Will your company pass the Sustainability Stress Tests?

Find out how 33 leaders have already started future-proofing their organisations

In a resource-constrained, fast changing environment where trust is paramount, organisations must move from incremental steps to bold transformations in order to survive.

In today’s world, models collapse and giants are born with increasing rapidity. Volatility and instability are now constant and stable(!) characteristics of future economies. While people generally agree it can be difficult to predict future transformations, most expect a series of highly probable and equally profound changes between now and 2030: scarcity and cost increase of key resources, strengthening of legal constraints, an ageing population in developed countries, possible technological breakthroughs in areas such as energy and clean tech, 2 billion more people on the planet, combined pressure on the land and water-related issues in some locations, persistence or worsening of certain inequalities. Meanwhile, social trends already visible today will only become more apparent, with an increase in societal demands for a shared responsibility from economic players, a desire for low prices, and a thirst for transparency.

These changes are a significant obstacle and issue for some, but also represent a tremendous opportunity for organisations to become more flexible in their operations, refocus their business models and develop new propositions. In this changing world, values such as the capacity to navigate challenges and anticipate future transformations will be increasingly in demand.

Volatility and instability are set to be enduring and long-term characteristics of future economies

These changes are a significant obstacle and issue for some, but also represent a tremendous opportunity for organisations to become more flexible in their operations, refocus their business models and develop new propositions. In this changing world, values such as the capacity to navigate challenges and anticipate future transformations will be increasingly in demand.

This study is not another theoretical demonstration that shows how organisations are placing "Sustainable Development" at the core of their business strategies. Instead, it argues that organisations can boost corporate performance, not only through enabling the reduction of certain costs and major risks to be managed (notably beyond the company’s boundaries), but also by allowing organizations to identify new markets, innovate products and processes, and improve brand perceptions through increasing customer confidence.’

By interviewing more than 30 international companies and questioning them on their strategies and operations, this study reflects on the sustainability of their business models, in terms of:

• Why? Why did you engage in achieving more sustainable development? What objectives have you pursued via your sustainability initiatives and social and environmental policies? And in the future, how would you model your organisation to better achieve this goal?

• How? How have you translated these ambitions in the core of your organisation? At a strategic, managerial and operational level, where have you focused your efforts up to now? Where will you invest your time and resources tomorrow?

• Ready? Will you be ready for the world in 2030? Have you already “imagined” your organisation in 20 years? Is your business model compatible with the world of 2030? Simply put, does your organisation pass our “Sustainability Stress Tests 2030”?

The lessons learned in this study are wide ranging. Traditionally, many organisations have engaged in sustainability transformations with a fundamentally defensive goal, i.e. to avoid being mired by specific regulations or the implicit expectations of their partners. Today, however, the leaders interviewed appear to be in the process of taking a real measure of the issue. Some even see it as a major facet of their commercial differentiation, or even more radically, their medium-term survival. The responses suggest a number of profound transformations in thinking, and certain organisations are already broadly committed to achieving such goals.

Models currently adopted by businesses do not pass the scrutiny of the “Sustainability Stress Tests 2030”

Against this background, one fact dominates: while many initiatives exist and the collective intelligence of the organisations interviewed is high, considerable work remains. Models currently adopted by businesses do not necessarily pass the scrutiny of the “Sustainability Stress Tests 2030” either in whole or in part. Some business models have been in place for decades, and both managers and staff have “been successful” and “made a career” operating smartly and adequately within their industry sector. To embark on a different way of thinking reveals what is perhaps the greatest difficulty – not only to “preserve the planet” and “respect people” but more prosaically, to enable the organisation to navigate new waters without sinking.

Sustainability Stress Tests enable organisations to assess their readiness for tomorrow’s business environment

What is a Sustainability Stress Test?

What will the world look like in 2030? While a precise response is impossible, current predictions emphasise stronger, structural trends, mentioned briefly below: strong demographic growth in developing countries, an ageing population in developed countries, expected scarcity of natural resources, strengthening of environmental and social legislative standards… These trends have been translated into Sustainability Stress Tests, which enable organisations to test their capacity to respond to the anticipated impact of such transformations. To make these Sustainability Stress Tests tangible, insights were translated into measurable topics.

How can companies use them?

First of all, Sustainability Stress Tests are sector-specific, having different relevance from one sector to another. For example, the anticipated scarcity of lithium resources does not affect the B2B industry sector in the same way as the FMCG sector. Equally, the increase in obesity and cardiovascular diseases has a different resonance for the banking and insurance sector, as it has for Fast Moving Consumer Goods (FMCG) sector. From the company perspective, a critical self-examination through the prism of Sustainability Stress Tests enables it to map out its plan of action in an innovative manner. For example, integrating other stakeholders and potential partners in its sector, so that they can take these “Sustainability Stress Tests” and devise business models and value propositions that fit with the world of tomorrow.

