidelines for a just transition towards environmentally sustainable economies andsocieties for all … highlight the need to secure the livelihoods of those who might be negativelyaffected by the green transition and also stress the need for societies to be inclusive, provideopportunities 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 climatechange 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 otherefforts that are aimed at achieving long-term sustainable development. Going for-ward, economic growth must be decoupled from our dependence on energy sourcesthat contribute to the concentration of greenhouse gas emissions in the atmosphere.Energy efficiency, renewable energy, electrification of transport and protecting andincreasing forests are important measures to combat the prominent challenge ofclimate change. Adaptation and resilience to the effects of climate change will beequally 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 chal-lenges—as depicted by the United Nations Sustainable Development Goals—thathave the potential to exacerbate the global risk picture. Owing to the unevendevelopment and recovery from the 2008 global financial crisis, further aggravatedby the COVID-19 pandemic, real and perceived inequality continues to grow withparts of society becoming disenfranchised or disaffected. All while the adoption ofArtificial Intelligence is changing industries with direct implications for the futureof work.

The founder of the World Economic Forum, Professor Klaus Schwab, uses theterm Fourth Industrial Revolution to describe how the rapid advancement in areassuch as Artificial Intelligence, the Internet of Things, Biotechnology and MaterialsScience will fundamentally change how we live, work, consume and engage. Bigdata will transform every part of society including healthcare, education and globalsupply chains while driving economic growth (Schwab 2016).

The onslaught of disruption has already displaced many traditional jobs andcontributed to stagnating or decreased income, with the financial benefits concen-trated among technology innovators, shareholders and investors. Schwab listsinequality as the greatest societal concern, with the potential for “democraticmalaise and dereliction”, as middle classes around the world are increasinglyfeeling 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 aliving planet.” This poignant statement by the International Trade Union Confed-eration calls for action on climate change and demands a just transition (ITUC2020). Adding to the chorus is an unprecedented level of public concern aboutclimate 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, anothergrassroots movement, using tactics of civil disobedience, has been mobilising theyoung as well as senior citizens in protests. Employees, most notably at Amazon,organised a walkout of work to voice critique on their employer’s environmentalcredentials.

In 2017, #MeToo grew into a global social media movement, when severalknown Hollywood actresses made sexual abuse allegations against the film pro-ducer Harvey Weinstein. In the following year, Oxfam, the international charity,was reported to have covered up serious sexual exploitation when assigned to reliefwork after the 2010 earthquake in Haiti. The ripple effects of both cases includemore victims of sexual abuse being empowered to seek justice.

Campaigns, protests and movements as those mentioned above depict an evo-lution in societal norms, while at the same time the public is increasingly moreconcerned about the future. The widely reported Edelman 2020 Global TrustBarometer reports a growing sense of inequity in the majority of 34,000 respon-dents across 28 surveyed markets. People fear about the future, and their role in it.Overall confidence is low, with only scientists, community leaders and citizenstrusted by the majority to either do the right thing or deliver on promisedimprovements for society (Edelman 2020).

Business leaders are trusted by around half the respondents. Business is the onlyentity in society that is seen as competent in generating wealth, innovation andeconomic prosperity, yet regarded as only serving the interests of the few. Ethicaldrivers of integrity, purpose and dependability are seen three times more importantto company trust than competence. Non-governmental organisations are the onlylisted entity considered ethical (Edelman 2020).

This changing public sentiment is delivering a political response. As of February2020, over 30 countries had declared climate emergency leading to new prioritiesand regulatory changes. In March 2020, the European Commission proposed aclimate law, designed to make it the world’s first climate neutral region by 2050(EC 2020). Another example includes proposed mandatory disclosures on climaterisks for companies listed on the UK stock market, in accordance with recom-mendations of the Taskforce on Climate-related Financial Disclosures (FCA 2020).New laws and regulations are being instituted widely to protect workers’ andvictims’ rights to restitution, including safeguarding policies, aiming to protectindividuals from abuse, harm and neglect.

Investors are also increasingly concerned about the resilience of companiesaffected by climate change, the growing green economy and broader social andgovernance practices. Dedicated groups such as The Institutional Investor Group onClimate Change, Climate Action 100+ and Global Sustainable Investment Alliancepromote strengthened practices in so-called ESG—social, environmental andgovernance—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, andbusiness models will be tested. The needed change in our economies and unsus-tainable resource use will require extraordinary levels of innovation, capital real-location and transformation. Companies that can adapt to these new circumstanceshave the potential to reap substantial rewards. The business opportunity in deliv-ering towards the United Nations Sustainable Development Goals is valued at $12trillion, equivalent to around 10% of global GDP, adding almost 380 million jobsby 2030 (Business and Sustainable Development Commission 2017).

In response to regulatory pressures and growing environmental and socialconsciousness, leading companies have developed sophisticated approaches tomanage risk and adopted novel approaches to embed sustainability. Such mayinclude advanced reporting, resource efficiency, research and development, stake-holder engagement, local enterprise and workforce development, revenue trans-parency and human rights. Nonetheless, decades of major corporate scandals,including claims of accounting irregularities by Enron, Parmalat and Shell, taxavoidance by Starbucks and the BP oil spill in the Gulf of Mexico have erodedsociety’s trust in business (Grayson et al. 2018).

The financial crisis that started in 2008 affected millions of people, and pro-gressive companies began to re-evaluate the role of business in society. GE,Walmart, Unilever and M&S all launched major activities to develop a competitiveedge by addressing sustainability issues. This meant setting public targets, sup-ported by internal mechanisms to aid decision-making and delivery. Still, currentmainstream business practices are not effectively addressing global challenges, suchas lack of economic opportunity, poor health and education, and environmentaldegradation at the speed and scale required (Grayson et al. 2018).

Business does not own the responsibilities of government; however, it has anessential role in contributing to progress for society, which in turn is fundamental tobusiness 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 globalwarming, erosion of nature and social fragmentation. For business, this meansgetting to the habit of leading in constant change. But changing organisations isdifficult, often unwanted and has many risks. It is also counter-intuitive, as com-panies tend to thrive in consistent and stable operating environments with clear lineof sight of regulatory and fiscal conditions. But there is a strong argument thatsecuring future success can only be achieved by anticipating and being well pre-pared for change. This means taking selective risks, anticipating barriers and actingdecisively towards the end goal of progress for society.

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Neste (petroleum refineries), Novo Nordisk (pharmaceuticals) and IKEA (fur-niture) are examples of leading multinational companies that are evolving theirbusiness models to deliver goods and services that better respond to the needs ofsociety. Aspirational targets stretch from substantial greenhouse gas emissionreductions to preventative healthcare and circular business models that eliminatewaste.

Unilever has implied its intention to divest brands that do not match or meet thecompany’s sustainability goals. It is taking its commitment a step further bybuilding specific sustainability-themed communities, supplier and innovationstrategies around key brands, (Wood 2019). Microsoft has announced that by 2050it will remove more carbon from the atmosphere than it had ever produced since itwas founded in 1975 (Microsoft 2020).

8.3.1 Empowering Employees to Help Design and DeliverStrategic Change

Equinor, formerly known as Statoil, is a Norwegian broad energy company that ismaking dynamic moves to deliver energy in a low-carbon future.

Knowing that inaction on global warming was elevating climate change from aslow-burning concern to become a business-critical matter, the management teamhad to make bold moves to prepare for the future. In 2014–15, the company wasalready leading the industry in carbon efficiency and had a sustainability strategythat had been approved by the board of directors.

Despite international growth, Equinor had always stayed true to the strongNorwegian ethos of actively engaging employees and caring for the physicalenvironment. These traits were a good basis to address the next chapter in thehistory of the company, but it was apparent that improving existing processeswould only go some way in shaping the future of energy.

Emerging company leaders were immersed into a training programme thatincluded dialogue with dozens of international leaders from academia, business,politics and non-governmental organisations, to understand different viewpointsand expectations on how the world’s energy systems should and could evolve. Thecompany also took the time and care in engaging employees in a process ofrevisiting the purpose, vision and values of the company.

In 2015, a sharp drop in oil prices meant Equinor had to focus on costs andfurther efficiency improvements, but it also made a bet on energy systems changingand launched Equinor’s dedicated New Energy Solutions division. The manage-ment team had the conviction to steer the company in a new direction with theknowledge that employees had been involved in the change process.

The following year, a refreshed strategy was announced to the markets, with thestrapline: “always safe, high value, low carbon”. This was a transformative movefor a major oil and gas producer. The implications of such strategic change wouldbe to profoundly reconfigure how energy is produced and delivered. The imple-mentation plan was to retain a steadfast focus on remaining competitive, while

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reducing emissions from existing production facilities through efficiencyimprovements, carbon capture and storage, and investing in renewable energy andemerging technologies.

Both the company and its stakeholders were ready on launch to enact the newstrategic direction. Creating so-called “climate ambassador” among staff was seenfundamental to success, with the objective to inform and educate employees on thescience around climate change and to empower action at all levels. Suppliers wereengaged through collaborative projects to reduce emissions, thus creating widerripple effects across the whole industry.

Since the launch of the refreshed strategy, Equinor has continued to reduceemissions in its oil and gas production and made significant investments inrenewable energy and new low-carbon energy solutions. In 2019 alone, Equinorreduced carbon dioxide from its operations by 303,000 tonnes and added 1.8Terawatt Hours of renewable energy, an almost 40% increase on the year before. Ithad secured licences to build and operate some of the world’s largest offshore windfarms, including Dogger Bank with a total installed capacity of 3.6 GW, equivalentto 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 plat-forms, Equinor has established the world’s first floating wind farm combined withbattery storage onshore known as Hywind, situated around 25 km off the Scottishcoast. The company is also pursuing several promising partnerships in commer-cialising carbon capture and storage value chains and converting existing gasinfrastructure to emission-free hydrogen.

Equinor’s focus on empowering staff, early in the process, meant it could raiseambitions with ease, knowing that the whole organisation would be ready to deliverfurther emission reductions. In early 2020, Equinor pledged to be carbon neutral forall operations by 2030 and reducing net carbon intensity, from production toconsumption, of energy produced by at least 50% by 2050. It also aims to grow itsrenewable business tenfold by 2026 (Equinor 2020).

8.4 Standing up for Change

Business success depends in large part on conducive regulation, economic systemsand customer demand. This is also true in the delivery of sustainability ambitions.Success hinges on society embracing the needed change. For the world to meetstated climate goals, major changes in behaviour must be achieved, includingemission-free transportation, plant-based diets and energy efficiency in buildings.As has been seen throughout the COVID-19 pandemic response, business has thecapability to innovate, finance and deliver needed solutions quickly. To ensure thatsociety keeps up the pace, it is vital for business to take a stand on issues and callfor 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 itimportant for company CEOs to speak out on social issues, with training for futurejobs, the effect of automation and ethical use of technology being the top threeissues of concern. Income inequality, diversity, climate change and immigrationfollow in respective order. Interestingly, 74%, up nine points over the past twoyears, believe CEOs should take the lead on change rather than waiting for gov-ernments to impose it (Edelman 2020).

As global societal challenges intensify, consumers are expecting integrity andincreased advocacy or campaigning around specific causes. Business has beenfound to contribute to destruction of the natural environment or treating employeesas cost items rather than as sources of knowledge and innovation. Countless food,beverage, tobacco and financial products have left consumers in worse health orfinancial stability, whereas progressive businesses are trying to undo problems ofthe 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 thatwas formed in response to the U.S. intent to withdraw from the Paris ClimateAgreement. It is a coalition of U.S.-based public, private, community and academicorganisations, representing US$9 trillion of the U.S. economy, pledging to continueto 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 aimto drive systemic change, supported by advocacy strategies, around key issuesranging from gender issues to hygiene (Unilever 2019).

Typically, business prefers to be neutral on public issues, and only weigh in onpolitical matters when they affect direct operational interests or framework condi-tions. Speaking up carries a risk of offending someone with an opposing view orcould lead the organisation to be labelled political. However, inaction does notfurther 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 morethan 1,500 Amazon employees on climate grounds showed that employees canassert powerful advocacy. Social media offer new ways for employees to speak up,organise themselves and hold their employers up for scrutiny on what they expectto be morally just.

Why is this happening? Millennials and generation Z now outnumber previousgenerations. These social media natives are quick to share information on their likesand don’t likes. In general, younger generations tend to be more active aroundsocietal causes, and social media amplifies their influence like never before. To beon the right side of such trends, many existing brands are building their ethicalcredentials, and others are created purely on ethical grounds. Where Body Shopmight have had an ethical niche in the 1980s and 90s, displaying moral beliefs inbusiness leadership is now becoming more common. This is further accentuated bythe effects of the COVID-19 pandemic, where health and safety, the treatment ofstaff 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 coronaviruscrisis” 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 ofdemands from the public. Lofty ambitions without substantive action and coalitionsthat serve corporate posturing will not stand scrutiny. This also means that com-panies must be consistent in their advocacy and ensure that strategy, actions andrhetoric 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 BroaderStakeholder Purpose

Addressing the root causes of climate change, inequality and the opportunities andchallenges presented by technology will require new ways of working, whichmeans a change in leadership practices as we know them. Business is an essentialpart of functioning society. Thus, it must take an active role, and invest instrengthening and stabilising local society that can also support constructivepolitical processes.

Existing approaches across industry sectors are falling short in creating businessand societal value. Research undertaken by the British Academy, canvasing viewsof some 350 leading experts, delivered a firm conclusion that the purpose ofbusiness is to solve economic, environmental and social problems profitably, andnot profit from causing such (British Academy 2019).

Societal norms have evolved in such a manner that it is no longer acceptable tocause harm to society in the sole pursuit of profit. Instead, core business shouldaddress stakeholders’ challenges comprehensively and develop solutions thatbenefit from new technology and science. If done effectively, the reward should beimproved trust with society, resilience and profitability (British Academy 2019).

Economist Milton Friedman’s thesis that “business’ only responsibility is to itsshareholders” has been much critiqued as a single-minded focus on short-term gainthat incentivises unscrupulous corporate behaviour (Posner 2019). To counterbal-ance unintended consequences of such purist capitalist model, over the years,corporate regulation has been introduced to oblige companies to consider and servethe 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

2The UK 2006 Companies Act (Great Britain, Companies Act 2006) refers to enlightenedshareholder value as how a company director should promote the success of the company for thebenefit of its members as a whole, and reflecting wider expectations of responsible businessbehaviour, such as the interests of the company’s employees and the impact of the company’soperations on the community and the environment.

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shareholder interests and how long-term value and competitive advantage is createdin benefit of customers, employees, suppliers and communities through a statedcorporate purpose.

In the face of global challenges, the 50th anniversary meeting of the WorldEconomic 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. BusinessRoundtable released a new “Statement of Purpose of a Corporation” signed by theCEOs of major corporations. With this statement the purpose of business hadchanged from focusing on shareholder gains to deliver benefits for all stakeholders(Business Roundtable 2019). Larry Fink, chairman and CEO of BlackRock, theworld’s largest asset manager said, “Companies must be deliberate and committedto 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 focusmeans 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 ofmobility that is better for business, society and the environment”. Henriksson is alsovery clear that sustainability must be built into everything you do. “We will soonreach a tipping point where it is no longer possible to run a business that is notsustainable” (Lombard Odier 2019).

Leading with such purpose will help guide decisions and judgements aboutbalancing the interests of stakeholders and inspire support from investors, cus-tomers and governments that can help transform industry. One of Scania’s strategiccommitments is to reduce its customers’ emissions. Every vehicle it produces isenabled to be run on biofuels. To ensure the supply of such fuels, Scania is creatingso-called ecosystems of partners, including government, industry and customers, togrow crops for biofuels on brownfield sites that will also have economic rippleeffects 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 tobroader trends. Essential traits are fluency in emerging environmental and social issuesand how they will inflict a change on business. Big transformative decisions must bebased on scenario analyses of significant matters, robust environmental and social dataand form the basis for stakeholder engagement and new operational practices.

A key accomplishment will be to internalise them for action through organisationaland management system design and across supply chains. The real strength will be inseeing 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 aunique set of competences for delivering change through a combination of creativeand 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 fromtechnical expert roles to executive leadership positions. The skills of sustainabilityprofessionals—ranging from literacy in climate change and human rights toresource efficiency, cross-sector partnerships, employee community engagement,supply chain management, measurement, reporting and driving performance—arenow business critical (Kreeger and Yorzyk 2019).

Both accountancy firm EY and the Swedish fashion giant H&M believe in thestrengths of combining leadership and sustainability expertise. In 2019, EYappointed its former UK CEO Steve Varley to become the organisation’s globalsustainability leader (E&Y 2020).

H&M that is already known for its strong commitments to become “fully cir-cular” and “climate positive” went a step further by appointing former sustainabilitymanager Helena Helmersson to CEO. She has expressed her desire to “develop asustainable fashion industry”. Fast fashion accounts for one tenth of the world’sgreenhouse gas emissions annually; it is a major contributor to waste and humanrights concerns prevail in the value chain. H&M has major initiatives in the pipelineincluding recycling, lending and mending of garments and is leading transparencyefforts in the industry by naming its suppliers (Edie 2020).

Equinor has placed its corporate sustainability function within the company’sglobal strategy and business development division. Thus, giving sustainabilityprofessionals the befitting opportunity to inform, influence and help deliver thefuture direction of the business.

There are strong arguments for why future-oriented organisations should builddiverse sustainability leadership acumen into the job description of top executivesas well as other essential functions, including strategy, finance, human resourcesand engineering.

8.5.3 Mobilising Collaborative Innovation Arounda Common Purpose

The enormity of the challenge of reaching the Paris Climate Agreement and theUnited Nations Sustainable Development Goals calls for unprecedented coopera-tion and collaboration between business, governments and civil society. Individualcompany action is inadequate and must evolve to collective deliveries that cutacross 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 ismuch bigger than the organisation itself. Walmart’s “Project Gigaton” is a goodexample, where a company uses its leverage and expertise beyond own operationsto broaden positive impact. The retailer’s supplier engagement programme is aimedat avoiding one billion tonne of greenhouse gas across its value chain. Suppliers canearn credits with Walmart by setting targets and reporting on performance in theareas 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 emissionsacross its value chain, improving working conditions of one million people in thesupply chain and help consumers enjoy better lives (Mars).

