Management magnified: Sustainability and corporate growth

Management magnifi edSustainability and corporate growth A report from the Economist Intelligence UnitSponsored by SAS

© Economist Intelligence Unit Limited 2009

Management magnifi edSustainability and corporate growth

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Preface

Management magnifi ed: Sustainability and corporate growth is the third in a series of three reports written by the Economist Intelligence Unit and sponsored by SAS.

The fi rst report, Management magnifi ed: Getting ahead in a recession by making better decisions, was published in August, and the second report, Management magnifi ed: Strategies for revenue growth in an

economic downturn, was published in September.The quantitative fi ndings presented in this report come from a global online survey of 183

respondents—79 of whom are board members or C-level executives—conducted by the Economist Intelligence Unit in August and September 2009. The survey asked respondents about the importance of sustainability to corporate strategy.

The fi ndings and views expressed do not necessarily refl ect those of the sponsor. The Economist Intelligence Unit’s editorial team executed the survey and wrote the report. Kim Andreasson was the editor and project manager. Dr Paul Kielstra was the author. Mike Kenny was responsible for the design of the report.

Our thanks are due to all survey respondents for their time and insight.

November 2009



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Management magnifi ed: Sustainability and corporate growth

As the link between sustainability and corporate growth is typically indirect and intangible, sceptics often dismiss initiatives in this area as window dressing. But in the survey conducted for this report,

executives counter the criticism. Seventy-eight percent of respondents say sustainability initiatives are very or somewhat important to their current business strategy. Eighty-seven percent see them as very or somewhat important to future growth plans and the same number expect them to be very or somewhat important in fi ve years’ time. Respondents, who represent a wide variety of industries and a broad range of functions, say they spend 22% of their working time, on average, integrating sustainability initiatives into business strategy, a sizeable investment.

Yet a signifi cant number of organisations do not devote suffi cient resources to sustainability. Thirty-three percent of those surveyed say their companies do not do enough to integrate sustainability initiatives into strategy. An equal number of respondents (45%) say their organisation does not spend enough of its budget on sustainability initiatives as those who say they do (45%).

Window dressing?Before the economic downturn of 2008-09, almost every company seemed to stress its credentials as a socially responsible organisation, where environmental and social bottom lines mattered as much as the fi nancial one. The business case for this thinking was, and remains, that these three areas do not

About the survey

In order to assess the importance of sustainability to corporate strategy, the Economist Intelligence Unit conducted a global online survey in August and September 2009.

Of the 183 respondents to the survey, 79 describe themselves as board members or C-level executives. Survey takers came from around the world, led by respondents in the Asia-Pacifi c region (31%), Europe

(26%) and North America (26%), with the rest from the Middle East and Africa (10%) and Latin America (8%). Roughly one-half (51%) work for companies with global annual revenue exceeding US$1bn.

Respondents represented a wide variety of industries, led by fi nancial services (20%), professional services (13%), energy and natural resources (9%), and healthcare, pharmaceuticals and biotechnology (9%). Respondents also came from a broad range of functions, including strategy and business development (43%), general management (39%) and fi nance (25%).



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require trade-offs but are mutually reinforcing. As Stan Litow, vice-president for corporate citizenship and corporate affairs at IBM, has explained: “If corporate citizenship were a frill and had no clear benefi t, it ought not survive in any economic climate, good or bad. But if it is viewed as something tied to business strategy with a real, measurable and clear return on investment established over time, then it’s not viewed as something you can or should do less of in a time of economic crises.”1

Yet perhaps as a consequence of the economic downturn, much of the business community remains unconvinced that sustainability initiatives are more than window dressing. In a March 2009 survey conducted by the Economist Intelligence Unit, 67% of executives agreed that economic conditions would force environmental issues down on the corporate agenda.2

So which is it? Given the pressure on sustainability, this report looks behind the rhetoric and evaluates sustainability from a corporate growth perspective.

