Sustainability must be a feature of how companies generate revenues and create value, not just how they operate.
Due to a combination of public pressure and investor demands, businesses are getting increasingly attentive to disclosing both material risks and ESG (environmental, social and governance) impacts. Today over 160 different reporting frameworks exist. Much progress has been made in disclosure terms and ESG has moved rapidly up the corporate agenda. Yet for all the positive noises, the data shows we're heading resolutely in the wrong direction. Where's the disconnect?
Well for one thing, having hundreds of frameworks doesn't help. Methodologies vary, giving significantly different results for the same company. Many rely on self-assessment. Scope 3 impacts, generally representing emission-intensive activities, are seldom included. Few provide a science-based approach which places data in a meaningful context for issues such as climate change. Reports are filled with relatives, comparatives and cherry-picked data. Only about 40% of large companies disclose ESG information. None of this, however, is where the disconnect lies.
Costs vs Revenues
What these reports reveal more than anything is that corporations have come to define ESG in terms of their operations, i.e., facilities, energy consumption, waste management, water use. This anchors sustainability in the cost-sphere of the business. Management investment is correspondingly limited and often associated with money-saving initiatives. Much of the low-hanging fruit has been picked.
The new paradigm for regenerative capitalism and resilient business must be to shift ESG into the value-sphere of a business. Sustainability must be a feature of how companies generate revenues and create value, not just how they operate. In other words, ESG must be embedded in core business if we want to see exponential change in this area.
The sustainability gap
Viewing ESG through the lens of operations and costs has a number of consequences. Most obviously, it ignores the glaring contradiction of producing highly unsustainable product, such as fossil fuel, in an ostensibly sustainable operation. It also brings into question the fundamentality of business's strategy for tackling climate change. All the focus is on achieving net zero. Following this logic to its natural conclusion would mean moving to a world where all businesses are net zero in operational terms, but continue to sell unsustainable products such as planes, phones or clothes on an industrial scale. That future, particularly for product markets, can never be sustainable, especially when coupled with endless consumption. There's a gap in the logic.
In between sustainable production and sustainable consumption is a space that can be termed sustainable propositions. Most products were of course never conceived as "eco" propositions and it will take years for us to physically recreate millions of products on sustainable platforms. (Product roadmaps should of course be making this a priority, but it all takes time we don't necessarily have.) In terms of immediate action for connecting ESG to revenues, we should look at what can be achieved through regenerative business models and value propositions. A product doesn't have to be an "eco" product to be sustainable. Much can be achieved by the way we commercialise a product to be more sustainable and reduce net increases in primary resources.
Innovative business models based on rental, reuse, asset sharing, usage-based pricing, etc, are already redefining many markets. While ESG might not have been the driver behind some of these innovations, it shows demand is there if you can link unmet customer needs with regenerative business models.
Some are already describing these models of value exchange as a form of degrowth. (That perhaps misses some important elements of degrowth theory.) However, these models should be seen as an evolutionary stage, preserving revenue, reducing impacts and limiting turbulence as we wait for bigger technological, regulatory and economic changes to take shape.
As the world convulses from the acute ravages of Covid-19 and heads inexorably toward the chronic impact of climate change, it's becoming clearer by the day that the greatest challenge for business is reforming its value model, not just its operating model. Business resilience depends on it. Be in no doubt, the coming months and years will test that resilience to its core.
Ali Shah is founder of Jara, a value innovation consultancy future-proofing business through regenerative business models and purpose-led strategy.
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