Sustainability drivers
Our interviews and roundtables indicated that sustainability drivers have increased in intensity and complexity. Participants stated that they expect these will continue to evolve. The eight sustainability drivers identified in our research are: regulation, investors, consumers, suppliers, competitors, employees, rising costs, and climate change-associated risks.
All drivers fall within one or more of the following categories:
People
Environment
Processes
This finding is backed up by existing literature on addressing global crises, such as climate change and the role shareholders and stakeholders play around the world in decision-making. Ongoing research in this field by Professor Renée Adams at the University of Oxford specifies that processes and people are the keys to solving problems like climate change3. Because processes and people were deemed to be part of the solution, they should also be acknowledged as significant drivers of sustainability. We found that the environment itself is another essential driver of sustainability because changes in weather and sea levels disrupt business activities globally. These changes also have a wider impact at the economic, financial, and geopolitical levels.
Within the realm of sustainable development, innovation is propelled by the synergy of processes, people, and environment. Streamlined processes provide the structure for eco-conscious ideas to flourish. People, with their diverse skills and perspectives, fuel sustainability-driven innovation through collaboration and adaptability. The environmental context, encompassing both organisational culture and external factors, sets the stage for innovative solutions that contribute to a more sustainable future. Together, these elements create a dynamic ecosystem where innovation is not only nurtured but also harnessed to address pressing sustainability challenges.
A quote from a finance director for a professional engineering and advisory company in the UK reflects the general feelings of the organisation in our research:
‘I have noticed when we’re sitting with our auditors, banking partners, or any suppliers in any tenders we are going for, we are being asked a lot more questions around sustainability. We’re on heightened awareness. I think there will be challenges around how we set KPIs for it, how we report against it, how we capture it, how we monitor it, and, as you all said, the cost of doing this as well as the reward’.
Sustainability-related regulatory changes are gaining momentum, leaving many organisations facing more complex reporting requirements than ever before. Some of the latest developments introduced in sustainability regulation affecting businesses are detailed in the report appendix. The two main areas of strategic regulatory focus are:
A focus on the reporting of sustainability-related disclosures — These introduce new complexities to an organisation’s reporting landscape.
A focus on protecting customers and empowering consumers to make environmentally friendly choices — This takes place through provision of accurate information on the sustainability of an organisation’s products and services.
The latest worldwide legislation sets a clear expectation for businesses to act towards achieving sustainability while carefully managing claims and actions on their products, services, and all associated initiatives. The legal and regulatory sector scrutinises ‘green’ claims made by organisations to ensure compliance with consumer protection laws.4,5
Globally, a number of stock exchanges, including the ones in most G20 countries, mandate that companies disclose and report on scope 1, 2, and 3 greenhouse gas emissions.6 These stock exchange schemes also require companies to put in place systems that ensure their suppliers provide transparency on their current emissions and seek further emission reduction.
One interviewee from a multinational retailer in the UK outlined the key concern associated with the increase in regulatory burden, earning the nods of all other roundtable participants present. ‘The risk is we spend all of our effort doing statutory reporting and complying with regulation and not enough on actually driving outcomes’.
Securing investment is at the forefront of many businesses’ agenda. We found that interviewees associate higher levels of sustainability with specific projects, and these sustainable initiatives are a more attractive investment proposition. This is due to a shift in investor stakeholders’ sustainability requirements and growing scrutiny over the impact of investments.
Consumers are embracing their identity as ‘decision shakers’. They increasingly understand the important role they play in achieving sustainable growth of the organisations they purchase goods and services from. Their choices reflect their increasing awareness of the environment, nature, and biodiversity. A CFO from an organisation in the manufacturing sector in China told us, ‘Consumers are moving very fast. Sustainability is becoming a community- driven process, and local stakeholders are the checks and balances system. Consumers are pivitol in supporting the initiatives that do right by people and the environment’.
Supplier collaboration is changing. Organisations headed towards a system value perspective now expect transparency on supplier emissions and a supplier willingness to reduce their environmental impacts. A finance manager from the manufacturing sector in Ireland told us, ‘We currently have a responsible procurement programme, whereby suppliers are scored based on sustainability performance’. The increasing scrutiny around suppliers’ sustainability is manifested through assessments and evaluations meant to determine responsible sourcing performance and, thus, selection suitability.
