One of the key findings from the most recent McKinsey survey on the strategic worth of sustainability is that, year after year, executives cite reputation as a top reason their companies address sustainability of the 13 core activities analyzed. However, many of this year’s respondents say their companies are not pursuing the reputation-building activities that would maximize that financial value.
Comparing companies with the most effective sustainability programs (“leaders”) with others in their industries highlights another obstacle: incorporating sustainability into key organizational processes.
According to executives, sustainability is becoming a more strategic and integral part of their businesses. Previously, when asked about their companies’ reasons for pursuing sustainability, respondents most often cited cost cutting or reputation management. Now 43% (and the largest share) say their companies seek to align sustainability with their overall business goals, mission, or values.
Top 3 Reasons Addressing Sustainability (% of Respondents)
Alignment… with company’s business goals, mission or values
Reputation… build, maintain, or improve corporate reputation
Cost Cutting… Improve operational efficiency and lower costs
Source: McKinsey, July 2014
One reason for the shift may be that company leaders themselves believe the issue is more important. CEOs are twice as likely as they were in 2012 to say sustainability is their top priority.
As sustainability rises in significance, capturing its full value grows more challenging. At companies that are already taking action, respondents most often cite challenges related to execution: the absence of performance incentives and the presence of short-term earnings pressure that’s at odds with the longer-term nature of these issues.
Accountability is an increasing concern: 34% of executives (compared with 23% in 2011) say too few people at their companies are accountable for sustainability. At companies that aren’t pursuing sustainability activities, respondents continue to cite a lack of leadership prioritization as the top challenge to taking action.
Of 13 core sustainability activities studied, we asked executives most often say their companies are
These actions were cited most often in 2011 and 2012, and a growing share of executives now identifies reputation management as a core activity, noting that reputation management has the highest value-creation potential for their industries over the next five years. Yet there’s a lack of clarity around reputation management, compared with other, better-defined activities, such as reaching new markets with sustainable products.
In extractive services, executives say their companies are pursuing seven core sustainability activities, with three-quarters saying reputation management is one of them (compared with 59% of all respondents). The reputation-building actions these companies focus on differ from those of their peers in high tech, where companies take an average of five actions and just half of respondents say reputation management is one of them. These results confirm that there’s no one-size-fits-all approach to reputation.
The reputation-management activities viewed as most important are not necessarily the most pursued.
Activities Most Important to Maximizing Financial Value (% of Respondents)
Say “Most” Important
Communicating sustainability activities to consumers
Changing core business practices to improve reputation
Building and maintaining external stakeholder relationships
Implementing policies on ethical issues or business activity
External reporting of, and transparency on, activities
Economic investments in communities where companies operate
Company leaders shape external debate around environment, social or economic activites
Sponsoring events or participating in sustainability-focused membership organizations
Source: McKinsey, July 2014
Value-creation efforts require certain organizational traits, says the report. When the study identified sustainability leaders, companies where executives report the strongest performance on core sustainability activities, leaders are much likelier than other companies to possess all 12 of these characteristics, though the results show which traits differentiate leaders from the rest:
Organizational Characteristics True of Respondent’s Companies (% of Segment)
All Other Respondents
Aggressive external targets or goals
Unified sustainability strategy
Aggressive internal targets or goals
Broad leadership coalition involved
Clearly understand benefits of sustainability
Source: McKinsey, July 2014
Much larger shares of executives at the leader organizations say their top leaders prioritize sustainability and report higher employee engagement on sustainability at every level, including CEOs, board members, and sustainability advisory committees. And they say their companies face fewer barriers to realizing value from sustainability, reporting better overall performance on the practices that underpin a healthy sustainability organization. Their companies are taking more action to manage the life cycles of their products, and are four times more likely than others to say they have already implemented a life-cycle strategy.
Of the executives who say their companies are better at fostering an organizational culture around sustainability and setting the direction for their programs, they struggle most with components of program execution, including employee motivation, capability building, and coordination of their sustainability work, 58% of executives say sustainability is fully or mostly integrated into their companies’ culture, compared with 38% who say so for performance management.
Looking more closely at individual practices, some interesting patterns emerge… four distinct approaches to the sustainability organization: leader supported, execution focused, externally oriented, and deeply integrated:
The report concludes by suggesting looking ahead with these major categories in mind:
For additional information from this report, please visit McKinsey here.