In Europe, six major oil and gas companies—BP, Eni, Equinor, Repsol, Shelland Total—have all made public pledges around reducing carbon emissions dras-tically by 2050. While the companies are still working on detailed roadmaps to backup their ambitions, there is consensus that the industry must work across sectors andsociety to change their business models and enable lower carbon energy systems.

Engaging consumers in support of societal change is still mostly untapped in itstremendous potential. Digital platforms can help inform, engage and empowerconsumers to adopt more sustainable lifestyles. Equally, the opportunity to engageand reach vulnerable and remote communities has the potential to transform socialhierarchies and to leapfrog development. Mobilising employees, younger genera-tions and other stakeholders to engage and support changes will open newopportunities for inclusion, diversity and more human-centric approaches (Leurentand Coll 2020).

Coalitions and alliances are formed in quick succession to give an outlet for anew wave of corporate action, each addressing specific sustainability challenges.Initiatives such as the Alliance to End Plastic Waste, Global Water Initiative, The BTeam and the Oil and Gas Climate Initiative aim to accelerate the scale and pace ofdelivering towards societal goals.

Collaborating with new and unfamiliar partners can be difficult to pursue, but thepotential for innovation makes it worthwhile. By aligning stakeholders around acommon purpose new perspectives can be forged (Rodriguez).

There is no doubt that impactful political action on climate change will dependon the strengths of economic development and social cohesion. The public andprivate sector must cooperate in new ways to help deliver an as orderly as possibletransition from jobs, products and services in high-carbon sectors to deliver growthof 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 restrictionsimposed due to the COVID-19 pandemic. Shaken by the discovery of how weak oursocieties are, the conversation has turned to the desire of building a better society thanthe one we “left” only some months ago. The pandemic has exposed continuedunderinvestment, since the last financial crisis in 2008, and lack of attention to delivereconomic security and equality of opportunity to all. The old path of seeking profits atany 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 resolveand seek a new path for a resilient future that would make the Paris ClimateAgreement and the United Nations Sustainability Goals within reach.

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Portner, H. O., Roberts, D., Skea, J., Shukla, P. R., Pirani, A., Moufouma-Okia, W., Péan, C.,Pidcock, R., Connors, S., Matthews, J. B. R., Chen, Y., Zhou, X., Gomis, M. I., Lonnoy, L.,Maycock, T., Tignor, M., & Waterfield, T., (Eds.). Global Warming 1.5. An IPCC SpecialReport on the impacts of global warming of 1.5C above pre-industrial levels and relatedglobal greenhouse gas emission pathways, in the context of strengthening the global responseto the threat of climate change, sustainable development, and efforts to eradicate poverty[online]. In Press. [Viewed 23 May 2020]. Available from: https://www.ipcc.ch/sr15/.

Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES).(2019). Brondizio, E. S., Settele, J., Diaz, S., & Ngo, H. T., (Eds.). Global Assessment Reporton Biodiversity and Ecosystem Services [online]. IPBES secretariat, Bonn, Germany. [Viewed23 May 2020]. Available from: https://ipbes.net/global-assessment.

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International Trade Union Confederation. (2020). ITUC Frontline Campaigns and Four Pillars forAction 2020 [online]. [Viewed 23 May 2020]. Available from: https://www.ituc-csi.org/ituc-frontline-campaigns-and-four.

Lombard Odier. (2019). Scania and the road to sustainability [online]. Date (11 April). [Viewed26 May 2020]. Available from: https://www.lombardodier.com/.

Mars Inc.. Today’s Commitments to a Sustainable Tomorrow [online]. [Viewed 26 May 2020].Available from: https://www.mars.com/.

Microsoft. (2020). Microsoft announces it will be carbon negative by 2030 [press release]. Date(16 January). [Viewed 23 May 2020]. Available from: https://news.microsoft.com/.

Porter, M. E., & Kramer M. (2011). Creating Shared Value. How to Reinvent Capitalism—andUnleash a Wave of Innovation and Growth. Harvard Business Review. January-February 2011.HBR Reprint R1101c. Available from: http://hbr.org/.

Posner, E. (2019). Milton Friedman Was Wrong—The famed economist’s “shareholder theory”provides corporations with too much room to violate consumers’ rights and trust. The Atlantic[online]. Date (22 August). [Viewed 23 May 2020]. Available from: https://www.theatlantic.com/.

Ripple, W. J., Wolf, C., Newsome, T. M., Bernard, P., & Moomaw, W. R. (2020). World’sScientists’ warning of a climate emergency. BioScience, 70, 8–12.

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Schwab, K. (2016). The Fourth Industrial Revolution. World Economic Forum [online]. Date (14January). [Viewed 23 May 2020]. Available from: https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/.

Taylor, A. (2018). When CEOs Should Speak Up on Polarizing Issues. Harvard Business Review,31 October, 2018., [online]. [Viewed 23 May 2020]. Available from: https://hbr.org/.

Unilever (2019). Sustainability event for investors on Wednesday 11th December [online].[Viewed 23 May 2020]. Available from: https://www.unilever.com/.

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Charlotte Wolff-Bye joined Equinor (formerly known as Statoil) in 2014 as Vice PresidentSustainability in the company’s Global Strategy and Business Development division. She is alsoEquinor’s representative on the Oil and Gas Climate Initiative Executive Committee and theSteering 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 companyArcelorMittal. Prior to her career in the extractives and manufacturing sectors, Charlotte spent adecade in the telecommunications industry holding several different positions, most notably inTelefonica and O2. Previous experiences include working in multilateral lending, music marketingand diplomatic affairs. In 2018, Charlotte joined the Board of Trustees of UN Environment WorldConservation Monitoring Centre.

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9How to Approach the Developmentof a Corporate Sustainability Strategy

Sally Taylor

Abstract

This chapter will provide a framework for the development of a sustainabilitystrategy within an organisation. It is recommended that a compelling case forchange is built. Once this is established, (and bought into) the business candefine its ambition and focus on the steps necessary to achieve it. The theoreticallens of the strategist is applied throughout, with core strategic principles andframeworks applied to developing a sustainability strategy; however, this chapterwill not evaluate the moral obligation of engaging with sustainability, nor takean ethical stance. Corporate sustainability can be considered, if harnessedcorrectly, as a potential strategic asset, and this chapter will endeavour tohighlight that the successful development of a corporate sustainability strategycould significantly contribute to an organisation’s long-term competitiveness.The process described in this chapter reflects both relevant theory and thepractical experience of the author. It is recommended that all stages of theframework 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 CollegeBusiness School or its affiliates.

S. Taylor (&)Imperial College Business School, Imperial College London, South Kensington Campus,London SW7-2AZ, UKe-mail: sally.taylor18@imperial.ac.uk

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. 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 Introduction

Corporate sustainability is gaining in momentum as a surge in social andeco-awareness increases the demand for businesses to pursue a purpose beyondprofit. Many corporations are responding to this ‘market shift’ (Laszlo and Zhex-embayeva 2011), and there is compelling evidence to suggest that organisationspursuing sustainability are outperforming their non-sustainable peers. Yet, recon-ciling sustainability with corporate success is undoubtedly a challenge, andachieving the status of a sustainable organisation is certainly no easy undertaking.There are numerous challenges associated with ‘translating sustainability intobusiness strategies and operations’ (Orsato 2009).

As a prerequisite to developing a corporate sustainability strategy, a criticalreview and analysis of the organisation’s current approach to corporate sustain-ability should be undertaken to establish its sustainability profile, as characterisedby Formentini and Taticchi (2015): traditionalist, practitioner and leader.

Once the sustainability profile of the firm is established, a compelling case forchange can be built through stakeholder and industry analysis, with an assessmentof the potential risk to the organisation of not engaging more with corporate sus-tainability as well as the potential opportunities.

With the why established, an organisation should then define its sustainabilityambition, taking into consideration the current corporate sustainability approach andprofile. A clear path to achieving the ambition can be mapped to successfully convertvision 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, thischapter will apply the theoretical lens of the strategist, applying core strategicprinciples and frameworks to sustainability strategies (Laszlo and Zhexembayeva2011). Indeed, this chapter will not evaluate the moral obligation of engaging withcorporate sustainability, nor take an ethical stance. As per Laszlo and Zhexem-bayeva (2011), ‘this is not an issue of corporate social responsibility’ but rather oneof ‘market economics and business strategy’.

A strategic approach to corporate sustainability can be largely attributed toPorter and Kramer (2006), and their principle of creating ‘shared value’ for both thefirm and society, challenging the traditional notion of value creation. In summary,Porter and Kramer (2006) assert that when considered strategically, corporatesustainability can be a source of ‘opportunity, innovation and competitive advan-tage’ 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 ofvalue creation, Willard (2012) asserts that ‘sustainability investments must bealigned with the core strategy of the company’. A generic sustainability strategywill not provide any benefits to the company (Porter and Kramer 2006), nor willside-lined activities, or so-called ‘bolt-on’ sustainability (Laszlo and Zhexembayeva2011).

Many companies are guilty of ‘aggregating anecdotes about uncoordinatedinitiatives to demonstrate social sensitivity’ (Porter and Kramer 2006). Instead,sustainability should be truly embedded and integrated into the core businessstrategy, with the ‘context and capabilities of a firm determining sustainabilitypriorities’ (Orsato 2009). As cited by Porter and Kramer (2006), corporate sus-tainability should be ‘fundamentally about business and economic value creation’and therefore must be treated as a ‘core strategic management task’ (Schalteggerand Wagner 2006), rather than ‘social responsibility’ or ‘philanthropy’ (Porter andKramer 2011).

As such, it is necessary to capture the core business strategy of an organisationbefore setting out a proposed sustainability strategy. The use of Porter’s ValueChain (1985) as adapted by Ian Mackenzie (2018) (Fig. 9.2) is recommended. Oncea firm’s strategic choices have been outlined, sustainability practices should beclosely aligned to these choices.

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9.2.1 Establish the Organisation’s Sustainability Profileand Approach to Corporate Sustainability

To establish the sustainability profile of the organisation, as characterised by For-mentini and Taticchi (2015), a critical review and analysis of the organisation’scurrent approach to corporate sustainability should be conducted. Formentini andTaticchi (2015) characterise three different sustainability profiles, considering pri-marily 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 reviewand analysis of the organisation’s current approach should be conducted; theCorporate Sustainability Model (Epstein and Buhovac (2010)) (Fig. 9.3) is therecommended framework,

‘…the model describes the drivers of corporate sustainability performance, the actions thatmanagers can take to affect that performance, and the consequences of those actions oncorporate environmental, social, economic, and financial performance’ (Epstein andBuhovac 2010).

This framework should be used to evaluate the organisation’s sustainabilityinputs, processes, outputs and outcomes. Such an evaluation will provide a holisticview of an organisation’s approach to sustainability, for the Corporate Sustain-ability Model (2008) does not focus solely on sustainability strategy. As cited byEpstein and Buhovac (2014), a sustainability strategy is merely ‘a minimum

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

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Table 9.1 Different sustainability profiles

Sustainabilitytraditionalist

Characterised by traditional approaches to business that do notnecessarily include explicit triple bottom line (TBL) and sustainablesupply chain management (SSCM) initiatives, but might presentsustainability elements (Formentini and Taticchi 2015). Management isfocused only on financial performance. The company does not have aclear sustainability strategy or agenda. Initiatives are unstructured, notaligned with the business strategy and mainly focused at the corporatelevel

Sustainabilitypractitioner

Characterised by a myopic approach to business sustainability with alimited focus to one or two TBL dimensions, and isolated SSCMinitiativesThe company has a strategy, agenda and a range of sustainabilityinitiatives. 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 tothe supply/value chain level (e.g. customers, suppliers, partners).The TBL approach is often not balanced (e.g. dominant focus on theenvironmental or social dimensions)

Sustainabilityleader

Characterised by a TBL approach to business which extends to SSCMThe company has a clear strategy and agenda which is fully integratedinto the business strategy. Initiatives are structured and well balancedfrom a triple bottom line perspective. Initiatives extend to the supplyand value chain level

Source adapted from Formentini and Taticchi 2015

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

9 How to Approach the Development of a Corporate Sustainability Strategy 147

enabler’, as it must be supported with both formal and informal organisationalsystems.

According to Epstein and Buhovac (2010), buy-in from leadership is critical forsuccess. Considered in the framework as both an input and within processes, therole of leadership is central to the corporate sustainability model; management musthave a commitment to sustainability and a shared belief that it can create increasedfinancial value for the business (Epstein and Buhovac 2010).

Other aspects to consider in analysing the firm’s current approach to corporatesustainability and establishing its profile include a critical analysis of how sus-tainability is impacting the firm’s strategy and business model; is there evidence ofsustainability being integrated into decision-making and is sustainability con-tributing to building a competitive advantage for the firm? In addition, a criticalreview of the sustainability agenda should be undertaken, identifying if there areany gaps and whether or not material issues are addressed. And finally, any evi-dence of transformation should be noted.

9.3 Why

In the successful development of a corporate sustainability strategy, it is necessaryto build the case for change. Although the hope is that the why for many organi-sations will be given, and that time and resources can be immediately allocated tothe how, this is often not the reality.

Indeed, even if the business is convinced of the merits of developing a corporatesustainability strategy, it is still highly recommended that a compelling case forchange is established. As cited by Willard (2019), when ‘the going gets tough’ onthe sustainability journey, and inevitably it will, for it is a notoriously ‘messy,non-linear process’ (Laszlo and Zhexembayeva 2011), it is important to have thewhy 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 theorganisation’s environment, the actors within it and their level of engagement withsustainability, both now and how this might evolve in the future. Laszlo andZhexembayeva (2011) assert that sustainability constitutes a ‘market shift’ and, assuch, it will create both ‘winners and losers’. Professor Ioannou, from the LondonBusiness 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 alldisruption. It will be no surprise that a lot of companies will simply fail to meet thatexpectation’.

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9.3.1.1 Customers and UsersA core element of an organisation’s strategy is addressing the needs of their cus-tomers (and/or end users), and it is the customer who has been recognised as ‘themajor engine for the change toward sustainable societies’ (Orsato 2009). Laszlo andZhexembayeva (2011) describe a ‘monumental shift’ in consumer expectationsregarding sustainability. Consumers are increasingly seeking products and brandswhich align with their own values (Best and Mitchell 2018), and this is particularlypertinent for Millennials and Gen Z. Without doubt, an organisation needs to meetcurrent consumer needs and demand trends, but critically it must also anticipatechanges in these states. The extent to which this is happening in an industry and thepotential effects on customer acquisition and retention should be evaluated.

9.3.1.2 CompetitorsA benchmarking exercise will illustrate how an organisation and its competitive setare responding to this market shift, establishing its competitive position relative toits peers. The inclusion of a ‘best in class’ comparator (not necessarily from thesame industry, particularly if the industry in which the organisation operates is alaggard), is also recommended. Such benchmarking will demonstrate if theorganisation’s competitive set are pursuing corporate sustainability and whetherthey have identified it as a business imperative.

9.3.1.3 Suppliers and Business PartnersSustainable supply chain management is an essential component in the pursuit ofcorporate sustainability. As cited by Krause et al. (2009), ‘a company is no moresustainable than the suppliers that are selected […] by the company’. The samecould 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 thesame levels of commitment to pursuing sustainability and who are aspiring towardssimilar goals. As articulated by Lechler et al. (2019), ‘this is especially crucial whenconsidering the fact that focal companies are often made responsible for theirsuppliers’ failures’.

9.3.1.4 GovernmentGovernments play a critical role in the development towards sustainable societies;indeed, policy decisions taken by governments could define the future of a sus-tainable world. According to a KPMG report (2017), the government has fourdistinct roles in addressing sustainability concerns: policy development, regulation,facilitation and internal sustainability management.

The impact of public policy (particularly decisions made concerning the envi-ronment and labour law) on business activity is sizable and can indeed change theway in which businesses have to work. Considering the government’s influence insuch stakeholder analysis provides an opportunity for the firm to ‘get ahead of thegame’ rather than being in a position that is reactive to changes. There is furtheropportunity, particularly if as a sustainability leader, to lobby and shape policy. Thegovernment can be friend or foe based on a firm’s approach to sustainability.

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9.3.1.5 SocietyIt is necessary to look beyond the firm’s immediate ecosystem to consider a widercast of stakeholders. In general, sustainable development is a core topic withindeveloped societies; those who are not customers, users or partners may still havean interest in the impact of your business activities. Society at large is therefore akey stakeholder, and with ever increasing attention on sustainable corporateactivity, companies need to be aware of the conversation at societal level.

9.3.1.6 EmployeesThis chapter has acknowledged the consumer as ‘the major engine for the changetoward sustainable societies’ (Orsato 2009) and the importance of future-proofingfor 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 byDavis-Peccoud (2013), ‘sustainability matters in the battle for talent’. According tothe most recent McKinsey Global Survey (2017), 24% of organisations cited ‘tomeet consumer expectations’ when asked why they are addressing sustainability,while 21% stated ‘to attract, motivate or retain employees’. The latter areincreasingly attracted to work for companies that align with their values and this isof particular prevalence in Millennials and Gen Z (who will make up the majority ofthe global workforce by 2020 Deloitte 2019). 73% of respondents in a recentBusiness of Fashion survey claimed that ‘creating positive impact is critical to theirlong-term commitment to an employer’ (Mellery-Pratt and Soar 2019).

9.3.1.7 Owners and ShareholdersPublicly 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 oftransparency and governance. Indeed, owners have the freedom to make decisionsbased on the short term rather than more long-term considerations.

