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First You Say "You Do," And Then "You Don't"
by Jack Loechner, Wednesday, August 6, 2014 6:15 AM
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) Reason2010200122014 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)
ActivitySay
“Most” ImportantCurrently 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)
CharacteristicSustainability LeadersAll 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.