Insight Article: 5 Steps to Developing an Effective Sustainability Strategy – Part 1
“The purpose of strategy is to enable action.”
Much has been written about the importance of measuring carbon emissions and the importance of addressing climate change. Indeed, this is increasingly becoming a legal requirement with, for example, larger companies in the UK having to report against SECR (Streamlined Energy and Carbon Reporting).
What Is ESG?
ESG stands for Environmental Social and Governance, and lists the three key factors when assessing the sustainability and ethical performance of a business or an investment.
Whilst compliance with legal requirements is an excellent (and necessary) place to start, there is a danger that a narrow legalistic focus can encourage companies to concentrate on the reporting aspects of sustainability, rather than developing and implementing strategies to improve their performance. This is where the G for Governance in ESG comes into play… as, with the right Governance, companies are much more likely to look at developing meaningful and challenging sustainability strategies that can improve all aspects of their business.
Senior Management Commitment And A Sense Of Urgency
All change is painful and implementing a successful sustainability strategy is no exception. Two factors stand out in successful sustainability change programmes:
- Senior management commitment
- A clear sense of urgency… around sustainability in general and climate change in particular
Implementing a Sustainability or Climate Change strategy requires a sense of urgency in the organization, especially among the senior leadership. If that is not present, the project may be doomed from the start. The good news is the amount of coverage of sustainability and climate change in the media means there are very few business leaders who feel they can? ignore sustainability and ESG. And, increasingly, company board and investors are looking to go beyond the reactive (“do the minimum”) and take a proactive, revenue creation, stance towards sustainability instead.
In the lead up to the COP26 conference in November this year, the question for most companies must surely be “If not now, when?”.
Do You Need A Separate Sustainability Strategy?
In the UK, the Companies Act requires Company Directors to consider, amongst other things, ‘the likely consequences of any decision in the long term’, ‘the impact of the company’s operations on the community and the environment’, and ‘the desirability of the company maintaining a reputation for high standards of business’.
In the light of these requirements, one could make a strong case that sustainability should be at the core of every company’s strategy and that the company strategy and the sustainability strategy should be one and the same. Which is why some people will argue that companies do not need a Sustainability Strategy at all!
Whilst it is likely that the thinking on business strategy evolves in this direction, for the moment most companies will maintain a separate sustainability strategy which needs to operate in tandem with the overall company strategy.
As with other aspects of strategy development, we encourage our clients to use a questioning approach to strategy development as embodied in our 5 Key Questions Strategy methodology.
Step 1 – Assess ‘Where Are We Now’?
The first step in developing the sustainability strategy is to assess the current position of the business. This analysis is typically in two parts:
- Materiality Assessment
- Measure Current Business Performance
All businesses face multiple challenges and opportunities in driving sustainable development, but it is not possible for any company to give equal priority to all the financial, climate, environmental and social issues it faces. The materiality assessment is a systematic way of determining which of the factors are the most significant for your organization, helping the business leadership to weigh different priorities.
A typical materiality assessment will include a series of structured questions which can be put to all the stakeholders in the business, including staff, management, customers and suppliers. The questions themselves will generally be guided by publicly available standards or guidance from organizations such as Global Reporting Initiative (GRI), the UN Sustainable Development Goals (SDGs) and the Sustainable Accounting Development Board.
The output of the Materiality Assessment is often displayed in a Materiality Matrix which plots Impact (on the business and society) versus Ability to Influence.
It is generally worthwhile including some form of benchmarking exercise in the materiality assessment, as this will provide intelligence on competitor activities and may generate further ideas for inclusion in the Sustainability Strategy.
Measuring Current Performance
In parallel with the materiality assessment, it is important to measure the organization’s current performance, particularly with respect to carbon emissions (the ‘carbon footprint’). This sets a baseline against which future performance can be judged.
As mentioned above, larger UK businesses will already be familiar with the need to measure carbon emissions as they already have to report to the SECR requirements, and similar requirements now exist in many other countries.
It’s also important to decide on the right methodology for calculating the carbon footprint; of which the most common are:
- Greenhouse Gas Protocol for Corporate Reporting, developed jointly by the World Business Council for Sustainable Development (WBCSD) and the World Resources Institute (WRI).
- ISO 14064: Greenhouse gases —Specification for quantification and reporting of greenhouse gas emissions.
Whilst it is not generally a requirement to have the carbon footprint verified or certified by a third party, it is generally accepted best practice to do so, and certification of this type is performed by organizations such as the Planet Mark.
Step 2 – Define A Destination
In the past it has often been sufficient to start measuring environmental performance and maybe set some objectives for incremental improvement. But increasingly companies and their stakeholders are looking for a more inspiring Vision of the future, typically including a commitment to zero carbon or even to become carbon negative.
Examples of companies on the carbon negative journey include UK brewery company Brewdog and Microsoft. And it is likely that publicity around the COP26 conference in November 2021 and the UN’s Race to Zero will encourage many other organizations to follow suit.
When deciding whether and when to target zero carbon, it is important to assess all the benefits of improved sustainability; in particular, to ask ‘How can we gain direct financial benefit from improving sustainability?’. Most organizations find that the real benefits are not so much about cost savings (e.g. from lower fuel use) but are more about the increased attractiveness of the company’s products and services and the ability to increase revenue.
Having set a long-term Vision, it is then important to define a series of interim Goals and Objectives (e.g. to reduce carbon emissions from our building by x% in the next two years, or to communicate more effectively about the programs we already have in place).
Step 3 – Decide ‘What Are We Going To Do Differently’?
It is in this stage that the ambitions of the organization confront reality. There will inevitably be some ‘low hanging fruit’ or short-term wins (e.g. reducing the amount of business travel by using technology more effectively), but many of the improvements will require changes in staff behaviour and capital investment.
We have found that companies who have the most success in reducing carbon put enormous effort into communicating their sustainability Vision and Strategy; and follow this up by ensuring their employees feel empowered to drive change at a local level.
This engagement with staff often has an additional benefit of increasing staff satisfaction and motivation (as most people want to work for an organization that tries to behave in a sustainable and responsible manner).
Of course, some of the improvements in sustainability will require significant investment. Examples of typical projects might include switching to electric vehicles, improved insulation in buildings or new technology to reduce water consumption in a process plant). Fortunately, the current low interest rates mean that many of these projects can be self-financing, even without considering the potential for increased revenue.
The changes needed to achieve the Vision, Goals and Objectives can be quite challenging for the organization which is why it is so important to have senior management commitment and a sense of urgency at the start of the process.
In this article we have described the first three steps in the development of an effective ESG sustainability strategy, leading up to decisions on what the organization needs to change.
Part 2 of this article will look at how the organization can implement these changes, how to overcoming cultural and other impediments to change, and the creation of a system to manage implementation. The SKCI web site contains additional strategy resources which we hope will also be of use.
We can help you to build and manage your own sustainability strategy. For more information please get in touch.