9.3.1.8 InvestorsTraditionally, investors have been predominantly driven by financial performancebut, as evidence grows demonstrating that the pursuit of sustainability can have apositive impact on long-term performance, environmental, social and governancecriteria (ESG) are increasingly employed in the decision-making process. Recentresearch by Eccles and Klimenko (2019) demonstrated that for the overwhelmingmajority of investment leaders interviewed in the study, sustainability ‘is top ofmind’, and furthermore these leaders described the ‘meaningful steps their firms aretaking to integrate sustainability issues into their investing criteria’. Additionally,ESG investors, driven by different objectives, such as accepting lower financialreturns, 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 tablesimilar to the one below:

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Today Trends 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 Reviewand the Boston Consulting Group (2017), 60% of companies have a sustainabilitystrategy, but only 25% have a supporting business case; companies combining thetwo were 200% more likely to profit from their sustainability strategies.

Yet, establishing a clear business case for sustainability is not without itschallenges. The creation of value across all three elements of the triple bottomline—economic as well as social and environmental—is the most significantchallenge (Elkington 2018). For sustainability, initiatives should be evaluated justas any other business initiative would be, ‘on their bottom-line merits’ (Willard2012).

The business case should address whether the firm’s performance, and thereforecompetitiveness, could be improved if it engages more with sustainability. Thischapter recommends establishing a two-part business case: avoiding risks (what itcould lose) and capturing opportunities (what it could gain) (Willard 2012).

9.3.2.1 The Potential Risk of not Engaging Morewith Sustainability

The threat of the risks associated with not engaging more with corporate sustain-ability could be ‘the critical motivator’ for many organisations (Willard 2019).Indeed, a full understanding of the potential risks, and their implications, could bethe ‘tipping point’ (Willard 2012), and for this reason, it is recommended that a riskassessment 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 typicalenterprise risk management (ERM) process, or aligning to the process already usedin the firm to assess business risk. This will assess, as well as quantify (in monetaryterms), the potential risks an organisation could face if it were not to engage morewith sustainability.

It is likely that this assessment will demonstrate an overwhelming risk to a firm’sreputation 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 thebrand image of a company’. For an organisation seeking to ‘maintain competitivedifferentiation’, safeguarding its reputation and maintaining brand trust is critical(Esty and Winston 2009). Furthermore, ‘the phenomenon of reputation in its var-ious forms has become an increasingly valuable corporate asset’ (Hansen 2017).Indeed, as outlined by Laszlo and Zhexembayeva (2011), intangible assets, such asreputation, now make up over 70% of a company’s stock price, whereas 100 yearsago 70% of value was attributable to tangible assets.

Ultimately, a tarnished reputation, a loss of brand trust and compromisedlegitimacy could result in a negative effect on revenue streams and future prof-itability (Willard 2012). To mitigate these very real threats, the organisation needsto 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 Morewith Sustainability?

Not engaging more with corporate sustainability could pose a considerable threat toan organisation. And yet, as cited by Schaltegger and Wagner (2006), pursuingsustainability can offer more to a firm than risk mitigation; it should also be con-sidered as a means to increase a firm’s competitiveness and harnessed as a valuecreation opportunity. As such, the potential value creation opportunities associatedwith sustainability, rather than just risk management, should form a fundamentalpart in building a compelling case for change.

This chapter proposes evaluating the opportunity of engaging more with sus-tainability through the strategist’s lens, as well as Porter and Kramer’s principal ofcreating shared value (CSV) (2006):

Policies and operating practices that enhance the competitiveness of a company whilesimultaneously advancing the economic and social conditions of the community in which itoperates (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 createsvalue for society by addressing its needs’ (Porter and Kramer 2011). To realise thepotential of shared value, organisations must adopt a strategic approach to corporatesustainability, 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 moreclosely tied a social issue is to a company’s business, the greater the opportunity toleverage 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 organi-sation 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 corporatesustainability strategy. It is necessary to take into consideration the current cor-porate sustainability approach and profile in order to create a vision for the future.

Collins and Porras’ framework, presented in the HBR article ‘Building yourCompany’s Vision’ (1996), provides an uncomplicated and straightforward con-ceptual framework to define an organisation’s vision and presents very practicalguidance for its application. Indeed, they promote a ‘substance over style’ approachto building a vision, all of which is entirely applicable to defining a ‘sustainabilityambition’.

The vision must have a core ideology, made up of core values and a corepurpose, and should be communicated as an envisioned future, with a big, hairy,audacious goal (BHAG) explained through a vivid description (Collins and Porras1996). A clear path to achieving the ambition can now be mapped, to successfullyconvert 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 (Willard2012) (Fig. 9.4).

This framework allows for easy identification of where the organisation iscurrently positioned as well as identifying the organisation’s ambition. It outlines aclear path to successfully transition from one stage to the next and yet it is importantto note that each stage need not be accomplished sequentially.

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

9.4.3 Create Strategic Pillars

It is recommended that when an organisation has identified where it is on thejourney, and where it is aiming to get to, strategic pillars should be created toprovide structure to the strategy and frame the sustainability agenda. Classic pillarscould include strategies and tactics aimed at strengthening the brand, with perhaps afocus on revenue-generating initiatives or on specific stakeholder groups.

Initiatives should be created for each of the strategic pillars and plotted on asustainability roadmap along the desired time frame. Every initiative should beassigned an owner within the organisation and a time frame, as well as a SMARTtarget. Initiatives should fall into two categories: strategic necessities, which areissues to be managed within ‘day-to-day operations’ (EY 2018) and strategicopportunities, which are potential sources of competitive advantage.

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

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Both types of initiatives are of importance; if an organisation is not making anattempt to match practices common to its industry (strategic necessities), Ioannouand Serafeim (2019) assert it risks compromising its legitimacy and will ‘likelystand 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 ‘sus-tainability practices have converged over time’, signalling inherent challenges whenattempting to differentiate sustainability initiatives to establish sources of compet-itive advantage. Furthermore, Ioannou and Serafeim (2019) attest that when amarket leader is also a sustainability leader there will be an even higher level ofconvergence amongst the peer group.

Whilst failing to match practices common to the industry in which it operatesputs an organisation’s legitimacy at risk, if the firm only strives to match practices,rather than differentiate, a competitive advantage will not be successfully estab-lished. It is only through building and maintaining a competitive advantage(through sustainability initiatives and practices which cannot easily be matched bycompetitors, as opposed to ‘imitation and homogeneity’ Porter and Kramer 2011)that an organisation will attain superior financial performance; ‘it is the adoption ofstrategic sustainability practices that is more reliably, consistently and significantlyassociated with superior performance’ (Ioannou and Serafeim 2019).

And finally, as per the strategist’s lens, initiatives must be relevant to, and helpaddress, current business activities and priorities. A process must be established toascertain whether an initiative will create shared value or if it is indeed a priority forlimited 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 reallyseeking to understand is what does sustainability mean for my organisation?Schaltegger and Wagner (2006) assert that ‘one company can’t, and isn’t expectedto, address every issue. Or even every demand made by a stakeholder’. Therefore,to determine what the business should really focus on and thus addressing thequestion above, a materiality assessment should be undertaken at the outset.

As articulated by Bartels (2014), assessing materiality is the process of ‘definingthe social and environmental topics that matter most to your business and stake-holders’. Through this process, material issues can be identified and then addressedwith the sustainability agenda and strategy. Kiron et al. (2017) assert that compa-nies achieve up to 50% in additional profit from sustainable practices when theyaddress material issues.

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According to a recent report by KPMG (Blasco and King 2017), a significantnumber of companies are now linking their sustainability strategies to sustainabledevelopment goals (SDGs). Furthermore, KPMG (Blasco and King 2017) claimsthat the SDGs will only increase in significance for both the creation of corporatesustainability strategies and reporting. As such, the SDGs are recommended as astarting framework for an organisation’s materiality assessment. The sustainabilityaccounting standards board (SASB) (2019) has developed industry-specific mate-riality matrices and the adoption of these is also recommended in the creation of anorganisation’s materiality matrix. This should be further supported by competitoranalysis to ensure issues deemed material by competitors are also considered.

It is then necessary to prioritise a process vital for creating shared value (Porterand 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 transitioningfrom responsive to strategic action. As cited by Porter and Kramer (2006),responsive corporate sustainability is ‘being a good corporate citizen and addressingevery social harm the business creates’, whilst strategic corporate sustainability ‘isfar more selective’. Being selective means considering the core competencies andbusiness activities of an organisation to determine priorities from all possiblematerial issues (Orsato 2009). The end result should be ‘a small number of ini-tiatives whose social and business benefits are large and distinctive’ (Porter andKramer 2006).

A materiality assessment should be dynamic, and as such, it should be carriedout periodically to ensure that the topics being addressed remain those mostmaterial to the organisation and its stakeholders: what matters to them and whatthey want the organisation to disclose. GRI (2019) recommends a materialityassessment is carried out every two years. Further to this, an evaluation of anorganisation’s stakeholders (and their varying importance, for ‘not all stakeholdersare created equally’ Chandler and Werther 2014) through stakeholder mappingshould also be undertaken periodically.

9.4.5 Design Sustainability Initiatives

Once a company has identified a strategic framework, the strategic pillars and thematerial issues, it is left with the exercise of designing suitable, coherent sustain-ability initiatives.

Indeed, sustainability initiatives must be assessed against the same businesscriteria as any other project (Esty and Winston 2009), with profitability at the coreof the sustainability approach (Taticchi 2019). According to research conducted bySteger (2006), very few companies consider the ‘economic logic’ of their sus-tainability strategy. Sustainability initiatives should be evaluated just as any otherbusiness initiative would be, ‘on bottom-line merits’.

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

9.5 How

9.5.1 Change Management: How to Successfully EmbedSustainability Within the Organisation

As cited by Laszlo and Zhexembayeva (2011), ‘embedded sustainability is theprimary means for achieving the goal of sustainable value’. Further underscoringthe importance of embedded sustainability, Willard (2012) devotes an entire stageof the five-stage sustainability journey to it and, as such, it should form one of anorganisation’s strategic pillars.

Achieving truly embedded sustainability often necessitates a transition fromexisting ‘bolt-on’ sustainability practices; ‘projects and anecdotes’ which are poorlyintegrated 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 effortswill only ever produce, at most, ‘fragmentary and symbolic wins’ (Laszlo andZhexembayeva 2011). This transition will require a culture change within theorganisation (this is described fully in the following chapter of this book). This isnot an easy task and ‘there is no formula’ (Willard 2019) since changing a culture isa serious undertaking which requires long-term commitment as well as changemanagement. Kotter (1995) underlines the inherent difficulties faced by firmsattempting 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 thischapter (Laszlo and Zhexembayeva’s (2011) four-step framework for the successfulembedding of sustainability within an organisation).

The aim is for sustainability to become a lens through which every employee islooking, 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 andcreating loyalty in customers and supply chain partners’.

9 How to Approach the Development of a Corporate Sustainability Strategy 157

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

Step One Getting the start right Mobilising, educating and acting around specificlow-hanging fruit

Step Two Building the buy-in Aligning company, value-added activities and allkey stakeholders around the vision of embeddedsustainabiliy

Step Three Moving fromincremental tobreakthrough

Developing clear but unorthodox goals, designingthe strategy and capturing value through co-creationand innovation

Step Four Staying with it Managing learning and energy while makingsustainability ubiquitous but largely invisible inbusiness practice

To achieve embedded sustainability within an organisation, the following ini-tiatives are proposed (please note, these initiatives are most applicable to a firm atstage two on the Five-Stage Sustainability Journey, while working towards stagefour). 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 Rightand Building the Buy-in’ (Laszlo andZhexembayeva 2011)

Managing Director Buy-in and EngagementPresent the sustainability vision and strategy tothe Managing Director and ensure buy-in andengagement; ‘without this commitment,becoming a sustainable company is a“non-starter”’ (Eccles et al. 2012)

Presentation to the BoardOnce the Managing Director is fully supportiveof the proposed vision and strategy, engaging theboard of directors and gaining their commitmentto the sustainability journey is imperative(Epstein and Buhovac 2014)

Engage all Members of Senior LeadershipEvery director must be engaged with the process,and the aim should be to gain their commitmentto the sustainability journey, as well as theirsponsorship. As cited by Laszlo andZhexembayeva (2011), this will create ‘aspringboard for all future action’. RachaelSherman (2019), Director of GlobalSustainability at McDonalds, asserts that ‘findingsustainability champions at senior levels of thebusiness is critical’

Engage Business UnitsManagers within each business unit will need tobe fully informed, as they will be responsible forthe practical application of the vision and strategy

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in their own departments. They need tounderstand the relevance for their business unitand take ownership in deriving a commercialadvantage. Business unit managers will needongoing support from the centralisedsustainability team

A Call to Action; The Wider EmployeeCommunityWith buy-in secured ‘at the top’, it is thennecessary to instigate a bottom-up approach(Laszlo and Zhexembayeva 2011).A company-wide presentation should bedelivered, followed by workshops and openQ + A sessions

Establish a Sustainability Steering CommitteeAll senior members of the senior leadership teamshould form part of the committee, which shouldmeet at least once per quarter. As per Epstein andBuhovac (2014), committee members willprovide input as well as ensuring accountabilityand responsibility. The organisation’ssustainability roadmap would be presented on aquarterly basis by the centralised sustainabilityteam

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

Invest in EducationAn education programme for all employeesshould be rolled out. This should be in additionto more specific training for individualdepartments (for example, those responsible forsustainable supply chain management)For employees within the centralisedsustainability team, an ongoing investment ineducation in the ‘fast-changing field ofsustainability’ (Willard 2019) should also bemade. This could involve attending conferencesand enrolling on relevant courses. It could also bebroadened to include the key individuals atdifferent levels of the business who have thegreatest involvement with sustainability

Guest SpeakersSustainability thought leaders, as well asrepresentatives from organisations who arefurther ahead on their sustainability journey,should be invited to speak, to inspire, provideinsight and to ‘keep the attention high’ (Laszloand 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

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9 How to Approach the Development of a Corporate Sustainability Strategy 159

9.5.2 Measurement and Reporting

As cited by Taticchi et al. (2013), ‘measurement is the base of management; dis-closure is the base of stakeholder engagement’. Measurement is vital in the mon-itoring, understanding and improvement of an organisation’s performance (Taticchiet al. 2013), and this applies equally to sustainability performance. As recom-mended, every initiative should have SMART targets plotted on a sustainabilityroadmap, which should be reviewed periodically by the senior leadership team.

With regard to reporting, an organisation should initially aim for the internalpublication of its first sustainability report. As cited by Epstein and Buhovac(2014), internal reporting ‘provides important feedback for effectivedecision-making and strategic planning’. It also provides a holistic view of indi-vidual 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 withmore than 500 employees must disclose non-financial information (EuropeanCommission 2019). Even if the firm is exempt, it should aim to publish a sus-tainability report, as doing so voluntarily further underlines a long-term commit-ment to pursuing sustainability. As cited by Taticchi et al. (2013), ‘propermeasurement and reporting (M&R) frameworks can facilitate the comprehension ofsustainability drivers, the management of processes and thecommunication/engagement to/with stakeholders, and therefore lead to superiorsustainability performance and competitive advantage’. This topic will be analysedin Chap. 11.

organisation’. This group should be‘cross-functional and cross-generational’ (Laszloand Zhexembayeva 2011) and charged withinitiating test and learn projects, and pilotingschemes conceived through ‘off-the-wallbrainstorming’ (Laszlo and Zhexembayeva2011). The group should be supported by abusiness analyst to ensure each business case isviable

Step Four: ‘From incremental tobreakthrough’ (Laszlo and Zhexembayeva2011)

Collaborate with AcademiaCollaboration with academics and researchcentres could serve to build an organisation’sreputation and credibility in the sustainabilityfield. Potential partnerships should be explored

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9.5.3 Recognition and Reward

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

9.5.4 Marketing and Branding

A key reason to engage with corporate sustainability is reputation, and the pro-tection thereof. It goes without saying that a corporate sustainability strategy needsto be supported with a robust marketing strategy. As previously cited, ‘reporting isthe base of communication’ (Taticchi et al. 2013), and yet, in addition to publishinga sustainability report, a firm must also create a ‘sustainability narrative’ (Niemtzow2018), which can be communicated both internally and externally and integratedinto the wider marketing strategy.

Furthermore, sustainability needs a strong visual identity for both internal andexternal communications and thus a branding (or, indeed, rebranding) exercise isrecommended. As cited by Laszlo and Zhexembayeva (2011), ‘relentless com-munication is needed to underscore the importance and urgency of the initiative andto 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 anin-house team and dedicated resource (a centralised sustainability team) that issufficient in size and seniority to deliver the strategy. In fact, according to Epsteinand Buhovac (2014), what matters most is not ‘the number of people working underthe top sustainability manager but the number of reporting levels above the sus-tainability officer’. To be truly effective, the most senior sustainability officer musthave direct access to the CEO and board.

The appointment of a Director of Sustainability would be recommended toensure 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 isdiscussed in chapter eleven.

If a director is not appointed, the centralised sustainability team should insteadreport to the Director of Strategy, for corporate sustainability should very much beconsidered a ‘strategic asset’ (Chandler and Werther 2014). As cited by Rasche(2019), a sustainability team in a large company reporting to either the HR ormarketing department is ‘a red flag’, indicating that sustainability practices are

9 How to Approach the Development of a Corporate Sustainability Strategy 161

peripheral, potentially cosmetic and ultimately not integrated into the core businessstrategy.

This chapter recommends establishing and maintaining a core, centralised sus-tainability team; however, sustainability initiatives should be owned and imple-mented within business units. As cited by Epstein and Buhovac (2014), thecentralised team will be responsible for ‘overall strategic planning, guidance andco-ordination’. It is also recommended that in addition to an employee educationprogramme any sustainability expertise and skills gaps within the organisationshould be addressed; knowledge as well as resources could be acquired throughrecruitment (Laszlo and Zhexembayeva 2011).

9.5.6 Short-Term Versus Long-Term Outlook

To successfully pursue sustainability, an organisation must take a long-termstrategic view (McKinsey 2017). In prioritising short-term financial gains, Porterand Kramer (2011) assert that companies could miss ‘the most important customerneeds 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 ‘acorrective’ to short-termism (Vallentin and Spence 2017).

