First You Say "You Do," And Then "You Don't"

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)

Reason

2010

20012

2014

Alignment… with company’s business goals, mission or values

21%

30%

43%

Reputation… build, maintain, or improve corporate reputation

35

35

36

Cost Cutting… Improve operational efficiency and lower costs

19

36

26

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

  • Reducing energy use in operations (64%), reducing waste (63%)
  • Managing their corporate reputations for sustainability (59%)

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)

Activity

Say “Most” Important

Currently Pursuing

Communicating sustainability activities to consumers

39%

60%

Changing core business practices to improve reputation

34

41

Building and maintaining external stakeholder relationships

33

60

Implementing policies on ethical issues or  business activity

32

57

External reporting of, and transparency on, activities

29

57

Economic investments in communities where companies operate

23

43

Company leaders shape external debate around environment, social or economic activites

22

40

Sponsoring events or participating in sustainability-focused membership organizations

17

52

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)

Characteristic

Sustainability Leaders

All Other Respondents

Aggressive external targets or goals

53%

11%

Unified sustainability strategy

69

19

Aggressive internal targets or goals

60

17

Broad leadership coalition involved

65

19

Clearly understand benefits of sustainability

51

18

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 first approach is characterized by actively engaged leaders across the company, employee encouragement, and clear strategy
  • The second by clear structure, accountability, and middle-manager engagement
  • The third by the use of external ideas, networks, and relationships, as well as top-leader and middle-manager engagement
  • The fourth by employee incentives for sustainability work, a focus on talent, and even engagement on sustainability at all levels of tenure.

The report concludes by suggesting looking ahead with these major categories in mind:

  • Extend the product life cycle. While resource constraints are creating unprecedented prices and volatility in natural-resource markets, most companies (studied) have not begun to implement strategies that extend the life of their products and thereby reduce their resource dependence in a significant way
  • Look to technology. Similarly, technological advances are creating opportunities to drive sustainability solutions. Yet only 36% of respondents say their companies are mostly or fully integrating sustainability into their data and analytics work
  • Focus your strategy. As sustainability becomes more central to the business, companies should align internally on what they stand for and what actions they want to take on these issues, whether it’s economic development or changing business practices

For additional information from this report, please visit McKinsey here.

 

 

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