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1. Know thy self
Invest in data quality and identify the material risks that align to purpose
Integrating sustainability into the core of the business begins with taking a 360-degree view of a company’s operational relationships with people and the planet. Done correctly, this process can often turn into a meaningful conversation about the overlooked risks, operational inefficiencies, and broader business realities that could affect business’ performance going forward.
For many companies, getting this level of insight may require deep investments. This may include introducing new data collection tools, improved data sharing with suppliers and customers, developing a data quality assurance process, and establishing internal governance for tracking the firm’s progress against stated goals and identified risks. Organizations that are doing this well build connectivity. They pull together strands of data from various systems and make it easily digestible for different audiences.
Having access to more data is not the same thing as having the right data, though. The key is to have data that reflects the sustainability risks and opportunities that are material to the business. Instead, the specialists Deloitte Global interviewed recommend that companies look closely at the resources and relationships that make them successful to identify the opportunities for making the value creation process more sustainable.
In turn, understanding the ESG matters that are relevant to the business can create a new rubric for evaluating and monitoring enterprise risks, prioritizing spending and making decisions that integrate sustainability aspects into the company’s DNA: “The definition of corporate success is changing, as is the role of business in society and corporate measurement systems (e.g., impact thinking, double materiality). To be successful in the new business reality, companies need to understand if they are leaders or laggards in their sector transition paths and how they manage trade-offs between financial and non-financial targets.”
Aligning the data collection efforts to the company’s key risk and opportunities is a good starting point: “There is a world in which companies could stick to 20 metrics that were deemed material for their sector,” one interviewee said. “This would serve as a reasonable proxy for performance along the most important and meaningful dimensions for sector peers.”
For those who are overwhelmed by the number of metrics, another interviewee recommended that companies leverage the emerging set of International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards to focus on climate-related risks. “Starting with one reporting topic –climate –will ease the burden for companies, and allow them time to prepare themselves organizationally, establish systems and processes, determine the kind of data needed and how to gather it.”
2. Root goals in strong governance
Embedding sustainability into business operations requires accountability
Regardless of the industry or the sustainability matters a company faces, good governance should be an essential part of the internal business transformation. “If you don’t have governance, you can’t talk about having environmental or social disclosures,” one interviewee said. “To be transparent, you need governance. It’s the foundation and the base.”
To help elevate accountability for sustainability integration, some companies are assigning responsibility to the senior leaders of the organization, including: the board of directors, the chief financial officer, or a cross-functional sustainability steering committee, as one interviewee described: “This is a major challenge for boards,” one interviewee said. “The focus of the board has typically been company strategy, reporting, investor engagement. Now you’re folding in a new suite of information that will require a diverse set of skills not traditionally required.”
To help drive governance over sustainability data and accounting, some companies are assigning sustainability information disclosure to the chief financial officer. “The finance teams have the capabilities to put strong controls in place, build systems that capture data once and reuse it for multiple purpose,” one interviewee explained. “They are also the teams responsible for management reporting and the information systems that support internal strategy and business decision making. Thus, they are uniquely positioned to ensure that sustainability information is integrated into management and board decision making.”
Just as having the right tone at the top is an important part of changing organizational culture, so too is empowering employees to contribute to the effort by embedding the work into day-to-day responsibilities.
“Companies will soon begin setting up teams consisting of sustainability, strategy, investor relations, and finance. Leading companies have already integrated sustainability directly into standard operations and decision-making processes.”
3. Chart your own course
Organizations can find traction through authentic stakeholder dialogue about what the future holds and where a company is on the sustainability journey
Because each company has a unique business model, structure, and culture, no two sustainability transformations are alike. Even within the same organization, the integration process may require different strategies for different business units, depending on such factors as industry segment, workforce composition, geography, and management structure.
Factors that can influence sustainability integration
- Privately held versus publicly owned (The market it is listed on also matters.)
- Industry sector
- Business model
- Organizational design
- Internal culture
- The availability/lack of talent to support sustainability efforts
- Macro-economic factors, supply chain disruptions, etc.
- The pace of broader, nested system integrations
That’s why it’s important to be honest about where your business is on the transformation journey. “Quality of dialogue is critical here,” one interviewee said. “We are at a tipping point where investors, auditors, business, and others need to collaborate to find solutions and address challenges. It is okay to disagree, but we need to have dialogue.”