Moreover, it will not be possible to ‘switch-on’ corporate sustainability, shouldstakeholder pressure reach a tipping point and be considered no longer possible toignore. Sustainability requires long-term planning and commitment; in a personalinterview with Rachael Sherman (2019), Director of Global Sustainability atMcDonalds, she stated that the tension between short-term returns and long-termstrategy is an ‘inherent difficulty’ with sustainability. As illustrated within thestrategic framework outlined for this chapter, it could take several years to realisefully embedded sustainability within an organisation, by which point stakeholderscould have become disillusioned and competitors even further ahead.

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Sally Taylor has over fifteen years experience in luxury retail. Currently Strategy and BusinessDevelopment Lead at a world renowned department store in London. In this role she developedand implemented the corporate sustainability strategy; presenting a compelling vision and case forchange 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.

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10Sustainability Transformations—FromTheory to Practice

Diana L. Copper

Abstract

There is evidence that sustainability is becoming more central to the wayorganisations create and capture value. As sustainability strategy becomesbusiness strategy, organisations need to change, aligning structures, cultures,systems and skills to embed sustainability. What does sustainability transfor-mation look like in practice? What are the drivers, challenges and promisingpractices in change management for sustainability? In this chapter, the authorprovides sustainability practitioners with a review of existing evidence onchange management for sustainability. The author grounds insights from theliterature with learning form primary research conducted in the engineeringconsulting sector in the UK. Then, change management practices that have beenadopted successfully in a variety of contexts are highlighted, to support readersin shaping sustainability transformation in their organisations.

Keywords

Strategy � Sustainability � Systems thinking � Change management

10.1 Introduction

In the past decade, corporate sustainability has become more central to the wayorganisations create value, adapt to external pressures, innovate and engage withstakeholders. Corporate social responsibility has evolved from being a philan-

D. L. Copper (&)Commonwealth Secretariat, Pall Mall, London SW1Y 5HX, UKe-mail: diana.copper16@alumni.imperial.ac.uk

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice,Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_10

165

thropic endeavour to being a strategy to create economic, environmental and socialvalue.

This shift was engendered by increasing awareness among regulators, consumersand firms of risks and impacts of climate change, resource depletion, inequality,globalisation and technological change. Consumer awareness has created newmarkets for sustainable products and services, and a cohort of increasingly purpose-seeking employees have made sustainability essential for organisations to attractand retain talent.

As sustainability becomes more central to strategy, organisations need to change,realigning structures, culture, skills and systems to embrace sustainability. Whatdoes 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 sustain-ability, but there are few qualitative studies of sustainability journeys. Wherestudies exist, they concern manufacturing and/or large multinational companies.There is a dearth of evidence on change management for sustainability in othersectors, and particularly, in services.

In this chapter, the author aims to provide sustainability practitioners with areview of existing literature on change management for sustainability. Learningform primary research the author conducted in the engineering consulting sector isincluded. Change management practices that have been adopted successfully in avariety of contexts are highlighted, to support readers in shaping sustainabilitytransformation in their organisations.

The chapter includes an overview of the existing relationship between organi-sations 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 sustainabilitytransformation in organisations, highlighting how firms have embedded sustain-ability in business strategy and realigned structures, culture, systems and skillsto achieve sustainable outcomes (Sects. 10.4, 10.5, 10.6, 10.7, 10.8). Sec-tions 10.4–10.8 are in three parts. Findings emerging from the literature are high-lighted first, followed by findings from primary research the author conducted in theengineering consulting sector; finally, in a table, promising practices that can beadapted in sustainability transformations are summarised.

Section 10.9 looks at challenges in change management for sustainability. Theconclusion summarises key themes and areas where further research is needed.

166 D. L. Copper

10.2 Sustainability and Organisations: An EvolvingRelationship

10.2.1 Context

Two milestones in the global ambition for sustainability are becoming increasinglyentrenched in corporate sustainability efforts. The first is the signing of the ParisAgreement in 2015, setting out clear national targets for carbon emission reductionand channelling governmental and private sector efforts to address climate change.

The other key milestone is the adoption in 2015 by the United Nations of theSustainable Development Goals (SDGs), identifying seventeen key areas whereglobal efforts to achieve development need to be focused, taking into accounteconomic, social and environmental needs of present and future generations. TheSDGs are providing a cognitive framework for organisations to conceptualise andreport on their sustainability achievements. It is the first time that a multilateralframework has been influential on private sector goal-setting (see Chap. 2 of thisbook).

As sustainability becomes more central to organisations, studies have emergedon sustainability theory and practice. These point towards an evolving definition ofwhat 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 withinorganisations over the years, including corporate social responsibility, corporatesustainability, responsible leadership, sustainable development, climate change,environmental performance, sustainable and circular economies, green businessmodels, business sustainability, environmental, social and governance approach,triple bottom line, sufficiency economy and ‘business in nature model’ (Dyllik2002; 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 appli-cation by organisations themselves (Doh and Quigley 2014). Whilst the ‘fuzziness’of the concept poses some challenges in relation to measuring and comparingoutcomes, there are advantages to an ‘emergent’ definition of sustainability,allowing the concept to be dynamic, context specific and responsive to the need ofmultiple stakeholders.

There is increasing recognition that ‘system’s thinking’ may be a helpful con-ceptual framework to understand what sustainability means (see Chap. 3 of thisbook).

This approach acknowledges that sustainability itself is not an end goal but aprocess (Lahtinen 2019). It is a way of thinking and adapting in the face of evolving

10 Sustainability Transformations—From Theory to Practice 167

circumstances, dynamic relationships and positive and negative feedback loops thatreinforce or undermine existing paradigms (Williams et al. 2017).

A systems’ understanding of sustainability is key to achieving sustainabilitytransformations in organisations. It allows for sustainability leaders to co-create asustainability language with key stakeholders including colleagues, customers,clients, regulators and suppliers (May et al. 2017). In the planning and execution ofsustainability 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’ amongchange actors. Finally, a systems approach recognises some of the key skillsrequired for sustainability transformations: complex problem-solving, emotionalresilience to complexity, trust and cognitive diversity.

For the purpose of this chapter, the definition of corporate sustainability pre-sented in Chap. 4 is used: ‘Corporate sustainability is an integral approach tobusiness aimed at enhancing competitive positioning and profitability through thesustained creation of shared value, co-creation practices with stakeholders and theintegration of ESG factors in decision-making’.

10.2.3 From Corporate Social Responsibility to CorporateSustainability

In the past decade, sustainability has evolved from being considered a ‘cost ofdoing business’ (Kennedy et al. 2017) to a driver of competitive advantage viabeing a compliance requirement (Dunphy et al. 2010). Where the complianceapproach is reactive, the strategic approach to sustainability is aggressive andproactive (Taticchi et al. 2017). Sustainability has moved from being project ori-ented, aimed at expressing good intention, to quality oriented, looking for opera-tional efficiencies, to strategically oriented, looking for critical businessopportunities involving complex network of strategic relationship and activities(Kiron et al. 2017). Strategic sustainability engages values, skill sets and organi-sational learning and recognises the value in building and maintaining relationships,rather than engaging with stakeholders transactionally (Martinuzzi and Krumay2013).

A number of categorisations and taxonomies have emerged, tracking whereorganisations are in the journey between compliance and creating new sustainablebusiness models (Nidumolu et al. 2009; Formentini and Taticchi 2016). Thesecategorisations provide a useful backdrop from tracking a sustainability transfor-mation in organisations.

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10.3 Becoming a Sustainable Organisation

10.3.1 Framing Change

To move from a compliance approach to sustainability to a strategic one, anorganisation needs to undergo a process of change that addresses strategy, valuesand capabilities, beyond the merely technocratic (Lozano 2015). Becoming a sus-tainable organisation requires a distinct kind of leadership effort that is beyondconventional management and requires strategic (vision), tactical (enabling envi-ronment) and operational (everyday practice) action (Lahtinen and Yrjölä 2019).

A number of change management frameworks help understand sustainabilitychange. The contingency approach, in line with systems thinking, highlights changeas continuous, multidimensional and challenging, engaging people, behaviours,practices, processes, structure and mechanisms. This framework helps to accountfor the complex, multidimensional and context-specific nature of sustainability.

Kotter’s widely used change model is also helpful to think through the ‘how’ ofsustainability transformations involving understanding, communicating, executingand institutionalising (Kotter 1996).

The literature on the reach and timing of change management is also relevant tosustainability. Effective change is about ‘alignment’ of the critical factors that makeup an organisation. A useful model to think about organisational factors is anadapted 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 optimalperformance when strategy is placed at the centre, and all other elements are alignedto the strategy. The literature, as well as empirical evidence described later in thechapter, indicates a relationship between the depth and scope of organisationalchange and sustainability performance (May and Stahl 2017) supporting this per-formance hypothesis (Fig. 10.1).

Fig. 10.1 AdaptedMcKinsey 7s Model (SourceMcKinsey 1982)

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The process of keeping these elements aligned and particularly aligned withorganisational strategy can be proactive or reactive. Proactive changes occur inanticipation of external events and involve adjustments or major changes without asharp 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 effectivelycontribute to sustainable societies (Lozano 2018a), is often a reorientation typeeffort. Most existing studies of sustainability change management highlight theiterative, constantly evolving and learning nature of the process. Frame-breakingtype of changes rarely observed, though pursuing a transformational sustainabilitystrategy 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 themselvesinclude customers, consumers and employees (UNEP 2010). Customer/clientdemand, reputation, regulation, technological and environmental change areexternal drivers. Internal divers include leadership, the business case for sustain-ability, efficiency, collaboration and innovation (Ha 2014; Ivanaj et al. 2015).Employees, and particularly millennials, seeking purpose through their employ-ment, are also an internal driver (Dunphy et al. 2010). Lozano’s sustainability drivermodel highlights internal and external drivers and the connection between these(Lozano 2015).

The interplay between external and internal drivers is dynamic and can createsubstantial value, in the form of collaboration and co-creation betweencustomers/clients and firms and between firms within and cross-industry (Ivanajet al. 2015; Niesten et al. 2017; Arnold 2017).

Fig. 10.2 Types andtimeframes of change (SourceNadler and Tushman 1989)

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10.3.3 Sustainability Transformation Journeys

In the previous sections, sustainability was defined and the evolution of sustain-ability approaches within organisations was tracked. Different approaches to changemanagement that can be useful to understand sustainability transformations werereviewed. In the next sections, the author describes how sustainability transfor-mations happen, starting from the integration of sustainability strategy into businessstrategy (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 executestrategy. Each section starts with a review of the academic literature on the topic.Findings from primary research the author conducted on a global engineeringconsulting firm based in the UK are then included.

The research was conducted as part of an Executive MBA for Imperial CollegeLondon in 2017. It was carried out at a time of steady expansion of sustainabilityservices, with demand for sustainability consulting globally estimated to grow by4% annually between 2015 and 2021 (Verdantix 2015). The firm studied providesengineering consulting services in the infrastructure industry, with practices inwater, transport, energy, construction and international development. The data wascollected through semi-structured interviews with leadership, senior and middlemanagement in both sector and corporate functions. A review of internal andexternal documentation regarding the firm and its sustainability strategy was doneto triangulate findings.

It is hoped that the outcomes of the empirical research will ground insightsemerging from the literature and support practitioners in understanding howtransformations can work in practice. Each section terminates with a box withpractical suggestions that sustainability practitioners can apply in their ownorganisations.

10.4 Sustainability Strategy as Business Strategy

According to the growing literature on sustainability and strategy, firms becomesustainable ‘sustainably’ when they develop competitive advantage through ‘eco-logically and socially supportive production processes […], and innovative humanand knowledge resource management practices’ (Dunphy et al. 2010:146), whenthey consider sustainability as an opportunity to create and capture value rather thana risk to be managed (Gasbarro 2017).

Sustainability is strategic when it is clearly articulated as ‘value creation story’; itis anchored in a clear business case, and spelled out in a long-term vision, a policywith clear goals and targets, an implementation plan developing new organisationalcapabilities 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 thinkingand approach to relationship management (Arnold 2017; Grewatsh 2017), andrequires deep understanding and intense collaboration with stakeholders across thevalue chain (Sàrda and Pogutz 2019).

Sustainability needs to be a matter of strategy clearly addressed by CEOs and theboard (Battacharja 2017). It is important that a sustainability plan clearly spells outresponsibilities and accountability, strategic, tactical and operational actions(Lahtinen and Yrjölä 2019), engaging the organisation and having clear systems formeasuring, monitoring and reporting outcomes (Sàrda and Pogutz 2019).

In terms of outcomes, the literature emphasises how firms that address materialissues 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). Thereare particularly positive results where sustainability is embedded in strategy, andfirms 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 sustainabilitystrategy has an impact on the sustainability performance (May and Stahl 2017).

In the engineering consulting firm studied, sustainability transformation waspredicated on closing the gap between corporate strategy and sustainability strategy.While reviewing its position on sustainability in 2013, the firm’s Board rejected theoption of keeping sustainability separate from the firm’s broader value propositionby developing a separate suite of sustainability services. Rather, it opted for ‘strong’approach to sustainability, making it an integral part of its value proposition toclients in all service provision and making sustainability a part of the jobdescription of the 15,000 employees. The idea behind this approach was toengender growth across the firm’s sectors by improving services through the sus-tainability value-add, rather than engender growth in sustainability services only.

Employees interviewed for the research acknowledged that since this strategicstance from the top, sustainability had become part and parcel of the work of thefirm not an ‘ad on’. Interviewees identified a clear shift from a corporate socialresponsibility approach to a strategic sustainability approach, where sustainability isseen as a value-adding proposition fully embracing all aspects of the organisation.

Staff were helped to identify things they were already doing: reducing, repur-posing, cutting out, as sustainability. Client focus was a key element of thisapproach to sustainability. The firm ‘exploited’ the perceived weakness of sus-tainability, i.e. the ambiguity of the term, to tailor its value proposition in relation tosustainability to the needs of each client.

Whilst the sustainability offering varied from client to client, there was a strongfocus on achieving positive environmental and social outcomes and a universalfocus on achieving efficiency, through, for example, innovative design. Efficiencywas 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 withthe client to share cost savings achieved by implementing sustainability effectively.This opportunity to capture value further inspired the firm to deliver value throughconnected thinking, leveraging expertise in different parts of the firm and trans-ferring lessons across sectors or across geographies.

Part of the value creation and capture was linked to a focus on material issues forthe 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 sustainabilityapproach in concrete terms in a way that both staff and clients could easilyunderstand and operationalise.

In terms of change process, listening and understanding stakeholders, and clientsin 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 enabledunderstanding of what the client’s sustainability questions, challenges andapproaches were and an elaboration of how the firm could better ‘interpret’ sus-tainability in a way that was value creating to the client.

The information garnered enabled the creation of a strong business case forsustainability within the firm, demonstrating value to client and versatility of thesustainability concept to achieve client focus. It also provided feedback for theempowerment and the capacity building of account managers and account leadswithin the firm.

Further, the sustainability team in the firm embarked in a series of one-to-onemeeting with senior management to understand their aspirations, and enlist supportfor the development of a sustainability vision and approach.

To flesh out this vision, the board was engaged, and was given three options: aweak option, where effectively the firm would make no change to the currentapproach and be ‘one of the pack’, a second option where the firm would adopt a‘strong’ sustainability approach embedding sustainability in its strategy andbecoming a leader in the industry or a third option, becoming an overall leaderbeyond 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 takeforward wider leadership on specific issues more broadly, for example, carbonefficiency and management.

A sustainability roadmap and action plan were then articulated, incorporating theaspirations expressed by top management during 1–1 discussions with the sus-tainability team as well as results from client survey and engagement. The roadmaphad a number of prongs, including skills development to enable all staff across thefirm 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 creatingstory’.

• Focus on material issues.• Make sustainability part of everyone’s job.• Understand stakeholders’ needs through surveys, one-to-ones and stake-

holder 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 isessential to sustainability performance (Kiron et al. 2017). Leadership is animportant structural dimension that impacts sustainability performance (May andStahl 2017).

Board involvement, oversight and leadership is essential, as well as integratedgovernance for sustainability (Dunphy et al. 2010; Kiron et al. 2017; UNEP 2014;Battacharja 2017). Diversity of expertise and backgrounds at board level is anenabling factor (Meuleman 2013; Fuente 2016).

Beyond the board, sustainability and accountability for results need to be inte-grated in multiple departments (Lozano 2015) and cross-functional teams (Kironet al. 2017), from junior staff to middle management (Dunphy et al. 2010). Inte-gration at different levels in the organisation is essential because knowledge isdispersed and does not reside in one person or team specifically. The sustainabilityteam has an important role in thought leadership, considering trends and challengesand coordinating different actors involved (Lahtinen 2019).

The use of change agents embedded throughout the organisation with expertiseand vision is pivotal to successful sustainability transformations (Dunphy et al.2010; Ha 2014; Stroufe 2017). The effectiveness of change agents is dependent ontheir mindsets and approaches to sustainability, but also on a number of contextualfactor, both internal (strategy, management commitment, planning, collaborationand organisation of roles) and external factors (government action and technology)(van den Berg et al. 2019). Sustainability champions can act as nodes and affectsystems change. As managers respond to improving indicators of sustainable

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progress, positive feedback loops are engendered and reinforce sustainabilitytransformation (Williams et al. 2017).

In the engineering consulting firm researched, in order to achieve the firm’ssustainability vision, there was a strong understanding that structure needed tofollow strategy and that sustainability leadership and know-how had to beembedded throughout the organisation.

There was consensus that responsibility and leadership for sustainability residedin the hierarchy vertically, horizontally, at the level of project, practice, functionand region. Each project benefitted from environmental and sustainability oversightat inception, and expertise was made available throughout the lifespan of theproject.

At the very top, the board is involved in the delivery of the sustainability strategythrough the Chairman and a sustainability lead. Expertise and leadership was also atthe front line, in account management and project design. The sustainability leaderand the sustainability team provided overall leadership, horizon scanning andcoordination.

In terms of change practices, the use of sustainability champions was a suc-cessful way to ensure sustainability leadership throughout the organisation.Champions were important to the visibility of the agenda, to idea generation andknowledge transfer across the organisation.