Sustainability and corporate performanceInconsistent implementation of sustainability initiatives harms businesses. Survey respondents say that over the past year, poor implementation of such projects has decreased their company’s ability to execute strategy (21%) and to innovate (20%). Companies have also suffered in the past 12 months from traditional issues associated with sustainability failures, such as damage to brand (cited by 15% of respondents), increased regulatory risk (14%) and loss of market share (14%). Overall, 58% of respondents say their company has suffered at least one negative consequence to their ability to operate in the past 12 months as a result of inconsistent sustainability implementation.

Similarly, good performance on sustainability is accompanied by superior results elsewhere. Twenty-seven percent of executives surveyed rate their organisation above average in every sustainability-related category—ability to integrate initiatives into core strategy, investment in initiatives and reputation among stakeholders. Members of this “sustainability leaders” group of companies report better than average results in other areas as well [see chart].

1. Economist Intelligence Unit, Corporate citizenship: Profiting from a sustainable business, November 2008, quoted on page 5.

2. Economist Intelligence Unit, Countdown to Copenhagen: Government, business and the battle against climate change, March 2009.

Financial performance

Revenue growth

Reacting to changing risks and opportunities

Percentage of companies rating themselves much stronger than peers in select areas(% respondents)

Sustainability leaders All others

Source: Economist Intelligence Unit survey, September 2009.

35 14

33 10

29 13



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Sustainability isn’t about being nice, but seeing profi tsThe fundamental difference between sustainability leaders and other companies is a greater conviction that business benefi ts will arise out of sustainability initiatives. In particular, leaders believe that sustainability provides a market advantage: 43% say that it is important to customers compared with only 16% of respondents from other fi rms in the survey. Similarly, 39% of sustainability leaders believe that sustainability can enhance revenue growth a great deal, compared with 26% from other fi rms.

The results can be impressive. While many companies were performing poorly in 2008, sales of General Electric’s Ecomagination line of products, for example, rose by 21%, to US$17bn, compared with just 5.8% growth for the company as a whole. Ecomagination products now represent more than 9% of total revenue. In March 2009, Proctor & Gamble felt confi dent enough to increase its 2012 target for sales from its sustainable innovation products from US$20bn to US$50bn.

As a result, internal stakeholder groups at fi rms that are sustainability leaders are more likely to consider the issue signifi cant [see chart]. They are also more convinced of the importance of sustainability to strategy. For example, 65% see them as very important to current overall strategy, compared with 34% of all others in the survey. Looking ahead, 80% of sustainability leaders see these initiatives as very important to future growth, compared with 40% of all others in the survey. These fi ndings fl ow into the practical necessity of better performance, such as an increase in resources: 79% of sustainability leaders say that they spend enough on sustainability, compared with 32% of other companies.

This perspective changes the corporate drivers of sustainability. According to the survey, leaders in this area most often cite brand enhancement as a leading motivation for sustainability initiatives (47%),

Board of directors

Senior management

Middle management

Employees

Investors

Proportion who say stakeholder groups consider sustainability initiatives “very important”(% respondents)



71 34

57 28

33 14

29 17

35 18



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followed by revenue growth (35%) and cost savings (31%). Other companies instead point fi rst to a goal which, although laudable, is not directly related to fi nancial performance—environmental protection (37%). Overall, matters that relate to the bottom line are more likely to resonate as sustainability drivers with leaders than with other companies, while the reverse is true of traditional external drivers, such as regulation or outside pressure [see chart]. Simply put: to be good at sustainability, companies must fi nd the business benefi ts.

Leadership countsLeadership at all levels is essential to effective sustainability programmes at all organisations. When integrating sustainability into strategy, by far the two most important keys to success are clear directives from policymakers or senior management (cited by 64% of all respondents) and the active involvement of senior management (60%). Similarly, a lack of clear mandates or objectives is the leading barrier to

Brand enhancement

Revenue growth

Cost savings

Environmental protection

Increasing profit

Opening of new markets

Public relations

External pressure from stakeholders to do good

Regulatory compliance

Leading motivations for sustainability initiatives(% respondents)



47 25

35 31

31 28

31 37

29 23

27 14

27 29

22 25

18 23



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success (cited by 37%), and a lack of interest by senior management comes in third (29%). Unsurprisingly, engagement of leadership is seen as crucial everywhere in business. When it comes

to sustainability, however, there appears to be a disconnect in the levels of support between various stakeholders. Sustainability initiatives are very important to the boards at 44% of companies, and to senior management at 36%. But these fi gures are much higher than those of any other stakeholder, whether inside the company—middle management (19%), employees (20%) and investors (23%)—or outside—local communities (28%), customers (23%) and suppliers (9%). This indicates that management needs to do more to educate both internal and external groups on the importance of sustainability to corporate strategy.