In a UAE roundtable, a senior accountant from the oil and gas sector noted, ‘If businesses commit to sustainability, then they are conditioning their suppliers to follow, that is scope 3. It is a cascading effect’. This insight expresses clearly how the changes in supplier collaborations are expanding globally, becoming the new normal for businesses across all sectors and industries.
Perceptions of competition are also changing as organisations shift from a shareholder to a system value perspective. As organisational sustainability increases in maturity, entities are faced with the need to find different ways to operate amid increasing global sustainability pressures. These are complexities that are difficult and costly to solve alone. A non-executive board member for a UK local council spoke about reassessing competitor behaviour and sustainability, telling us, ‘I think the need to operate more as an industry rather than as an individual organisation is something that is becoming increasingly important. I don’t know the extent to which that exists in other sectors, but here it is essential to achieve sustainability strategy success’.
There was unanimous consensus amongst our interviewees and roundtable participants that changes in competition are strongly affecting sustainability and vice versa. These changes come with new challenges as one of our interviewees, a director with a retail and shared services company in the UK, outlined, saying, ‘Sustainability is becoming an important layer of competition, but one needs to distinguish between environmental focus and greenwashing’.
Mounting inflation, rising energy and raw material costs, and the soaring expenditures of doing business more generally all remain the most pressing issues for organisations, finance functions, and finance professionals.
For organisations still in the shareholder perspective or en route to a stakeholder perspective, these concerns are more pronounced. They also tend to dictate the type of sustainability initiatives that take front of stage in businesses all around the world. These initiatives are all strongly focussed on cost reduction. Below (Table 2) are the three sustainability initiatives mentioned most frequently across our interviews and roundtables.
Achieving a paperless or energy-efficient office and waste reduction were mentioned by many interview and roundtable participants as their organisations’ sustainability objectives, often in connection with saving costs.
‘Sustainability solutions ultimately incur a cost and the industry is driven around margins and price. Business will always look to reduce costs or to deliver cost-effective solutions and unless the sustainable options are cheaper than the existing solutions, it’s never going to be given the priority it deserves’ Finance Director, Constructions, UK
This quote explains why simple, cost-saving, short-term sustainability initiatives remain at the top of most organisations’ agenda, while more complex, resource-intensive, long-term ones are yet to gain traction.
Apart from winning the hearts and minds of customers, a favourable sustainability reputation leads to many strategic benefits. For one, it offers organisations a strong advantage in attracting new talent. Candidates have an increasing desire for more meaningful work, which is becoming a rigorous check on the organisations’ sustainability reputation. A learning and development specialist, from a Fortune 500 food processing company in the United Kingdom, notes, ‘A lot of people are very passionate about matters such as sustainability and working in an organisation which promotes the right values’.
While grappling with climate change, organisations, finance functions, and finance professionals are facing an uphill battle as they work to take suitable mitigation actions and adapt to the new ESG imperatives.
In interviews and roundtables, research participants mentioned several climate risks, such as rising sea levels and increased extreme weather events. They also highlighted the effect climate events like these can have on organisational risks like reputational risk and increased operating costs. There were also concerns around financial insurance for organisations becoming either unaffordable or unavailable in increasingly at-risk areas of the world.
A chief risk officer for a Fortune 500 insurance company in Malaysia suggested that finance professionals should look beyond risks and get acquainted with the many opportunities available through enhanced sustainability awareness. They said, ‘Sustainability should not be perceived as a mere risk. One needs to look at the opportunities that can arise from understanding the risks associated with not achieving sustainability correctly’.
It is interesting to note one sustainability driver absent from our research interviews and roundtables: the participant’s organisations themselves. This may be due to modesty or a deep internal focus, but our research reveals that organisations themselves are a key sustainability driver influencing regulation, consumers, and suppliers. Many organisations are involved in piloting draft standards and participating in regulation consultations. They’re also providing product sustainability information to help consumers make informed decisions and collaborating with competitors in their sector.