Champions provided front-line staff with tools to achieve sustainability out-comes and ensured coordination. Sustainability champions were also included inthe network of early career professionals underscoring the importance of thisagenda for future leaders in the firm.

Sustainability champions across the organisation benefited from context speci-ficity and flexibility. There was no standardised job description for sustainabilitychampions, but each was enabled and empowered to lead. This allowed for a degreeof ‘self-organisation’ and emergence of unexpected collaboration and innovation,underscoring the importance of balancing structural interventions with flexibilityand 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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10.6 Creating a Sustainability Culture

The literature on sustainability and organisational culture highlights a number ofessential values. Complex problem-solving, sense-making and emotional resiliencein the face of ‘wicked problems’, conflict and change are essential leadershipqualities to achieve sustainability outcomes (Metcalf and Benn 2013; Williamset al. 2017). The need for these ‘system’ capabilities is observed cross-culturally. Inthe Asian context, for example, perseverance, resilience, moderation and sharingare key values of sustainability leaders (Ketprapakorn 2019).

The leadership style most associated with complex problem-solving distributedintelligence, 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 iscollaboration. This is true both for internal collaboration and engagement withstakeholders, including other firms and even competitors, across sectors and acrossdisparate 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 innovationand risk sharing, and the ability to better identify and capitalise on global oppor-tunities (Dunphy et al. 2010; Kennedy et al. 2017). There is a clear link betweenrelationship management among firms, co-creation and sustainable innovation, withbenefits increasing the more diverse the stakeholder group involved (Arnold 2017).The ability to manage conflict and mediate conflicting needs of different stakeholderis needed in sustainability leaders.

In terms of sustainability outcomes, an organisation’s culture, principles, valuesand characteristics have an impact on how successful the implementation of thesustainability strategy is (Macke and Genari 2019; May and Stahl 2017). A keydifference is made by committed employees’ driving action (van den Berg 2019).

Further, values highlighted as essential to effective sustainability transformationsinclude agility, flexibility and adaptability (Dunphy et al. 2010; Metcalf and Benn2013; Martinuzzi and Krumay 2013; Lozano 2015; Davis 2016, Kennedy et al.2017). Transparency and the ability to learn from failure are extremely relevant tochange management for sustainability (Lahtinen and Yrjölä 2019).

In the firm studied, there was a clear understanding that sustainability is neededto engage the culture and values of the firm for it to be truly everyone’s respon-sibility. The firm tried to instil sustainability as a core behaviour so that individualscould apply it almost subconsciously, and be empowered to solve problems ininnovative ways.

Empowering staff was viewed as critical, beyond process type changes. Theneed to have sustainability leadership at every level of the organisation, rather thancentrally held, was deemed essential to respond to the complexity of the challengesthe firm and clients were facing. It was clear that one person and one team wouldnot 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 ‘collabora-tive’ approach where the sustainability team is repository of the questions but notthe answers was deemed essential.

The firms’ sustainability journey fostered collaboration as a key value. Allinterviewees acknowledged that sustainability had increased collaboration acrossthe organisation and contributed to connected thinking to solve complex environ-mental and social problems. The transfer of solutions and best practices acrossclients, projects and geographies was helpful to embed the firm’s sustainabilityoverall approach. This resulted in significant opportunities for the firm.

Collaboration increased internally, but also externally with clients and also withcompetitors. The firm partnered with others to achieve overall industry change. Thiswas the case with the firm’s leadership on thinking about carbon reduction in theinfrastructure value chain, in the UK. The firm’s commitments and thought lead-ership resulted in substantial reputational gains. Employees felt that externalcommitment was a powerful statement from the firm’s top leadership in relation tothe role of sustainability within the firm.

In terms of change practices, the shift in the firm culture was achieved bycascading leadership at all levels, affording individuals’ trust and ownership tointerpret sustainability in the context of the client relationship and identify oppor-tunities. 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 tounderstand sustainability transformations. There was a degree of self-organisation,where the sustainability beliefs and agendas of individual employees could meldand consolidate a sustainability culture within the firm. There was ‘space’ within aclear strategy and implementation plan for ‘emergence’ of sustainability innova-tions and spontaneous collaborations. This has allowed for ownership andempowerment of individuals creating positive feedback loops that have catalysedthe sustainability transformation.

The use of sustainability champions highlighted in the structure section wasenabling for cultural change as well, embedding sustainability advocacy at everylevel 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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10.7 Implementing Sustainability Through Systems

Whilst leadership, the buy-in and empowerment of individuals is important inachieving sustainability transformation, it is equally important to embed sustain-ability in key systems and processes to reduce reliance on individuals (Dunphyet al. 2010).

The development of a sustainability system serves a number of purposes inorganisational transformation: allowing communication, collaboration and learning;developing data for decision making; measuring and monitoring economic, socialand environmental value created, and enabling transparency and reporting, bothinternally and externally.

Systems for clear and continual communications are important because organ-isational discourses and narratives have an impact on organisational structure andthe success of sustainability transformations (Narayan 2016).

A number of specific sustainability systems and processes have beencreated/adapted to measure and monitor results achieved across the whole valuechain. Commonly used systems include life cycle analysis and assessments, bal-anced scorecards, carbon footprint and/or energy footprint analysis, environmentalaccounting, enterprise resource management and the use of quantitative, qualitativeand financial metrics (Sàrda and Pogutz 2019).

The manufacturing sector has seen an increase in the use of big data analytics forbusiness intelligence, supply chain management, procurement and operationsmanagement, improving capabilities, competitive advantage and enabling sustain-ability transformation. The likelihood of the use of big data analytics for sustain-ability is dependent on a number of contextual factors including integration inglobal value chain and government regulation (Raut et al. 2019).

The importance of reporting cannot be overstated in the literature. Sustainabilityreporting is considered a helpful way of measuring sustainability outcomes andinspires further sustainability change (Lozano 2018b). Reporting enables learningand signals transparency.

To foster internal learning, it is important for different organisational departmentto participate in the reporting effort, as different individuals will bring insightsdepending on where they sit in the organisation. As change happens iteratively,reporting allows to track continuous improvement. There is evidence that compa-nies where the board is more diverse and has mechanisms to engage with sus-tainability (e.g. committees) are more likely to report sustainability outcomes(Fuente et al. 2017). For learning, it is important that organisations disclose what isworking, but also what is not working (Lahtinen and Yrjölä 2019). The cumulationof learning form reporting can contribute to industry/system level change (Lozano2015).

There is also increasing demand for transparency and disclosure from govern-ments, civil society organisations and investors. Recent years have seen an expo-nential increase of the use of non-financial reporting. A number of global initiativescapture organisations’ reporting, including the Global Reporting Initiative,

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reporting under EU Directive 2014/95, the Sustainable Stock Exchange Initiativeand the International Integrated Reporting Council and Sustainability AccountingStandards Board. Reputational gains can yield to organisations who report in astandardised and recognised way, while the existence of these global frameworksenables tracking the development sustainability as a new business paradigm (Sardàand Pogutz 2019).

In the firm studied, to enable collaboration across the firm, communication andknowledge sharing systems and practices were initiated. The firm also developed asuite of models for carbon measurement and management, and economic and socialimpact assessment. These are shared across projects to achieve sustainabilityoutcomes.

In terms of change practices in the area of communication systems, the annualsustainability week was identified as particularly transformative as well as theannual sustainability award. These enabled individuals and teams to share infor-mation and understanding on sustainability challenges and solutions. They enabledcollaboration to be established between teams and created an atmosphere of healthycompetition, where visibility and financial reward stimulated teams to beinnovative.

The use of ‘yammer’ groups was also deemed particularly helpful to disseminateand share information, initiate and consolidate collaboration across teams andgeographies. All interviewees mentioned how they use the firm’s social media toolsto communicate, share, jointly solve problems and establish new connections.

Sustainability reports, a relatively new initiative by the firm, highlight in thewords of clients the impact the firm on the client’s sustainability aspirations, and thefirm’s engagement with social issues (employment, regeneration, equality anddiversity). The company’s external twitter account was also referenced as a vehiclefor internal visibility, communication and leadership. Interviewees acknowledgedthat sustainability is one of the priorities of the firm that is better communicatedinternally 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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10.8 Developing Sustainability Skills and Capabilities

Skills development is often neglected in change management efforts, but researchindicates that organisational learning and innovation are pivotal for organisations toembrace sustainability. Key skills required for sustainability leadershipcross-culturally include perseverance, resilience and moderation, (Ketprapakorn2019). In turn, sustainability positively encourages the building of specific organ-isational capabilities such as confidence, innovation and independent thought(Davis 2016; Kennedy 2017; Grewatsh 2017).

Because of the unpredictability, complexity of sustainability itself, its non-linearand emergent nature and impact, skills building for complex cognition is essentialto solve sustainability problems. Developing skills for holistic thinking is found inthe literature to be the most important leadership skill. Managers need to cultivateadaptive capabilities in order to continuously sense-make change (Metcalf andBenn 2013; Williams et al. 2017). Sustainability challenges leaders to reconcilemultiple and conflicting goals and requires extraordinary capabilities. The ability tohold conflicting situations and sustainability tensions is essential to ensure overtime interconnections between system elements and the maturation of sustainabilityoutcomes (Williams et al. 2017).

In terms of outcomes, the development of human and social capital contributesto organisational longevity and performance for and beyond sustainability in theknowledge-based economy (Dunphy et al. 2010; Ha 2012; Martinuzzi and Krumay2013). There is emerging evidence of a link between cognitive diversity andleadership ability for sustainability (Williams et al. 2017).

In the firm studied, the importance of skills cannot be underestimated, given theengineering consulting industry and the level of challenges the firm and its clientsexperience.

In the interviews, it was universally acknowledged that sustainability was fun-damental to the firm to attract, motivate and retain talented staff. Employees,especially newer recruits, ‘millennials’, attached great importance to the firm’spurpose, as contributors to environmental and social value. Senior management waskeenly aware that the sense of purpose, integrity and moral imperative associatedwith 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, back-ground, experiences and field of study was deemed essential to bring a fresh pair ofeyes to the sustainability challenges experienced by the firm. Many intervieweesacknowledged that the firm had become more skills oriented in the last few years.The fast pace of external change had required innovation and continuousimprovement, across geographical and cultural boundaries.

Skills recognised as essential to sustainability were complex problem-solvingand innovation. The firm’s drive towards behavioural change for sustainability issupporting the development of these skills across the firm: for example, innovationfor sustainability is part of the job description of practice leaders, who are expectedto be on the look out for things that could match client’s needs. There was a mix of

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formal and informal skills building within the organisation. Professional excellencetraining was referenced, as well as courses both in person and offline. The informaltypes of skill-building were frequently mentioned as powerful, including theavailability of sustainable expertise at project level, the sustainability team itself, thesustainability weeks and awards, client events and practice networks all facilitatedskills 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.

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

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10.9 Challenges

A number of studies on sustainability transformation are emerging, providingpractitioners with useful information on how to develop and execute sustainabilitystrategies.

Studies however also point to considerable challenges and barriers to successfulsustainability transformations.

One of the key barriers is the lack of internal consistency between businessstrategy and sustainability strategy. Aspirations do not always translate into com-petitive action. This consistency gap is an obstacle to achieving sustainabilityresults (May et al. 2017).

A major review of sustainability in organisations identified a big gap betweentheory and practice. As sustainability is a moving target and constantly evolving, itrequires a careful balance between clear targets and measures and enough flexibilityto adapt to emerging issues. It is imperative that practitioners and leaders continueto ask the right questions and remain alert to new trends and challenges. Knowledgeand good practice on sustainability solutions is still emerging and is often difficultto access. In many cases, sustainability remains confined to supply chains, but thereis a need to consider the whole value chain. Whilst the number of sceptics on theneed for action, e.g. on climate change is decreasing, there is still an overwhelmingnumber of ‘undecided’ people, customers, investors and employees that need to bebrought on board in order for organisational and system transformation to beembraced. There is also a need to shift the mentality of firms and sectors fromcompetition to collaboration to solve the challenges of sustainability (Battacharya2017).

The applicability of lessons learned in sustainability transformation across size,sector and geography remains to be explored. Different geographical and culturalcontexts, different regulatory pressures affect the drivers of sustainability andexecution of strategies (Ivanaj et al. 2015). Most research has been conducted inEurope, North America, Australia and to a lesser extent Asia and South America,but little is known about how sustainability is conceptualised, embedded andpractised in other parts of the world.

The majority of action, and the analysis of same, seems to be occurring in largeorganisations. Though extrapolation can be made to smaller companies, compara-tively less is known on sustainability challenges and action in Micro, Small andMedium Size Enterprises (Fairfield et al. 2011).

There are also challenges with monitoring and reporting. Self-reporting hassignificant limitations (Dunphy et al. 2010), and there are also a multiplicity ofsystems and standards for tracking and reporting different aspects of sustainability(Mustapha et al. 2017). The relationship between corporate reporting (e.g. GRI) andstate reporting (e.g. to the UN, the SDGs) requires conceptualisation and research.The Reporting on the SDG Action Platform, an initiative of the UN GlobalCompact 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 whilediscussing the firm’s sustainability journey; but when asked to enumerate keyoutcomes, there was some hesitation in clearly spelling out and quantifying results.

The reluctance to quantify is understandable and coherent with the firm’s viewof 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 outcomesof sustainability in the firm might be helpful to ensure continuity and energy in thefirm’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 ratherthan complementary with sustainability. While the firm has leveraged the ambiguityof the term sustainability as a strength, enabling it to be tailored to clients’ needsand aspirations, a number of interviewees were uncomfortable with this ambiguity.

Developing a strong and clear narrative around sustainability results wouldcontribute to countering this narrative and provide renewed energy and impetus tothe firm sustainability journey. Sustainability reports may support the firm in thisregard.

10.10 Conclusion

There is evidence that sustainability is becoming more central to the way organi-sation creates and captures value. As sustainability strategy becomes businessstrategy, organisations need to align structures, cultures, systems and skills toembed sustainability.

Research on change management for sustainability remains fragmented, andmostly concerns multinational corporations and the manufacturing sector in thewestern world.

There are promising theories and practices emerging from the literature, as wellfrom the primary research conducted by the author, which provide valuable insightson the process of sustainability change.

The definition of sustainability is ambiguous. This is both a strength and aweakness. It enables organisations to co-create a sustainability language with theirstakeholders as well as adaptation to a constantly shifting landscape and emergingissues and solutions. On the other hand, ambiguity contributes to fragmentation andposes challenges to measuring and comparing results across sector.

The relationship between sustainability and organisations has evolved fromphilanthropic endeavour to value creating story. Where this has happened, a numberof benefits have accrued to organisations. There remains however a ‘consistencygap’ (May et al. 2017), and a difference between theory and practice, which meansthe alignment of business strategy and sustainability strategy is still a challenge formany organisations.

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Aligning structure, values, systems and skills to achieve sustainability withinorganisations requires a clear vision, targets and measures of success and a sub-stantial change management effort.

Change happens in an iterative structured and unstructured, planned and unplan-ned way. The engagement of the Board and C suite is essential to sustainabilitytransformation. Sustainability champions play a key part in change, especially if thecontext 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 sustain-ability transformation process, top down, bottom up and sideways in organisations.

Creating a culture of collaboration is essential to achieve sustainable organisa-tions and sustainable development more generally. There is a link between col-laboration and value creation and sustainable innovation. Joint problem-solving andstrategic engagement with networks can engender a paradigm shift from competi-tion to collaboration.

The adoption and/or creation of systems is essential to complete sustainabilitytransitions beyond individual leadership and commitment. Systems serve a multi-plicity of purposes; they enable value creation and implementation, help commu-nicate and inspire and allow for measurement and reporting. Transparent andstandardised reporting is important to enable learning and organisational and systemchange.

The literature has identified key skills needed to imagine and implement sus-tainability change, including complex cognition, emotional resilience to uncertaintyand conflict, curiosity and openness to learning. As these are not ordinary man-agement capabilities, organisations should invest in both formal and informal skillsdevelopment and learning. There is a relationship between sustainable outcomesand diverse cognition. The link between sustainability and diversity should befurther investigated and strengthened.

Gaps and uncertainty remains. This chapter, however, has identified a number ofgood practices readers can apply in their sustainability transformation, as sum-marised in the table below.

Change practices in strategy development

• Align sustainability strategy to business strategy with a ‘value creatingstory’.

• Focus on material issues.• Make sustainability part of everyone’s job.• Understand stakeholders’ needs through surveys, one-to-ones and stake-

holder 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.

184 D. L. Copper

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.

10 Sustainability Transformations—From Theory to Practice 185

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Diana Copper is Head of Portfolio Management at the Commonwealth Secretariat. TheCommonwealth is an intergovernmental organisation of 53 countries in Africa, Asia, Caribbean,Europe and the Pacific. The Secretariat supports member states in economic, social and politicaldevelopment. In her role, Diana develops the organisation’s strategy, and supports designs andimproves performance across a wide set of programmes ranging from climate finance, debtmanagement, ocean governance, rule of law, gender equality and election management. She alsosupports the Secretariat’s partnerships and innovation work, and the interface with governingboards. Prior to this role, Diana was an Advisor in the Governance and Peace Division of theSecretariat; Head of International Policy at the Equality and Human Rights Commission of GreatBritain; Policy Manager at the International Council on Security and Development, working inAfghanistan, Uganda and Brazil and Gender Mainstreaming Consultant for the Centre for Ethicsand Global Politics in Rome. She has fifteen years’ experience working in social and economicdevelopment for international organisations, national governments and civil society. Diana holdsan Executive MBA from Imperial College London; a Masters Degree in Gender, Development andGlobalisation from the London School of Economics and Political Science, London and a Mastersin International Relations and European Policy from LUISS, Rome and Sciences-Po, Paris. Shealso 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 Pompidouturn 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.

