Management magnified Sustainability and corporate growth. A report from the Economist Intelligence Unit Sponsored by SAS

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1 A report from the Economist Intelligence Unit Sponsored by SAS

2 Preface Management magnified: is the third in a series of three reports written by the Economist Intelligence Unit and sponsored by SAS. The first report, Management magnified: Getting ahead in a recession by making better decisions, was published in August, and the second report, Management magnified: Strategies for revenue growth in an economic downturn, was published in September. The quantitative findings presented in this report come from a global online survey of 18 respondents 79 of whom are board members or C-level executives conducted by the Economist Intelligence Unit in August and September The survey asked respondents about the importance of sustainability to corporate strategy. The findings and views expressed do not necessarily reflect 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

3 Management magnified: 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 five 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 significant number of organisations do not devote sufficient resources to sustainability. Thirtythree percent of those surveyed say their companies do not do enough to integrate sustainability initiatives into strategy. An equal number of respondents (5%) say their organisation does not spend enough of its budget on sustainability initiatives as those who say they do (5%). Window dressing? Before the economic downturn of , almost every company seemed to stress its credentials as a socially responsible organisation, where environmental and social bottom lines mattered as much as the financial 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 Of the 18 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-Pacific region (1%), 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 financial services (20%), professional services (1%), 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 (%), general management (9%) and finance (25%). 2

4 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 benefit, 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 performance Inconsistent 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 (1%) and loss of market share (1%). 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. Twentyseven 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]. Percentage of companies rating themselves much stronger than peers in select areas Sustainability leaders All others Financial performance Revenue growth 10 Reacting to changing risks and opportunities Source: Economist Intelligence Unit survey, September Economist Intelligence Unit, Corporate citizenship: Profiting from a sustainable business, November 2008, quoted on page Economist Intelligence Unit, Countdown to Copenhagen: Government, business and the battle against climate change, March 2009.

5 Sustainability isn t about being nice, but seeing profits The fundamental difference between sustainability leaders and other companies is a greater conviction that business benefits will arise out of sustainability initiatives. In particular, leaders believe that sustainability provides a market advantage: % say that it is important to customers compared with only 16% of respondents from other firms in the survey. Similarly, 9% of sustainability leaders believe that sustainability can enhance revenue growth a great deal, compared with 26% from other firms. 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 confident 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 firms that are sustainability leaders are more likely to consider the issue significant [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 % of all others in the survey. Looking ahead, 80% of sustainability leaders see these initiatives as very important to future growth, compared with 0% of all others in the survey. These findings flow 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 2% 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 (7%), Proportion who say stakeholder groups consider sustainability initiatives very important Sustainability leaders All others Board of directors 71 Senior management Middle management 1 Employees Investors 18 5 Source: Economist Intelligence Unit survey, September 2009.

6 Leading motivations for sustainability initiatives Sustainability leaders All others Brand enhancement 25 7 Revenue growth 1 5 Cost savings 28 1 Environmental protection 1 7 Increasing profit 2 29 Opening of new markets 1 27 Public relations External pressure from stakeholders to do good Regulatory compliance 18 2 Source: Economist Intelligence Unit survey, September followed by revenue growth (5%) and cost savings (1%). Other companies instead point first to a goal which, although laudable, is not directly related to financial performance environmental protection (7%). 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 find the business benefits. Leadership counts Leadership 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 6% of all respondents) and the active involvement of senior management (60%). Similarly, a lack of clear mandates or objectives is the leading barrier to 5

7 success (cited by 7%), 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 % of companies, and to senior management at 6%. But these figures are much higher than those of any other stakeholder, whether inside the company middle management (19%), employees (20%) and investors (2%) or outside local communities (28%), customers (2%) 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. 6

8 Conclusion 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 significant 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 financial resources necessary for success. The data suggest that all industries stand to benefit 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 financially. The bottom line is that sustainability remains an important issue for businesses today precisely because companies have discovered that success can lead to good financial performance, no matter the economic climate. 7