Directly engaging with stakeholders can be a chance to understand their needs and improve connections that can support the business transformation in important ways. Some companies formally incorporate stakeholder dialogue into the goal-setting process, while others find that these dialogues can open the aperture for bigger shifts in the business. In talking to stakeholders, they must identify the most significant voices, not simply the loudest, and take ownership of responding to what is most important.
Stakeholder mapping can also help companies target communications, based on the needs and uses of the various audiences. The interviewees recommended that companies take a “multidimensional” approach.
“I think companies need to think about ESG disclosure in the same way they think about communications strategy broadly – tailoring information to the needs of the user,” one interviewee said. “You don’t use the same communication vehicles that you use internally with your employees with your clients. You tailor information to people’s needs and companies need to view ESG information through that same lens.”
As companies learn more about their sustainability impacts, risks, and opportunities they might become fearful of backlash from making related disclosures. It is helpful to remember that most companies are still in the early phases of building their programs and stakeholders seem to understand that perfection should not be the enemy of moving towards good practice.
4. Reframe the problems
Managing uncertainty requires business leaders to get comfortable with making decisions without a perfect answer
While most corporate leaders have grown up in a business culture that expects answers to come from accurate and timely information, sustainability will likely require business leaders to make decisions when they simply might not have the information, when choices are ambiguous, and the business outcomes vague.
“The differences with financial reporting are not trivial,” one interviewee explained. “The fact that ESG reporting will be forward-looking is quite an important distinction. There is also the timeframe, [which] is significantly longer than for traditional financial reporting. The data challenge gets compounded, and further compounded if you want that data to be verifiable. You need data based on science-based metrics. You need data on Scope 3. Those challenges are there. You are more likely to get qualitative than quantitative information.”
It may be uncomfortable for leaders to admit what they don’t know, but it’s more accurate to present information in terms of ranges, scenarios, and confidence intervals and with explanatory narrative if the pace or direction of change may shift over time. “The ones who know they don’t know are the smartest,” one interviewee said.
When it comes to setting goals and reporting progress, leaders should be authentic. This may mean limiting the scope at the outset to focus efforts and build internal capabilities. “Figure out a couple of things [that] have impact and make progress on those,” one interviewee recommended. “This has been the most effective way to break through the noise and be a part of the conversation.” Over time, “companies will mature in setting more practical goals, will become bolder in what they do and how they share it will stakeholders,” another interviewee observed.
Because sustainability programs require long-term thinking, leaders may also have to make the business case for spending on programs with much longer payback periods. Although fiduciary duties sometimes keep business leaders and investors focused on the short-term, it’s important to begin socializing with stakeholders the idea of making legacy investments in long-term risk reduction, resiliency, and business continuity. “It will take time, effort, and investment for these systems to develop and mature and ensure reliable data. By allowing for a greater period of maturity, we will also likely see better alignment between financial and non-financial reporting and account for potential implications between the two,” one interviewee said.
On the positive side, sustainability investments can often bring a host of unexpected benefits, too. Once companies start changing processes to help reduce factors such as energy consumption, water use and waste, they often discover new opportunities to help reduce operating expenses, improve efficiency, and even to generate new revenue altogether.
Making progress with sustainability integration is not about having all the answers, but about having a process that can help you understand problems better, align decisions to the core purpose of the organization and create space to experiment with solutions.
5. Commit together to a better future
No organization or institution can address the sustainability challenge by themselves.
If the goal is to create a new economic system that operates within the planetary boundaries and ensures quality of life to all members of society, then every organization is being called to do its part—in partnership. This last (and often overlooked) goal in the list of 17 SDGs recognizes the importance of building multi-stakeholder partnerships and voluntary commitments to help mobilize resources, build capabilities, and drive innovation.
“Transformation can only happen if everyone works together. What’s missing is key players (financial market, regulators, corporates) working together. It is still occurring too much in siloes. We are seeing more collaboration, but the question is if it’s happening fast enough.”
It’s time for concrete actions. Embracing transformation means investing in the capabilities, the capacity, the infrastructure, the technology, the enabling mechanisms that can help drive integration throughout the organization. It can also mean supporting experimentation for those who want to lead and help reduce costs and uncertainties for those who follow.
Although the scope of the challenges can be daunting, business leaders are in a position to make a significant impact, by focusing on the matters they effect and committing themselves to continuous improvement. Each internal change that takes place becomes another ripple that cascades outward, reshaping business ecosystems and eventually rewriting the rules of the road altogether.
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