190 D. L. Copper

11The Evolution of SustainabilityReporting: Integrated Reportingand Sustainable DevelopmentChallenges

Cristiano Busco and Elena Sofra

Abstract

In this chapter, we shed light upon the current practice of integrated reporting inrelation to sustainable development issues. Throughout the chapter, we presentan approach which understands the practice of integrated reporting andintegrated thinking as two tools which manage to benefit from the aspirationaltrait that characterizes the concept of sustainability in corporate discourse. Tothis aim, we outline the historical and academic debate that has fostered theembedding of sustainable development issues in corporate discourse. Weexplore how the gradual shift of the accountability relationship between businessorganizations and society is reflected within the evolution of corporate reportingpractices, with a specific focus upon integrated reporting.

Keywords

Sustainability reporting � Integrated reporting � Sustainable developmentchallenges

C. Busco � E. Sofra (&)LUISS Guido Carli University, Rome, Italye-mail: sofra.elena@gmail.com

C. BuscoUniversity of Roehampton, London, UKe-mail: cbusco@luiss.it; Cristiano.Busco@roehampton.ac.uk

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice,Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8_11

191

11.1 Introduction

In the eighteenth century, Thomas Robert Malthus published “An Essay on thePrinciple of Population,” in which he expressed concerns upon the ratio betweenfood production and world population. According to Malthus, the food productionsystem in place could not support the growing population, thus it would have led tostarvation or to a decrease in the living conditions of individuals. Indeed, Malthushad not foreseen one unpredictable variable, namely technology, which at the timeproved him wrong; nonetheless, his work shed light upon issues of sustainabledevelopment (Brander 2007). The quest for finding alternative means of productivecapacity to meet the rate of demographical growth is even more relevant today thanit was back then. We are now challenged to find alternative productive means tofeed the growing World Population which will be 34% higher than today by 20501

while keeping the environmental impact of these tools under check. Meeting theexpectations of a wider number of stakeholders while ensuring that the meansadopted guarantee an economic, social, and environmentally sustainable growth arethe ultimate quest bound to be faced by business organizations.

The tension between short-termism pressures and long-term prospects are farfrom new to the private sector. However, transcending profit maximization tounderstand the societal impact of generating profits is relatively new but is nowwidely understood as the defining trait that characterizes the sustainable growth of acompany. Indeed, reporting the sustainable growth of a company is the ultimatestep of a deeper and longer process which starts with the definition of a sustainablecorporate strategy which is then translated into the several steps of the value cre-ation process of the business organization itself. Hence, discerning the path that hasled to the creation of sustainability reporting inevitably is linked with the historicalpath that has led to the definition of the very concept of sustainable developmentand how it has been embraced by the private sector.

Within this chapter, we will briefly retrace the road which has led to sustainabilityreporting. Then, we will shed light upon the current state of the art by paying particularattention to how the practices of integrated reporting and integrated thinking are usefultools in translating issues of sustainable development in the corporate discourse, with aspecific 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 thehistorical sustainability movement which characterized the end of the twentieth

1http://www.fao.org/fileadmin/templates/wsfs/docs/expert_paper/How_to_Feed_the_World_in_2050.pdf.

192 C. Busco and E. Sofra

Century. Within the past 50 years, several transnational conferences took placewhich have demanded a more active global participation toward the achievement ofsustainable development goals and have gradually called upon business organiza-tions to take on-board global goals.

The sustainability movement began with the 1972 Conference on HumanEnvironment held in Stockholm, which was attended by 113 states, 19 internationalorganizations’ representatives and was held by 27 experts who laid out the inter-connections that link environmental and economic development issues. The con-ference led to the adoption of an Action Plan which included 109 specificrecommendations for international cooperation on issues affecting the environmentand a declaration containing 26 general principles which then became the Stock-holm Declaration.

However, the 1972 Conference and the Stockholm Declaration on HumanEnvironment, led to little effective change and the absence of concrete resultsspurred the wave of criticism. These were especially concerned with the limitedscope given to the concept of sustainability (Bac 2008). The concept of Sustain-ability was further developed by the UN World Commission on Environment andDevelopment, better known as the Brundtland Commission, after its Chair, GroHarlem Brundtland. The Commission, founded in 1983, published in 1987 “OurCommon Future,” a Report which carried forward what had been initiated inStockholm in 1972. “Our Common Future,” generally referred to as the “Brundt-land Report,” laid down a first clear and politically significant definition of sus-tainable development: “sustainable development is the development that meets theneeds of the present without compromising the ability of future generations to meettheir own needs” (World Commission on Environment and Development 1987).

The necessity to commit the private sector to endogenize sustainable develop-ment issues became crucial as the World witnessed unprecedented environmentaldisasters between 1979 and 1989. The massive oil spills2 which took placethroughout these years and polluted the oceans in an unprecedented way, producedenormous repercussions to the extent that within the US, socially responsibleinvestment funds (SRI) and environmental groups called to take action and started amovement which advocated for greater disclosure of environmental risks by cor-porate organizations (Rupley et al. 2017).

The demand for greater awareness over the environmental and social impact ofbusiness activities came at a time in which the role of business within society washighly debated also in academia. The shareholder view which had been first the-orized by Friedman (1970) and according to which the main responsibility of acorporate executive is to their shareholders, was now challenged. The very nature ofthe accountability relationship of corporate executives had shifted to the

2Amoco Cadiz, Ixtoc 1, Atlantic Express, Nowruz field platform, Castillo de Belluer, Odyssey, arethe names of the tankers which led to massive oil spills in between 1979 and 1988. In less than 10years the oceans were filled with millions of gallons of oil, which polluted the sea and created anumber of environmental disasters. In 1989, the second largest oil spill in the US History occurredwhen the tanker Exxon Valdez ran aground in Alaska, 10.8 million gallons spilled into the PrinceWillian Sound.

11 The Evolution of Sustainability Reporting: Integrated Reporting … 193

stakeholders of organizations, rather than only the stockholders (Freeman andMcVea 2001). According to Kolk (2016), several other approaches have beentheorized which vary according to the degree of responsibility of a company, to theextent that a considerable number categorizations of these approaches have beencarried out [see: (Garriga and Melé 2004; Höllerer 2012; van Marrewijk 2003)].

The gradual shift of the accountability relationship between business organiza-tions and society was reflected within the evolution of corporate reporting systemsfrom being mainly concerned with the idea of conveying financial information ofthe company, to answering the rising demand over non-financial information. Thisgradual shift was supported by a number of initiatives. For example, in 1989 theCoalition for Environmentally Responsible Economies Principles (CERES) wasissued, which aimed at creating a framework for the flow of information necessaryto evaluate a company’s performance against both its historical context and com-munity norms. The CERES Principles represented a landmark in molding a stan-dardized environmental reporting system to which companies could voluntarilyadhere. Thus, the principles gave space to rethink business organizations alsoaccountable for the impact that their value creation processes had upon the externalenvironment. This reinterpretation of business organizations implied the gradualadoption of accounting tools and reporting systems which addressed corporateissues of sustainability. This project led to the launch of the Global ReportingInitiative (GRI) a non-profit organization aimed at integrating economic, gover-nance and reporting standards of CSR into a unified single sustainability reportingframework (Rupley et al. 2017). As stated by its 1998 Steering Committee, GRI’sgoal was to work toward the additional disclosure of information that went farbeyond 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 GRIguidelines (2000 GRI Guidelines).4

11.2.2 Defining Sustainability and Sustainability Reporting

The very concept of sustainable development was politically legitimized with theBrundtland 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 tothe extent that Gray (2010) has conceptualized an understanding of sustainabilitythat ranges from weak to strong. A weak understanding of sustainability believes inthe possibility to compensate for the loss of species, habitat, and natural resourcesthrough human intervention. A strong understanding of sustainability foreseeslosses as being neither replenishable nor compensable with human intervention

3https://www.globalreporting.org/information/about-gri/gri-history/Pages/GRI’s%20history.aspx.4The 2000 GRI Guidelines were immediately revised to ensure major compliance withinternational sustainability agreements which were established in those years.

194 C. Busco and E. Sofra

(Gray 2010). Moreover, scholars have emphasized the complexity of sustainabilityand the misconception of interpreting it with either an environmental or anthro-pocentric focus (Reinhardt 2000; Lozano 2008). As stated by Quattrone and Gio-vannoni (2016), the very nature of definitions does imply a continuous evolution;nonetheless, the number of definitions provided to the concept of sustainability areso many that Onn and Woodley (2014) have argued that the word has been leftundefined yet Lozano and Huisingh (2011) have also claimed that the lack of adefinition does not imply that the concept does not lack meaning.

Although this may be true, several scholars have counterargued that the concepthas been left in the thrall of the collective eye, thus triggering an incorrect usewithin accounting and reporting practices (Gray 2006). Moreover, Tregidga et al.(2018) have argued that the universality of sustainability has left corporate dis-course with the ability to fill the void with economic-focused discourse, thusenabling it to be used by groups of interests to exercise their power. The “hege-monic construction” of sustainability has thus enabled business corporations to usethe concept to pursue shareholder ends. Indeed, other scholars have argued that theendogenization of sustainable development issues within corporate discourse hasfostered negative implications rather than virtuous positive outcomes. For example,Zappettini and Unerman (2016) have argued that the concept has been mixed andbent to build fictitious discourses over business organizations aimed at meeting onlyshareholder expectations. Indeed, Gray and Milne (2002) have also argued that theconcept of sustainability has been used in the past to wash out poor sustainabilitymanagerial actions and have questioned the impact that accounting practices forsustainability may have in delivering the aspirational outcome of shedding lightupon what a business organization does and how it actually carries it out. Academicliterature thus suggests that there still is a gap between what business organizationsstate to do and what they actually do.

11.3 The State of the Art

The applicability of the concept of sustainability within corporate discourse isrooted in two paradigmatic changes which affect the analysis of a business orga-nization. Firstly, the value creation process of business organizations which haveshifted from resembling a classical input–output model—in which investors, sup-pliers and employees provided the inputs and customers represented the recipientsof the outputs to a Stakeholder model—in which a broader number of parties nowcontribute to and are affected by the production process of business organizations(Donaldson and Preston 2016). This model has not only reinterpreted the processthrough which business organizations create outputs but it has also understoodcompanies as producing value beyond the financial one, thus leading to analysisand assessment not only of the financial performance of a company but also of thevalue added (VA) produced by a business organization. In the work carried out byHaller 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 bythe organization’s business activities affects the wider environment, characterizedby factors such as “labour” and “capital” as well as of the community representedby the public sector. Hence, VA is understood as the value produced by theorganization which impacts the social and economic growth of the external envi-ronment. The second change regards the accountability perimeter of businessorganizations. Indeed, if inputs and outputs match in a value creation perspectivethat goes beyond the mere economic one, then the very accountability relationshipof a company has to assess the expectations of all the actors involved. In laying outa model which foresees the existence of an organization to be linked in an extricableway to its external environment and to the support of its stakeholders, the modelrecognizes the need to address several issues. Indeed, the model recognizes theimportance of assessing the impact of the business organization on the externalenvironment, the concerns of its stakeholders. Thus, it has required the crafting ofan adequate corporate reporting system which addresses the non-financial perfor-mance of companies (Vaz et al. 2016).

These two changes are extremely linked to the corporate necessity to endogenizesustainable development issues. Acknowledging the role of business organizationsfarther than the profit-maximizing rationale has enabled us to understand businessorganizations as entities which produce outcomes beyond outputs (goods andservices). This has required the crafting of concrete corporate reporting tools toassess whether those outcomes produce negative or positive externalities. Thus, ithas required to understand whether a business organization is contributing to thesustainable development of its external environment. That same external environ-ment provides the capital (inputs) necessary to produce the goods and services(outputs) adopting a sustainable strategy or not. This approach enables to overcomeissues of definition over what sustainability means in corporate discourse andallows an interpretation of it which is aspirational. To this extent, Christensen et al.(2013) have argued that corporate discourse over sustainability has to be aspira-tional and has to be understood as the fuel which powers the future of an organi-zation. The aspirational trait of corporate sustainability does find its realization inthe practice of integrated reporting, which connects the financial and non-financialinformation in such a way as to explain their interaction within the corporate valuecreation process (Owen 2013), thus building a “One Report” (Eccles and Krzus2010).

11.3.1 Integrated Reporting

Integrated Reporting is defined by the International Integrated Reporting Council asa 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 Inter-national Integrated Reporting Council—established in 2010 as a partnershipbetween GRI and Accounting 4—its aim is to create a globally accepted integratedreporting framework. The latter is envisaged as to pool together financial, social,environmental, and governance information in a reporting system that would beclear, concise consistent and comparable. The first prototype of the framework wasreleased in 2012 giving all the stakeholders the possibility to have a say prior to thefinal publication which occurred in 2013 and led to the creation of the International<IR> Framework.

The International <IR> Framework is built upon a principle-based approach andits aim is to enable the creation of a globally applicable reporting system. Its contentis structured as to deliver in a balanced way, flexible, and prescriptive principlesthat may be applied by a number of different firms varying across industries. Theflexibility of the framework allows disclosure to occur over different topicsaccording to the industrial relevance they hold. The <IR> enables companies toproduce a report, nonetheless, it is the endogenous force required to produce itwhich revolutionizes the way of doing business. Indeed, building an integratedreport requires a deeper practice of integrated thinking, defined as

an active consideration by an organization of the relationships between its various operatingand functional units and the capitals that the organization uses or affects” and “to provideinsight about the resources and relationships used and affected by an organization and toexplain how the organization interacts with the external environment and the capitals tocreate value over the short, medium and long term (IIRC 2013).

The integrated report which companies may produce by adopting the <IR>framework is the final result of a practice which starts with adopting integratedthinking is reiterated with the practice of integrated reporting and materializes withthe issuance of an integrated report. A metaphor may be helpful in delving into therelationship between integrated thinking and integrated reporting.

When an environment no longer fulfils our needs (Place A), moving our bodytoward an environment that will fulfil those needs (Place B), becomes imperativefor our brain. The latter will elaborate on the movement required to move our bodyfrom place A to place B and will send a message to our muscles, that will eventuallytake the first step. The growing societal needs have pushed organizations to find anew stand. Undoubtedly, integrated thinking may be interpreted as a company’sbrain for this new journey, which elaborates corporate reporting discourse throughintegrated reporting to take the first step toward the place in which those societalneeds are met, namely the integrated report. Within this view, the InternationalIntegrated Reporting Framework < IR > is to be understood as the street signs thatwill 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: theidentification of the capitals of an organization and how these capitals interact tocreate value.

11 The Evolution of Sustainability Reporting: Integrated Reporting … 197

The Framework sets seven principles which should be taken into account byintegrated reports, these are strategic focus and future orientation, connectivity ofinformation, stakeholder relationship, materiality, conciseness, reliability andcompleteness, consistency and comparability. Moreover, the Framework prescribesa set of eight content elements which ought to be taken into account when workingon an integrated report, these are the organizational overview; the external envi-ronment; governance; business model; risks and opportunities; strategy andresource allocation; performance; outlook; basis of preparation and presentation;general reporting guidance (IIRC 2013). The Framework detects six capitals asthose through which the company acts and upon which the company may have animpact, these are intellectual capital; financial capital; manufactured capital; naturalcapital; and social capital. The latter is understood as inputs used by the company tocarry out its business activities and produce outputs. Nonetheless, the company’svalue creation process is understood beyond the production of outputs andencompasses also the outcomes, namely the impact that the production process hasupon the external environment and thus the six capitals. Thus, the productionprocess of the business organization is understood in a holistic way and is bestsummarized in the so-called “Octopus” herein reported (see Fig. 11.1). The practiceof integrated reporting well adapts to the aspirational trait of sustainability since itenables to understand the value creation process of a company in a holistic way. Tothis extent, Gibassier et al. (2018) argue that integrated reporting holds an aspira-tional trait which fosters action even though the aims of integrated reporting are not

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

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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 tailoredaccounting practices” (Busco et al. 2018a).

11.3.2 Integrated Reporting and Sustainable DevelopmentGoals5

The aspirational nature of integrated reporting well adapts to capture the valuecreation process of a business organization against goals set internally and exter-nally by international independent standard-setting bodies, institutions and orga-nizations. Hence, this practice easily flows in the general trend which hascharacterized the past twenty years in which the private sector has been called uponto take action in order to achieve global development goals, the most prominentexample being the sustainable development goals (SDGs). The latter were descri-bed and analyzed at the beginning of this book, we here discuss them from theperspective of measuring sustainability performance and reporting. Thus, the fol-lowing section will briefly recall the most salient historical steps undertaken tocreate the SDGs and will then address their relation to sustainability reportingpractices 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 beachieved by 2015, their aim was to promote “economic well-being, social devel-opment and environmental sustainability and regeneration”(OECD 1996).Nonetheless, their implementation shed light upon the necessity to take onboardbusiness organizations in order to attain global sustainable development goals. Thisrequired building a new discourse among International Organization, Governmentand Business Organizations which converged in the creation of the United NationsGlobal Compact Initiative. As the World approached the deadline given to theMillennium Development Goals (MDGs), the international framework began toapproach the quest of the post MDG phase, Summits and Conferences wereorganized to address this issue. Indeed, among the most important Summits orga-nized to create a dialogue on what had to be done in the post-2015 internationalframework era, the two pivotal ones that ought to be remembered are the UnitedNations Conference on Sustainable Development which took place on 20 June 2012in Rio, Brazil, and the Addis Ababa Agenda6 (AAAA) which stemmed from theThird International Conference on Financing for Development and took place on

5We 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 developmentissues faced by our Planet. Nonetheless, we here propose integrated reporting and integratedthinking as two tools which are flexible enough as to evolve as the sustainable development issuesfaced by our Planet do the same.6The Addis Ababa Agenda (AAAA) was the outcome of two previous conferences which tookplace in Monterrey, Mexico, and Doha, Qatar, and represented an early step in defining thepost-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 ledto the creation of the 2030 Agenda, the international framework setting 17 sus-tainable goals (SDGs) declines into 159 specific targets, which was adopted inSeptember 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 privatesector is beyond crucial. Lucci (2012) analyzed this from the least developedcountries (LDC) perspective, arguing that the presence of multinational corpora-tions in LDCs could play a crucial role in fostering development. Nonetheless, therevolutionary trait of the 17 SDGs is that they are not only targeted toward LDC butshould rather be achieved at a global level, binding all actors to take action nomatter their sector of origin (private–public). Moreover, business organizations canbenefit from achieving the SDGs. According to the Business Sustainable Devel-opment Commission, the private sector will shed light upon new opportunities,such as providing new growth markets; improving production systems and supplychains; initiating regulatory changes.9 As argued in Busco et al. (2018b), makingSDG alignment part of their strategies and business models can help companiesgenerate new revenue; increase supply chain resilience, recruit, and retain talent;spawn investor interest; and assure license to operate. This requires businessorganizations to understand their value creation processes in a holistic way and theiroverall 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 integratedapproach to planning, measurement, and reporting Busco et al. (2018b). Integratedreporting is a valid tool in developing better awareness upon the relationshipbetween the value creation process of an organization and sustainable developmentissues, due to its traits: the value creation process of a business organization isunderstood as being affected by the external environment and in turn affects it; theexternal environment with whom the business organization holds this interrela-tionship is characterized by issues of sustainable development which affect theavailability of the capitals used by the business organization to produce value.Hence, taking into account issues of sustainable development implies assessingwhether the value creation process enacted by the company may endure in the longterm. This rationale enables integrated reporting and integrated thinking to beappropriate in unraveling the relationship that business organizations hold withpresent sustainable development issues, as well as with future ones. This is therationale which has led us to refer to this section as the relation between < IR > andsustainable development issues, whether present or future ones; the practice ofintegrated thinking and the practice of integrated reporting are flexible enough toevolve as the sustainable development issues that our Planet faces do as well.