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When it comes to sustainability, many companies talk a good game yet institute isolated policies that fail to resonate with managers and employees, let alone customers. Still, a signifi cant number of

businesses genuinely see market opportunities from sustainability. At companies deemed by respondents to be sustainability leaders, people at all levels of the organisation attach greater importance to the issue. As a result, their businesses are much more likely to provide the fi nancial resources necessary for success.

The data suggest that all industries stand to benefi t from integrating sustainability into corporate strategy. More than one-half of all companies surveyed have suffered some negative effect on their ability to operate from inconsistent implementation of sustainability initiatives. And leaders in this area are more likely to outperform their peers fi nancially. The bottom line is that sustainability remains an important issue for businesses today precisely because companies have discovered that success can lead to good fi nancial performance, no matter the economic climate.

Conclusion

8 © Economist Intelligence Unit Limited 2009

AppendixSurvey results


Appendix Survey results

Very important

Somewhat important

Neither important nor unimportant

Somewhat unimportant

Not at all important

Don’t know

In your view, how important are sustainability initiatives to your company’s overall business strategy today?(% respondents)

43

35

10

3

6

3

Very important

Somewhat important




Don’t know

In your view, how important are sustainability initiatives to your company’s future growth plans?(% respondents)

51

36

3

4

3

2

Very important

Somewhat important




Don’t know

In your view, how important will sustainability initiatives be to your company 5 years from now?(% respondents)

59

28

4

2

4

3

63

33

4

Yes

No

Don’t know

In your view, does your organisation do enough to integrate sustainability initiatives into business strategy? (% respondents)

45

45

10

Yes

No

Don’t know

In your view, does your organisation spend enough of its budget on sustainability initiatives? (% respondents)




9

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

What percentage of your working time is spent on integrating sustainability initiatives into business strategy?(% respondents)

7 22 14 13 11 8 5 3 3 0 2 1 3 2 1 1 2 0 1 0 1

0 20 40 60 80 100

Very important Somewhat important Neither important nor unimportant Somewhat unimportant Not at all important Don’t know

Board of directors

Senior management

Middle management

Employees

Customers

Investors

Suppliers

Local community

How important do you think your organisation’s sustainability initiatives are to the following stakeholder groups? Select one for each row. (% respondents)

44 35 10 3 5 2

36 46 9 2 7 1

19 43 24 6 6 1

20 34 27 12 6 2

23 34 29 8 4 3

23 36 24 3 7 7

9 29 35 11 8 8

28 39 18 7 3 4




What are the biggest barriers to consistent, successful implementation of sustainability initiatives across your organisation? Select up to three.(% respondents)

Lack of clear objectives or mandates

The complexity of consistent implementation

Lack of interest from/understanding by senior management

Difficulty in aligning sustainability goals with financial ones

Inability to quantify financial costs and benefits (ROI)

Insufficient funding/resources (eg, the organisation does not spend enough of its budget on sustainability)

Cost (eg, the financial cost of implementation is too high relative to perceived benefits (ROI))

Lack of interest/push back from employees

Poor planning of implementation

Cultural issues

Negative impact on competitive position

Inability to set strategy (what initiatives to take on first)

Other

Don’t know

37

36

29

27

22

21

20

19

17

15

9

9

4

3

Clear directive from policy-makers or senior management

Active involvement of senior management

Alignment with broader company goals

Sufficient funding

Establishment of processes

Alignment of financial incentives with successful implementation

Thorough planning before implementation

Return on investment

Use of technology

Broad consultation with employees

Effective communication with customers

Other

Don’t know

In your opinion, which of the following factors are most important to successful integration of sustainability initiatives at your organisation? Select all that apply.(% respondents)