Sustainability Stress Tests assess an organisation’s ability to respond to tomorrow’s economic conditions and answer to whether they are ready for the future

Sustainability Stress Tests measure the capacity of an organisation to make predictions, adapt activities to a longer cycle, and align its business model with anticipated global changes. In the same way as banking stress tests simulate extreme, yet plausible economic and financial conditions to study the consequences on banks and measure their ability to withstand their impact, Sustainability Stress Tests assess an organisation’s ability to respond to tomorrow’s environmental, social and economic governance conditions. They enable organisations to respond to the following question: are we ready for the future?

Thus, any organisation who wants to consider the future with a sense of calm ought to face these tests: are you passing them? Or at least, have you taken them into account? Just like banking stress tests, Sustainability Stress Tests help assess the resilience and durability that accompany the economic activity of the company for the years to come.

Finally, if these tests underline tomorrow’s risks and opportunities for the organisations concerned, they are above all a reminder that long-term stability and success of a company cannot be considered without factoring sustainability considerations into the current strategies and transformations of the organisation.

A combination of the following constraints & challenges has helped us design our Sustainability Stress Tests (further described in each sectorial part).

Through the visualisation of a possible future, leading companies embark on a retro-planning journey, which in turn helps them drive changes and transformation

Almost all Sustainability Stress Tests resonate and make sense for every company interviewed: after all, few are not concerned by climate change or a growing global population. Considerations of such changes sometimes go beyond sheer concern and some companies clearly understand how their business could be affected: for a logistics company like Deutsche Post, increasingly scarce and therefore expensive energy sources are of tangible importance to their core business. Worldwide luxury leader LVMH proactively acts to preserve biodiversity, as a number of its creations depend on rare quality leather and specific plants, amongst other natural resources.

However, in most cases, though the interest for Sustainability Stress Tests remains high, it is not yet applied systematically to the business environment. In some cases, similar approaches have been implemented, at Mahindra & Mahindra (on Water) or Imperial Tobacco Company for instance. These initiatives remain mostly driven by holistic and prospective risk mapping. Drivers were to forecast trends in order to avoid them, rather than to identify opportunities for business. However, most companies have not really done the exercise of "visioning" their business environment in 2030, and remain focused on short- to medium-term constraints and opportunities.

Reasons why this long-term vision is not often taken into account is because such considerations sound too far-sighted. Indeed, the people that could be in charge of conducting such a "visioning" exercise are in position for five to ten years, and therefore cannot necessarily feel concerned or see their relevance. Another interesting trend to notice is that companies and sectors highly dependent on raw materials and energy – such as the industrial sector, have taken Sustainability Stress Tests into account much more systematically than service sectors or financial services for instance. A cultural difference is also visible: Anglo-Saxon and Japanese companies seem more prone to engaging on long-term sustainability ambitions. For instance, Unilever has committed to 2020 sustainability targets, supported by figures and related monitoring.

Even if this kind of commitment is still not common, it remains an interesting exercise: by imagining and describing a possible future, companies engage in a retro-planning agenda, therefore drive change and transformation to meet this agenda. Envisioning one's company in 2030 through the Sustainability Stress Tests can be the start of a 'prospective regression exercise', triggering action and setting milestones.

Sustainability value creation model: A framework for informed decisions

The study confirmed, if it were necessary, a ‘sustainability’ approach could be a clear source of business value. Depending on an organisation’s culture, the economic context and its industry sector, such an approach can create value in different ways. Eight axes of value creation have been identified via the Sustainability Value Creation Model. Though these axes are not mutually exclusive and sometimes even reinforce each other, they can equally be approached individually.

Eight axes of value creation have been identified via the Sustainability Value Creation Model

We identify the following axes:

• Enrichment of corporate culture: increase motivation and reinforce employee engagement through collaborative action, participation, trust, productivity and teamwork. This dimension represents a translation of company values through its contribution to society or the environment.

• Cost cutting: select more efficient production processes, optimise product recycling, avoid fines and financial penalties, use much less resources.

• Risk prevention: mitigate risks linked to security and product monitoring, employee health and safety, labour law, business ethics…

• Catalysing innovation and profitability: promote sustainable products and business approaches (ethical products, eco-design, Bottom of Pyramid approaches, targeting markets where sustainable products and services enables greater margins...).

• Securing strategic resources: manage use of natural resources (sustainable sourcing), human resources (diversity management, access to skills/talent) as well as debt and equity.

• Building trust, through:
– Preservation or strengthening of brand image: protect and enhance a company’s brand image by taking responsible action
– Development of stakeholders relationship: reinforce licence to operate and "neighbourly relations" through aligned and constructive interaction with stakeholders
– Crystal clear transparency: reassure via transparent operations and clearly labelled products and services, ability to communicate when necessary.