7The conference laid down a number of practical and financial means to achieve the sustainabledevelopment goals and comprehended more than 100 concrete measures, which covered nine areasof interest: Technology; Infrastructure; Social protection; Health; Micro-, small-, andmedium-sized enterprises; Foreign aid; A package of measures for the poorest countries;Taxation; Climate Change (UN 2015).8https://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf.9Report available at http://s3.amazonaws.com/aws-bsdc/Valuing-the-SDG-Prize.pdf.

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The < IR > Framework provides an important tool to align integrated reportingand sustainable development issues. To this aim, Adams sheds light upon the linkbetween < IR > and the SDGs, the ultimate relationship that the two frameworkshold 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 alignits value creation process to the SDGs. The first step prescribes understandingwhich of the sustainable development issues are relevant to the business organi-zation and to the external environment from which it pools the inputs and releasesthe outcomes. The second step foresees the identification of those sustainabledevelopment issues that influence and are influenced by the value creation processof the business organization itself. The analysis carried out in the second step maybe summarized and illustrated through a materiality matrix which links corporatematerial issues to the SDGs. The third step is to develop a corporate strategy thataims at contributing to the attainment of the SDGs; this entails allocating resourcesand building development plans and specific targets based upon a short-, medium-,and long-term horizon. The fourth step foresees the permeation of the SDGs withinthe business organization, that is to say, that the business organization shall developintegrated thinking, connectivity, and governance as to broaden the external envi-ronment 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 pointreflect and deliver the internal processes which the organization holds that worktoward the attainment of the SDGs detected in the first step. Thus, organizations arecalled to report their material contributions to the SDGs, identifying which capitalsare 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 relationto reporting on the SDGs, an analysis was carried out to understand whether arelationship was held between these two practices limited to the geographical scopeof Europe and for the fiscal year 2018. This was done by carrying out two uni-variate analysis and one bivariate analysis. The databases chosen to frame thispractice were the UNGC SDG Reporting Initiative Platform database andthe < IR > Example Database. The analysis yielded interesting results; more thanone-third of the companies adhering to the UNGC SDG Reporting Initiative Plat-form were also issuing an integrated report (Fig. 11.2). Indeed, the adoption ofthese two Databases to identify the current state of the art does hold a few limi-tations. Firstly, the < IR > Database Example does provide a useful insight into thecurrent trend of integrated reporting, nonetheless, it does not hold an internalmonitoring and evaluation upon the degree of alignment of the integrated reportsand the < IR > framework [see: (Bratu 2017; Sofian and Dumitru 2017)]. Sec-ondly, the adoption of the UNGC SDG Reporting Initiative Platform is useful intaking a glimpse at the degree to which business organizations are reporting overthe SDGs, nonetheless, the number of members adhering to the SDG ReportingInitiative Platform is an underestimation of the actual number of companies that areundergoing this process. Although the number of business organizations adheringto the UNGC SDG Reporting Initiative Platform is not so many, this analysis maysuggest that a relation between reporting on the SDGs and adopting an integrated

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

11.4 Final Remarks

Current sustainability reporting practices are the answer of business organizations tothe environmental, social, and economic issues faced by our Planet, these issues aresummarized 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 understandthe current corporate reporting trend over SDGs. The study showed that, although theglobal average of companies that have identified priority SDGs is 50%, these fail tolook deeply into each goal and the relation that the goals hold with corporate per-formance. To this extent, the research yielded three main findings which suggest threemajor areas of improvement. Firstly, the study found that there is an extensive lack ofguidance on how to measure positive and negative impacts in key areas and theirrelation to the SDGs. Secondly, sustainability frameworks which have been devel-oped by international independent standards-setting organizations11 offer different

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

10Access is available at https://www.pwc.com/gx/en/sustainability/SDG/sdg-reporting-2018.pdf.11E.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 howthe disclosure has to be carried out and linked to the reports. Thirdly, there still isslow sector collaboration in sharing best practices and knowledge over how to tacklesustainable development issues at a corporate level. Finally, the report outlines thatcompanies do still rely upon governments’ guidance on how to tackle the SDGs, thussuggesting the necessity to create homogenous policies. Moreover, the researchinterestingly concluded that

(…) while there is a clear appetite for embracing the SDGs, many organisations still lackthe strategy, tools and culture needed to transform those commitments into tangible busi-ness actions. That has a knock-on effect in terms of measuring and reporting on theirprogress 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 overallbusiness, both now and sustaining it for the long term.12

Hence, one of the challenges that we are faced with nowadays is to bridge thegap between business and Agenda 2030 without producing redundant complexity.To this aim, integrated reporting is a useful tool for it enables to integrate infor-mation over how an organization produces its outputs in such a way as to take intoaccount the environmental and social constraints of the external environment andthus may be interpreted as an evolution of sustainability reporting. Moreover,integrated thinking enables business organizations to rethink the impact of theirvalue creation processes in a flexible way. Integrated reporting may also promote adialogue among the international independent standard-setting organizations.

However, reporting over sustainable development issues is only the final output ofa deeper process which starts with the corporate mindset. These processes do beginwith nurturing a corporate culture and corporate mindset that enables the organizationto be understood as a whole, namely as an agent which operates in society and thus isaffected and in turn affects it. Integrating sustainability issues within corporate dis-course requires companies to rethink their value creation processes as yielding greaterreturns than only financial ones, in order to do so business organizations are requiredto assess their performance also on a longer time horizon. To this aim, the role ofcorporate executives in committing business organizations to strategies which assessand encompass sustainable development issues in corporate discourse. Among others,the Board of Directors, especially inside directors, are crucial to foster corporatesustainability (Crifo et al. 2019). By undertaking this holistic approach, corporateexecutives are able to endure “corporate sustainability.” The latter is crucial in orderto prevent sustainability and thus sustainability reporting to become a sustainabilitystrategy rather than what they should pursue, namely a sustainable strategy. To thisextent, Eccles and Serafeim (2013) shed light upon the necessity for business orga-nizations to relate the environmental, social and governance performance to thefinancial one, this certainly does require for companies to quantify this relationshipand commit to innovating products, processes, and business models. Indeed,reporting tools which are able to summarize this overall process are of the utmostimportance and integrated reporting does to this extent represent a valuable answer.

12https://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 wit-nessing a revolutionary moment in the history of corporate reporting; we are thewitnesses of a huge leap which has occurred in a matter of years from the belief ofprioritizing financial performance to the certainty that a company is worth investingonly 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 fullpotential. It will ultimately lose the license to operate from key stakeholders. It will suc-cumb to short-term pressures to distribute earnings, and, in the process, sacrifice invest-ments in employee development, innovation, and capital expenditures that are necessary forlong-term growth (…).13

Now, the soil appears fertile for us to grow solid, comprehensive, and clear rootsfor societally responsible companies. Companies whose aim is not to be responsibleby addressing social challenges, but rather to address societal challenges, issueswhich hamper the sustainable growth of humanity, to be understood as the pros-perity of humankind in the long term. This process is clear in the evolutionary turnthat 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 oflife. Indeed, the process is far from finished and its aspirational nature may suggestthat it does not actually possess a finishing line, but the journey has just begun, thejourney to craft a societally responsible private sector is in the process of becoming.

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Cristiano Busco is a Professor of Accounting and Reporting at LUISS Guido Carli University inRome, Italy, and at the University of Roehampton in London, UK. He is also currently a visitingprofessor at the Leventhal School of Accounting and Marshall School of Business of theUniversity of Southern California, Los Angeles. Before joining LUISS, Cristiano served as theHead 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 ResearchInstitute for Innovation and Societal Change. After his Ph.D. (management accounting) at theUniversity of Manchester, UK, he has hold positions in the US (Babson College, Boston,University of Southern California, Los Angeles), the UK (Manchester Business School), andItalian universities (the University of Siena). His research interests are in the field of managementaccounting, performance measurement and management, accounting for sustainability, as well asintegrated thinking and reporting. He has published articles in leading peer-reviewed journals suchas Accounting, Organizations and Society; Contemporary Accounting Research; ManagementAccounting Research; Accounting, Auditing, and Accountability Journal; Journal of Managementand Governance; Qualitative Research in Accounting and Management; Journal of Accountingand Change; Business Horizons as well as in professional journals such as the Journal of AppliedCorporate Finance; Journal of Corporate Accounting and Finance; Strategic Finance; and FinancialManagement. Currently, he is on the Editorial Board of the following peer-reviewed journals:Management Accounting Research, Qualitative Research in Accounting and Management, Journalof Accounting and Organizational Change.

Elena Sofra is a research assistant of the project Fixing the Business of Food carried out by theconjoint effort of the Barilla Center for Food and Nutrition, the UN Sustainable DevelopmentSolutions Network, the Columbia Center on Sustainable Investment, and the Santa Chiara Lab ofthe University of Siena. She is also currently collaborating on developing a Framework to collectand communicate the evidence of case studies within the activities of the International IntegratedReporting Council’s Strategy and Integrated Thinking Group. Elena earned her master’s degree inInternational 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 paperfocused on the analysis of Integrated Reporting and Thinking as an enabler of the sustainabledevelopment goals (SDGs). Prior to this, she has nurtured her passion for this field of research bytaking part to the Siena Summer School on Sustainable Development as a tutor and by carrying outa traineeship at the Permanent Representation of Italy to the EU, where she has cooperated with theWorking Party on the 2030 Agenda.

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12Sustainable Supply ChainManagement

Marco Formentini

Abstract

The main objective of this chapter is to present and discuss the SustainableSupply Chain Management (SSCM) concept by analysing the state of the art inresearch and practice and considering its future trends and developments.Managers need to develop a careful understanding of sustainability issues alongtheir supply chains, both at strategic and operational levels. Leveraging onestablished frameworks developed in the SSCM discipline, a comprehensiveoverview of the key supply chain processes and the variety of actors involved insustainability initiatives is provided in order to discuss the complex challengefaced by companies in translating corporate sustainability strategies into specificactions at the supply chain level, and in turn, influence performance from aneconomic, environmental and social perspective. This chapter adopts a specificfocus on governance, highlighting the need for collaborative approaches todevelop more responsible supply chains. An in-depth example of Barilla—aleading company in implementing sustainability projects at the supply chainlevel—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, Italye-mail: marco.formentini@unitn.it

© The Editor(s) (if applicable) and The Author(s), under exclusive licenseto Springer Nature Switzerland AG 2021P. 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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12.1 Introduction

While supply chain management has been studied extensively over the past threedecades, debates on Sustainable Supply Chain Management (SSCM) have onlygained momentum in the early 2000s, attracting the attention of scholars andpractitioners. SSCM has become a relevant concept, evolving from its initialancillary role, when it was perceived as a sub-set of the supply chain managementdiscipline. Nowadays, it is acknowledged that sustainability is paramount forsupply chains management and extremely relevant in all industries. In other words,an integrated and comprehensive understanding of sustainability should be at thecore of supply chain management: in fact, it is not enough to consider the effectivemanagement of supply chains from an economic and financial point of view, but theenvironmental 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 andachievement of an organization’s social, environmental, and economic goals in thesystemic coordination of key interorganizational business processes for improvingthe long-term economic performance of the individual company and its supplychains”. In line with this comprehensive definition, in this chapter, we will focus onthe key dimensions of sustainability, taking a supply chain perspective to under-stand the key governance mechanisms able to provide mutually beneficial outcomes—not only for the “focal company” (i.e. the one orchestrating the supply chainprocesses) but also for the involved supply chain actors.

The concept of supply chain sustainability has evolved from its initial focus onthe environmental perspective (i.e. “green” supply chain management). Companieshave started to develop increasing awareness about the impact on the environmentall along their supply chains, for instance, by reducing carbon emissions, phasingout toxic substances, collecting and recycling products when they reach theirend-of-lives, not only in reaction to regulations by governments and institutions(e.g. EU’s Restriction of Hazard Substance directive, Waste Electrical & ElectronicEquipment WEEE legislation) and under the pressure of different stakeholders (e.g.Basel Action Network Greenpeace, Oxfam) but also developing pioneering andinnovative initiatives. Environmental managers and chief sustainability officers areincreasingly looking to their supply chains to preserve the value of naturalresources, in a journey towards new paradigms, such as the circular economy.

However, a deeper understanding of sustainability from a supply chain point ofview is required. More recently, SSCM has started developing a stronger focus onthe social perspective. One of the key events attracting attention to social issues isrepresented by the Rana Plaza accident.1 The collapse of an eight-storey garmentfactory 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 industrialaccident in South Asia and the worst ever in the garment industry. This disaster

1https://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 andaudits performed by fashion retailers to guarantee safety along their supply chains,highlighting the need for more transparency and responsibility to target betterlabour conditions and improve social standards. Companies have started to paymore attention to fair wages, child labour issues, promoting gender equality andprovide a safe working environment, however relevant challenges still need to befaced, such as modern slavery, both in emerging and developed countries—e.g.migrant workers exploited in Southern Italy.2 It is clear that although severalimportant steps have been done, there are still many issues and open questions. Forinstance, “greenwashing” aimed at deceiving consumers into believing that acompany’s behaviour is environmentally and socially responsible; measuring thereal impact and effectiveness of sustainability actions; the adoption of “incremental”or “low-hanging-fruit” initiatives in comparison with more pioneering and dis-ruptive sustainability improvements.

Leveraging on established frameworks developed in the SSCM discipline, acomprehensive overview of the key supply chain processes and the variety of actorsinvolved in sustainability initiatives is provided in this chapter, in order to discussthe complex challenge faced by companies in translating corporate sustainabilitystrategies into specific actions at the supply chain level, and in turn influenceperformance from an economic, environmental and social perspective.

Eventually, a few recommendations on how to use this book chapter. The topicsdiscussed have been the object of several lectures and seminars with students (atdifferent levels, from master degrees to MBAs, in the context of internationalbusiness 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) openquestions related to sustainability. Therefore, this book chapter aims at offeringdetailed insights to students approaching not only the study but also the practice ofsupply chain management, with the objective to develop a critical understanding ofthe main issues, risks and challenges related to sustainability from a supply chainperspective; the opportunity to integrate a sustainability perspective in managingseveral processes, at different strategic levels (i.e. from strategy to implementation).

12.2 The Evolution of Sustainable Supply ChainManagement

Traditionally, supply chain management is related to managing the flow of mate-rials and services, information and financial flows within and between firms, con-sisting of all parties involved, directly or indirectly, in fulfilling a customer request.

In addition to this traditional perspective, it is relevant to understand the impactof sustainability along with the interconnected supply chain processes, i.e. sourcing(purchasing raw materials, components, services), transformation (manufacturing,

2https://edition.cnn.com/2017/12/07/europe/italy-migrant-camp-exploitation/index.html.

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production, service delivery), delivery (distribution), closed-loop (reverse logistics),as depicted in Fig. 12.1, on the basis of the established SCOR framework.3 Thecomplexity of supply chain management—usually intended in terms of coordina-tion of global supply chains, alignment of different interests and objectives,information asymmetry, lack of visibility throughout the different tiers of the supplychain, the development of specific metrics for measuring performance—is increasedwhen adopting a sustainability perspective, thus posing additional challenges tosupply chain managers.

Consistent with this need to develop a better understanding of sustainabilityfrom a supply chain perspective, in this chapter, we rely on another relevant def-inition: “Supply chain sustainability is the management of environmental, socialand economic impacts, and the encouragement of good governance practices,throughout the lifecycles of goods and services. The objective of supply chainsustainability is to create, protect and grow long-term environmental, social andeconomic value for all stakeholders involved in bringing products and services tomarket” (United Nations Global Compact Report 2015).

In line with Seuring and Müller (2008), this can be translated in a first importanttakeaway: “Sustainable supply chain management deals with a wider set of per-formance objectives, thereby taking into account the environmental and socialdimension of sustainability”.

The focus on sustainability also highlights the importance of managing rela-tionships, not only with actors of the supply chain directly involved in the severalprocesses but also with additional stakeholders (i.e. parties with interest in acompany, which can either affect or be affected by the business). In order toorchestrate effectively their supply networks, focal companies need to developvisibility throughout their key processes to identify key issues and risks. Supplychain risk management should also include a sustainability perspective, providing

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

3https://www.apics.org/apics-for-business/frameworks/scor.

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firms with the ability to understand and manage their economic, environmental andsocial risks along the supply chain, moving from a “reactive” towards a “proactive”approach.

The necessity for extended visibility and transparency (e.g. monitoring theprocesses beyond first-tier suppliers) provides a second key message, in line withSeuring and Müller (2008): “Sustainable supply chain management has to take intoaccount a wider range of issues and, therefore, look at a longer part of the supplychain.”