64

60

43

38

33

33

33

25

24

23

16

2

1

0 20 40 60 80 100

1 We are much stronger 2 3 4 5 We are much weaker Don’t know

Profitability

Revenue growth

Ability to react to changing risks and opportunities

Ability to integrate sustainability initiatives into core strategy

Investment in sustainability initiatives

Reputation among stakeholders for sustainability

In your opinion, how does your organisation compare with its closest competitors in the following areas? Rate on a scale of 1 to 5, where 1=We are much stronger and 5=We are much weaker. (% respondents)

20 35 29 8 5 4

16 37 30 10 4 2

17 44 23 10 3 3

14 33 30 12 4 7

10 28 33 12 9 8

14 31 31 10 6 8




11

Decreased ability to execute strategy

Decreased innovation

Slower time to market with new products

Reduced collaboration across teams

Loss of brand reputation

Loss of market share

Increased regulatory risk

Reduced customer satisfaction

Other

Don’t know

Has inconsistent implementation of sustainability initiatives across your organisation caused any of the following in the past year? Select all that apply.(% respondents)

21

20

18

16

15

14

14

11

6

29

29

57

9

4

To great extent

To some extent

Not at all

Don’t know

In your view, to what extent can sustainability enhance company revenue growth? (% respondents)

Environmental protection

Revenue growth

Brand enhancement

Cost savings

Public relations

Increasing profit

External pressure from stakeholders to do good

Regulatory compliance

Opening of new markets

Internal pressure to do good

Recruitment and retention

Worker rights

What are your company’s primary motivations for new sustainability initiatives? Select up to three.(% respondents)

35

32

31

28

28

25

24

22

17

17

7

3




US

India

Brazil

Canada, Australia, Spain

China, UK, Nigeria, UAE

Germany, Hong Kong, Japan, Russia, Austria, Denmark, Poland, Singapore

Argentina, Greece, Iceland, Indonesia, Mexico, Portugal, Romania,South Africa, Sweden, Uganda, Ukraine, Egypt, Finland, Hungary, Jordan,Kenya, Lithuania, New Zealand, Philippines, Slovenia, South Korea,Switzerland, Taiwan, Trinidad and Tobago, Zambia

In which country are you personally located?(% respondents)

21

15

5

4

3

2

1

Asia-Pacific

North America

Western Europe

Middle East and Africa

Latin America

Eastern Europe

In which region are you personally based?(% respondents)

31

26

21

10

8

5

41

8

17

7

26

$500m or less

$500m to $1bn

$1bn to $5bn

$5bn to $10bn

$10bn or more

What is your organisation’s global annual revenues in US dollars? (% respondents)

Board member

CEO/President/Managing director

CFO/Treasurer/Comptroller

CIO/Technology director

Other C-level executive

SVP/VP/Director

Head of business unit

Head of department

Manager

Other

Which of the following best describes your job title?(% respondents)

4

27

4

2

6

21

3

9

19

5

Financial services

Professional services

Energy and natural resources

Healthcare, pharmaceuticals and biotechnology

IT and technology

Manufacturing

Government/Public sector

Telecommunications

Consumer goods

Transportation, travel and tourism

Construction and real estate

Retailing

Chemicals

Entertainment, media and publishing

Education

Aerospace/Defence

Logistics and distribution

Agriculture and agribusiness

What is your primary industry?(% respondents)

20

13

9

9

7

7

6

5

4

4

3

3

3

3

2

1

1

1




13

Strategy and business development

General management

Finance

Marketing and sales

Operations and production

Risk

IT

Information and research

R&D

Customer service

Human resources

Supply-chain management

Procurement

Legal

Other

What are your main functional roles? Please choose no more than three functions.(% respondents)

43

39

25

20

16

13

11

8

8

7

6

4

3

2

3

Whilst every effort has been made to verify the accuracy of this information, neither the Economist Intelligence Unit Ltd nor the sponsors of this report can accept any responsibility for liability for reliance by any person on this report or any other information, opinions or conclusions set out herein.Co

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Management magnified: Sustainability and corporate growth