9 Appendix Survey results Management magnified Appendix Survey results In your view, how important are sustainability initiatives to your company s overall business strategy today? In your view, does your organisation do enough to integrate sustainability initiatives into business strategy? Very important Somewhat important Neither important nor unimportant 10 Somewhat unimportant Not at all important 6 5 Yes No 6 In your view, how important are sustainability initiatives to your company s future growth plans? Very important Somewhat important Neither important nor unimportant Somewhat unimportant Not at all important In your view, does your organisation spend enough of its budget on sustainability initiatives? Yes No In your view, how important will sustainability initiatives be to your company 5 years from now? Very important Somewhat important 28 Neither important nor unimportant Somewhat unimportant 2 Not at all important 59 8

10 Appendix Survey results What percentage of your working time is spent on integrating sustainability initiatives into business strategy? How important do you think your organisation s sustainability initiatives are to the following stakeholder groups? Select one for each row. Very important Somewhat important Neither important nor unimportant Somewhat unimportant Not at all important Board of directors Senior management Middle management Employees Customers Investors Suppliers Local community

11 Appendix Survey results Management magnified 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. 1 We are much stronger 2 5 We are much weaker 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 What are the biggest barriers to consistent, successful implementation of sustainability initiatives across your organisation? Select up to three. In your opinion, which of the following factors are most important to successful integration of sustainability initiatives at your organisation? Select all that apply. Lack of clear objectives or mandates The complexity of consistent implementation Lack of interest from/understanding by senior management 29 Difficulty in aligning sustainability goals with financial ones 27 Inability to quantify financial costs and benefits (ROI) 22 Insufficient funding/resources (eg, the organisation does not spend enough of its budget on sustainability) 21 Cost (eg, the financial cost of implementation is too high relative to perceived benefits (ROI)) 20 Lack of interest/push back from employees 19 Poor planning of implementation 17 Cultural issues 15 Negative impact on competitive position 9 Inability to set strategy (what initiatives to take on first) 9 Other 6 7 Clear directive from policy-makers or senior management Active involvement of senior management Alignment with broader company goals Sufficient funding 8 Establishment of processes Alignment of financial incentives with successful implementation Thorough planning before implementation Return on investment 25 Use of technology 2 Broad consultation with employees 2 Effective communication with customers 16 Other

12 Appendix Survey results Has inconsistent implementation of sustainability initiatives across your organisation caused any of the following in the past year? Select all that apply. 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 11 Other 6 In your view, to what extent can sustainability enhance company revenue growth? What are your company s primary motivations for new sustainability initiatives? Select up to three. Environmental protection Revenue growth Brand enhancement Cost savings Public relations Increasing profit 25 External pressure from stakeholders to do good 2 Regulatory compliance 22 Opening of new markets 17 Internal pressure to do good 17 Recruitment and retention 7 Worker rights To great extent To some extent Not at all

13 Appendix Survey results Management magnified In which country are you personally located? Which of the following best describes your job title? US 21 India 15 Brazil 5 Canada, Australia, Spain China, UK, Nigeria, UAE Germany, Hong Kong, Japan, Russia, Austria, Denmark, Poland, Singapore 2 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 1 In which region are you personally based? Board member CEO/President/Managing director CFO/Treasurer/Comptroller CIO/Technology director 2 Other C-level executive 6 SVP/VP/Director Head of business unit Head of department 9 Manager Other Asia-Pacific North America Western Europe Middle East and Africa 10 Latin America 8 Eastern Europe 5 What is your organisation s global annual revenues in US dollars? $500m or less $500m to $1bn $1bn to $5bn $5bn to $10bn $10bn or more What is your primary industry? Financial services Professional services 1 Energy and natural resources 9 Healthcare, pharmaceuticals and biotechnology 9 IT and technology 7 Manufacturing 7 Government/Public sector 6 Telecommunications 5 Consumer goods Transportation, travel and tourism Construction and real estate Retailing Chemicals Entertainment, media and publishing Education 2 Aerospace/Defence 1 Logistics and distribution 1 Agriculture and agribusiness

14 Appendix Survey results What are your main functional roles? Please choose no more than three functions. Strategy and business development General management Finance Marketing and sales 20 Operations and production 16 Risk 1 IT 11 Information and research 8 R&D 8 Customer service 7 Human resources 6 Supply-chain management Procurement Legal 2 Other

15 Cover image: istockphoto.com 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.

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