First of all, this message underlines the need to map clearly processes and rela-tionships with supply chain parties and novel influential actors such as stakeholders(institutions, non-governmental organizations, etc.). The interaction with stake-holders requires transparency, not only in disclosure and reporting to communicateabout sustainability initiatives and outcomes but also in fostering active engagementwith stakeholders to receive their feedback and input with the ultimate goal ofimproving supply chain processes. An example of comprehensive reporting cate-gories 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 theirpolices, supplier codes and public commitments. Developing supply chain trans-parency can play an important role in tackling “greenwashing”, intended as theprocess of conveying a false impression or communicating misleading informationabout how a company’s products are more environmentally and socially sound.

The integration of a sustainability perspective is becoming relevant not only in theprivate supply chain context but also in the case of public procurement. Green PublicProcurement (GPP) represents an opportunity for the public sector to includeenvironmental criteria in all phases of the purchasing activity, by spurring the dif-fusion of environmental technologies and the development of environmental-friendly goods, by searching and choosing solutions with the least impact on theenvironment 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 thepurchase price (De Giacomo et al. 2019). Authorities who implement GPP will bebetter equipped to meet evolving environmental challenges, for example, to reducegreenhouse gas emissions or move towards a more circular economy.

The case of IKEA

The Swedish-origin company, leader in the modern furniture industry pro-vides an interesting example of a comprehensive focus on sustainabilitythrough the entire supply chain processes. The company aims at providing “abetter life for more people”, striking a balance between the economic, envi-ronmental and social dimensions. Three key objectives are driving IKEA’ssustainability strategy

• Healthy and Sustainable Living–inspiring and enabling people to livehealthier, more sustainable lives

• Circular and Climate Positive—reducing absolute greenhouse emissions;Transforming into a circular business and regenerating resources, pro-tecting ecosystems and improving biodiversity

• Fair and Equal—Providing and supporting decent and meaningful workacross the IKEA value chain, being an inclusive business, promotingequality

These strategic objectives are translated at the supply chain level withspecific actions and measurable results

4https://www.behindthebrands.org/.

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Sourcing process

• Materials and sourcing wood: control of origin and tracking from woodsuppliers. Adoption of Rainforest Alliance certification

• Cotton: Weather resilient cotton production systems, working in collabo-ration 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 environ-mental, 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 isoften triggered and characterized by two distinctive and complementary strategies:“supplier management for risk and performance” and “supply chain managementfor sustainable products”.

The first is driven by the fear of company reputation damage if sustainability-related problems are raised. Hence, additional environmental and social criteria aretaken up to complement economically based supplier evaluation.

The second strategy is driven instead by the definition of lifecycle-based stan-dards at the supply chain level for the environmental and social performance ofproducts. It is evident that SSCM requires rethinking the management of the firms’economic capital by deploying tangible resources such as investments to improvecorporate and supply chain processes and develop intangible resources such asknowledge and organizational culture for sustainability. See for instance theexample of a lifecycle-based approach developed by Timberland (box below).

The case of Timberland

Timberland pioneered the development of an environmental performanceindicator based on life-cycle assessment (LCA). The Timberland “GreenIndex” is a measure of the environmental impact of their products. The goal isto provide consumers with visibility into the footprint Timberland cre-atesTimberland products are rated on a scale of 1–10 using a system createdto measure environmental footprint from raw materials to the finished prod-uct. The lower the score, the lower the environmental footprintThree mainimpact categories are: 1. Climate Impact: The greenhouse gas emissionscreated through production; 2. Chemicals Used: The presence of hazardous

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substances (PVC and Solvent Adhesives); and 3. Resource Consumption: Thepercentage, 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 asupply chain perspective is especially critical when considering sustainability.Enriching the definition provided by Gimenez and Sierra (2013), we define sus-tainable supply chain governance mechanisms as practices, initiatives and processesused by the focal firm to manage relationships with (1) internal functions anddepartments and (2) their supply chain members and stakeholders with the aim ofsuccessfully implementing their corporate sustainability strategies, as represented inFig. 12.3. In this vein, this chapter refers to internal governance mechanisms andexternal governance mechanisms to distinguish between actions limited at thecorporate boundaries and actions extended at the supply chain level. The literaturehighlights two relevant factors that characterize governance mechanisms, namelycollaboration and formalization.

12.3.1 The Role of Collaboration

Companies can implement their sustainability strategies by applying their marketpower in a non-collaborative way, or conversely by adopting a shared, collaborativegovernance style. In a non-collaborative setting, the focal firm relies on its con-tractual power to define governance parameters and impose decisions to supplychain counterparts. While this is a common practice in traditional supply chainmanagement, in the context of SSCM, there is evidence that collaborative and

Fig. 12.3 Sustainable Supply Chain Governance Framework

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shared governance approaches represent a powerful tool for facilitating sustain-ability initiatives (Vurro et al. 2009; Gimenez and Sierra 2013). This calls forbalancing the traditional power-based approach with new collaborative ways ofimplementing governance. Among collaborative mechanisms, Cousins and Menguc(2006) clarify the role of socialization that forms bonds and ties that facilitate theexchange of information and helps to build a culture of mutual commitment. Caoet al. (2010) derive a model of supply chain cooperation assigned to seven com-ponents (information sharing, goal congruence, synchronization of decisions,incentive alignment, sharing of resources, joint investment and joint knowledgecreation). Simatupang and Sridharan (2005) conceptualize supply chain collabo-ration by including five features: cooperative quality scheme, information sharing,decision synchronization, incentive alignment and integrated supply chain pro-cesses. A comprehensive framework derived from Matopoulos et al. (2007) ofsupply chain collaboration is depicted in Fig. 12.4.

In line with Seuring and Müller (2008), a third takeaway emerges: “There is amuch increased need for cooperation among partnering companies in sustainablesupply chain management”.

12.3.2 The Role of Formalization

The second factor suggested by the literature to classify governance mechanisms isformalization. According to Alvarez et al. (2010) and Pilbeam et al. (2012) for-malization is defined as the extent to which decision-making is regulated by explicitrules and procedures. A common typology of governance mechanisms distin-guishes between formal and informal mechanisms of coordination. Formal mech-anisms include control and reporting systems through which organizations structuretheir interaction in an explicit way and can include command structures, incentivesystems, contracts, certifications, standard operating procedures and documenteddispute resolution procedures. Formal mechanisms are usually adopted in dynamic

Fig. 12.4 The key components of supply chain collaboration

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and unstable circumstances. On the other hand, informal social systems encompassadditional coordination mechanisms characterized by relationships rather than bybureaucratic structures and tend to be adopted in contexts where prior relationshipsexist 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 followingdefinitions are given to depict the three sustainability profiles:

• Sustainability leaders—characterized by a triple bottom line (TBL) approach tobusiness which extends to SSCM;

• Sustainability practitioners—characterized by a myopic approach to businesssustainability with a limited focus to one or two TBL dimensions and isolatedSSCM initiatives;

• Traditionalists—characterized by traditional approaches to business that don’tnecessarily include explicit TBL and SSCM initiatives but might present sus-tainability elements.

Who are “sustainability leaders”? Companies able to understand the industrycalls for TBL approaches, not only following supply chain risk management pur-poses but also identifying with a more proactive behaviour sustainability oppor-tunities that may originate from the contextual uncertainty. Strategies ofsustainability leaders can be proactive, offensive, pioneering. Their corporate sus-tainability approaches are defined with clear strategies, business models andpractices of the disclosure. Management structure and style sponsor sustainability.

A consistent number of governance mechanisms of different nature are imple-mented, especially at the supply chain level, following the strategic alignmentshown in Fig. 12.3. Governance mechanisms are structured internally at the cor-porate level, and they extend coherently throughout the supply chain both upstreamand downstream with a well-developed supply chain focus.

Sustainability leaders leverage this in their internal mechanisms with both formaland informal initiatives and extend it at the supply chain level predominantly withinformal and collaborative initiatives aiming for long-term trust development ofrelationships. Sustainability leaders appear to keep a balance between formal andinformal mechanisms and a collaborative approach that extends both upstream anddownstream in the supply chain. The high level of socialization is translated into theengagement with a broad network of actors in the extended business environment.

Resources are dedicated to translating and supporting the sustainability strategyinternally and externally. Sustainability leaders invest financial resources, man-agerial 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 devel-oped for transferring knowledge and resources at the supply chain level (forinstance, upstream with specific supplier development initiatives).

12.5 The Case of Barilla

Finally, the in-depth case of Barilla and the sustainability supply chain contractsdeveloped to source durum wheat is used to review the key elements of supplychain sustainability, such as the role of sustainability leaders, the role of collabo-ration, 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 pastabusiness, the pasta sauces business in continental Europe, the bakery productsbusiness in Italy and the crispbread business in Scandinavia. Barilla developed anintegrated strategic approach for sustainability entitled “Good for You, Good for thePlanet”,5 incorporating the triple bottom line with a long-term perspective. More-over, another key strategic component is represented by the Barilla Center for Foodand Nutrition (BCFN) Foundation6 as an independent international idea centre withthe objective to analyse the predominant issues tied to food and nutrition around theworld. Economic, scientific, social and environmental factors are studied relative totheir impacts on food using a multidisciplinary approach.

Barilla is a family-owned food company: sustainability is perceived as a coreelement of the corporate strategy. The company encourages open, transparentpartnerships with local communities “from field to fork”. The company recognizesthe crucial role of partnerships with stakeholders to achieve objectives that thecompany could not achieve by working alone.

12.5.2 Implementation of Sustainability Strategy: DurumWheat Supply Chain Contracts

A key example of this close interaction with communities and different supplychain actors and stakeholders is represented by the development of the durum wheatsupply chain contracts presented in this case. Supply chain contracts are governancemechanisms able to translate Barilla’s strategic sustainability objectives into prac-tice (strategic alignment) in coordination with other supply chain actors (supplychain focus).

5https://www.barillagroup.com/en/our-responsibility.6http://www.barillacfn.com.

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In 2012, Barilla performed 70% of its Italian wheat procurement throughregional supply chain contracts in the Italian wheat market, sourcing the remaining30% from the regional spot market. In the past, they have also purchased wheatfrom the US market (e.g. Arizona) for making pasta for the Italian market and didnot have contracts in the regional market either. One motivation for this change wasthe company’s policy of local sourcing for local demand to decrease transportationcosts and impact, following a detailed LCA, in order to create and share value withlocal farmers by shifting the production of high-quality durum wheat in Italy.

The company aims to further increase sourcing through regional contracts. Thesupply chain contracts developed in the Emilia Romagna region represent aninnovative and pioneering initiative. In 2006, Emilia Romagna Region institution,the seed producer Società Produttori Sementi and several farmers’ consortia signedthe 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 pro-duction of high-quality durum wheat, with the implementation of an innovativeand exclusive model for the integration of farmers, pasta industry andinstitutions;

• Offer an adequate productive capacity and supply of high-quality grains forBarilla’s mills and plants and create an alternative for Barilla to importedhigh-quality grains;

• Offer a solution for economic viability to farmers, many of whom had alreadyexited or were considering exiting the wheat market.

In parallel, Barilla signed a partnership with one of the most important Italiansugar producers to promote sustainable cropping as a part of its strategic IntegratedSupply Chains project (Fig. 12.5), thus creating both vertical and horizontal col-laboration projects in its supply network. This collaboration has a strategic value,since it allows the integration of the durum wheat contract with other products inorder to facilitate the correct crop rotation, the opportunity for growers to develop aprofitable 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 sustainabilityobjectives pertaining to environmental goals. However, there was a clear

Fig. 12.5 Barilla’sintegrated durum wheatsupply chain

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understanding that economic (i.e. capacity, premium over market prices), as well associal elements (i.e. support to farmers, rural development), were to be a keycomponent of the project.

Since then, the nature of these contracts has evolved as aims have broadenedtowards the development of specific sustainability contracts (additional detailsrelated 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 theexperimentations on the field within the Sustainable Grains project for rollout in2014. The company has then introduced an additional premium of 3€/ton for cer-tification of adoption of sustainable practices and hopes to achieve its objective of100% of its procured wheat to be certified as ‘sustainable’ in this way. The com-pany had already been offering premium for protein content, but the sustainabilitycomponent 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 thatextends to cover the main production areas and supports farmers in optimizing theiragricultural practices. Between 2011 and 2012, the project was extended to 13Italian farms. The outcomes of this first stage were collected in the “BarillaDecalogue for the sustainable cultivation of durum wheat”. Specific focus wasgiven to traditional rotation techniques, often abandoned for intensive practices thatinvolve an excessive use of resources and a decrease in soil fertility. Between 2012and 2013, in Italy, the project involved more than 100 farmers for a total of 10,000tons of durum wheat. In 2013, the activity was also launched in other countrieswhere the Barilla group is present.

The ‘best practices’ in the Decalogue pertain to improved crop rotation withother vegetables before wheat sowing vs. rotation with other cereals. The results ofthe implementation of these best practices consist of reduced direct cultivationcosts, improved production yield, reduced use of fuels, reduced carbon footprintand reduced ecological footprint and better agronomic nitrogen use efficiency.

The evolution of contracts has not ended: Barilla is continuously experimentingwith new pricing techniques. The company has committed to providing financialknow-how to its suppliers for the implementation of new financial techniques.

12.5.3 Supply Chain Contract Structure, Objectiveand Elements of Collaboration

The product sourced by the pasta company is durum wheat used to produce a staplefood product in Italy. The company seeks durum wheat that is produced andstocked ‘locally’ by farmers’ consortia for delivery to the manufacturer’s mills.A key component of the collaboration (aimed at aligning the interests of Barilla andfarmers, synchronize decisions and share mutually beneficial incentives) is repre-sented 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 thetime 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 farmerchooses this proportion of his produce to be sold at the guaranteed unit price withthe remaining sold to the firm at the (ex ante uncertain) market price to be realizedat the time of delivery after harvest. On top of that, the partially guaranteed-pricecontracts adopted by Barilla come with incentives and/or price premiums for thefarmer 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 a1-year duration during which contracted deliveries are made every month. Thecontract 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 separatecontracts with each consortium—and is then transferred to farmers comprisingthese consortia. Each consortium stores the production of its farmers upon harvestand then transfers 50–100% of their wheat to Barilla on a monthly calendar, sellingthe remainder on the open market whenever the market price appears attractive.Creation of the contracts entails information sharing with the consortia togetherwith support from the local government and takes place well before sowing.

From a “dynamic” point of view, Barilla’s supply chain contracts in EmiliaRomagna evolved in order to meet different objectives: firstly, to assure supplycapacity and quality improvement, and secondly to integrate these critical elementswith the overall sustainability dimensions. Contractual parameters helped to sta-bilize prices and to create a mutually beneficial relationship between Barilla andinvolved consortia and farmers, with an extended approach at the supply chain levelthat overcomes the traditional dyadic buyer–supplier relationship (Formentini andRomano 2016), in line also with the second key message of this chapter.

Figure 12.6 shows how supply chain contracts confer the following potentialtriple bottom line benefits for Barilla and its durum wheat supply chain.

Barilla’s contracts are not the only interesting projects in agri-food supply chainsto involve sustainability from a triple bottom line perspective. For instance, Star-bucks developed a set of global guidelines for suppliers (C.A.F.E. practices) toimprove sustainability and fairness and a related set of incentives to reward farmers.Nestlé’s developed various “creating shared value” initiatives that are intended tohelp the poor farmers to break the vicious circle of poverty by offering a higherprice, reducing farmers’ transaction costs, increasing farmer’s productivity creatingnew non-farm-related employment.

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Vurro, C., Russo, A., & Perrini, F. (2009). Shaping sustainable value chains: Networkdeterminants 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 theUniversity of Trento (Italy). He received his Ph.D. from University of Padova (Italy) and he hasbeen previously a Research Fellow at Cass Business School, London (UK), a Lecturer at theUniversity of Bath, School of Management, Bath (UK) and an Associate Professor at AudenciaBusiness 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 relatedgovernance mechanisms—supply chain collaboration with a specific interest on agri-food supplychains, 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 Manage-ment, Journal of Purchasing and Supply Management, European Journal of OperationalResearch, Journal of the Operational Research Society, International Journal of ProductionEconomics, International Journal of Production Research, Transportation Research: Part E andJournal 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 & ProductionManagement and Journal of Purchasing and Supply Management. In 2017, he chaired the“Mainstreaming Responsible Business Conduct in Companies” session at the OECD GlobalForum in Paris.

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Index

CChange management, 157, 165, 166, 169–172,

176, 180, 183, 184Climate 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, 115Collaboration, 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, 218–222Corporate Social Responsibility (CSR), 66–69,

71, 147, 194Creating shared value, 71, 152, 156, 222

EEnergy transition, 41, 43, 46, 56Engagement challenges, 84Environmental, 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

FFinancial return, 97, 98, 101, 103, 105, 107,

109, 150Financial risk, 41, 106, 107, 115, 116

GGovernance, 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

IImpact banking, 112, 120Impact investing, 101, 103, 107–109Integrated reporting, 22, 179, 191, 192,

196–201, 203

LLeadership, 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

MModern corporate sustainability, 66Multi-stakeholder partnerships, 25, 27–30, 36

PParis Agreement, 8, 113, 119, 127, 134, 137,

138, 167Planetary boundaries, 41, 43, 55, 56, 58, 59Purpose, 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

SSocial purpose, 127, 134Stakeholder capitalism, 136Strategic alignment, 25, 36, 37, 217, 218Strategy, 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 licenseto Springer Nature Switzerland AG 2021P. Taticchi and M. Demartini (eds.), Corporate Sustainability in Practice,Management for Professionals, https://doi.org/10.1007/978-3-030-56344-8

225

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, 170Sustainability facts, 75Sustainability reporting, 69, 102, 178, 179,

184, 192, 194, 199, 202, 203

Sustainable development challenges, 84, 191Sustainable 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, 123Sustainable lending, 111, 118Sustainable supply chain management, 41, 93,

146, 147, 149, 152, 159, 207–211,214–217

226 Index