The eight dimensions of value creation can be considered as a useful framework for reflection, enabling organisations to identify the most critical contribution of sustainability to their long-term performance. The model also helps businesses evaluate their current actions with a business performance focus and refocus their priorities on targeted benefits.

This ‘corolla’ and ‘petals’ model can equally be used to graphically represent the level of excellence of individual organisations, and to measure the ability of each organisation to improve its performance within the real-world context of the Sustainability Stress Tests. If an organisation chooses to prioritise certain dimensions over the others, it should do so cautiously taking into account current and future risks it may be exposed to.

Business drivers for sustainability tend to differ from one sector to another: moving away from sheer risk prevention to value creation

During our interviews with key representatives from the 3 sectors (Consumer Goods, B2B and the Financial Sector), our interviewees positioned on our model their past sustainability initiatives relative to the value they brought to the company, and explained the direction they planned to give to their sustainability strategies going forward. They explained the rationale for doing so, through the prism of issues faced and the expectations of their own shareholders.

For each of the eight dimensions identified in this study, one can read different levels of importance:

• Empty Petal: subject is frequently left out of sustainability strategies or initiatives for companies in this sector.

• 1st level: subject acknowledged and well identified, however in a marginal way.

• 2nd level: subject more formally accounted for in Company’s strategy.

• 3rd level: subject considered to be a strategic priority, reflected across operations and different business units, resulting in significant efforts.

The Sustainability Value Creation Model helps reveal the types of business value created by sustainability in each sector. These practices appear in the following pictures:

The priorities vary by sector and by company, addressing sustainability from different viewpoints according to their culture, identity and own strategy. A number of similarities are of interest. For example, identification and mitigation of risks appears as a top priority for the organisations we spoke to, as it can significantly impact their brand image. However, organisations are no longer simply interested in image-related risks, but also supply, regulation, climate and political risks. This "defensive" approach has long been a key feature of sustainability strategies, and is well established today with leading companies. Now such companies look for more proactive approaches. Thus, the majority of our interviewees confirmed an intention to address sustainability in a more "offensive" manner, for example by supporting product innovation or transforming relations with stakeholders on the basis of active and constructive dialogue.

Organisations are no longer simply preventing image-related risks, but also supply, regulation, climate or political risks

Equally, in consumer goods, retail companies and the B2B sector, sustainability is becoming a driver to secure strategic resources, particularly raw materials or else ‘access to land’. This evolution indicates a fundamental pattern: the role of sustainability is changing from a ‘minor priority’ to a strategic business issue, enabling new markets to be tapped, or to assure business continuity in increasing resource competing sectors (food, luxury, industry etc). This is equally visible in companies’ growing intention to use sustainability as a driver of products and services innovation.

Sustainability is becoming a driver to secure strategic resources, particularly raw materials

Transparency builds trust, and despite the pain of disclosing previously confidential information, leaders confessed that increased transparency led to a tangible rise in goodwill. This is particularly true for the financial sector, whose success increasingly depends on clients, investors or rating agency trust levels. Finally, our interviews revealed that the approach of many organisations is turning increasingly outward, involving more stakeholders. With this in mind, organisations are becoming more transparent, having grasped the importance of the topic for their relationships with clients and other external stakeholders.

In the following sections, we will review each sector in detail looking at how leading corporations use the different axes of value creation to prepare their organisations and business models for the world of 2030.

Distribution and FMCG sector

Earth Overshoot Day, population growth, reduction in arable land… The list goes on: Farming and Food practices are exhausting the earth’s supply of natural resources. While the retail and fast-moving consumer goods sector is already confronting the realities, they appear to be accelerating: by 2040, we will consume 170% (note 1) of the ‘bio-capacity’ of the earth. The challenge is therefore huge for this sector, which is so highly dependent on natural resources as raw materials.

In Europe, the greatest environmental impacts of the agro-food sector are not within industrial processing (11% only) but during agricultural production (49%) and the use of products by consumers (18%)  note 2. It is therefore at every level of the value chain that organisations need to act to assure the continuity of their activities in the long term: partnering with the farming community, protecting access to natural resources, triggering product innovation, raising health and consciousness of consumers, and reorganising the supply chain.

Beyond environmental considerations, the sector needs to confront current and future demographic trends – an ageing population, growth of urban populations and higher levels of education for example. With these demographic changes comes increasing mistrust, as consumers are faced with the industrialisation of products and the opacity of their production methods. Companies should therefore adapt their products and improve their operational transparency to address changing expectations of consumers; who are ever more concerned about the impact of products on the health and well-being of their families, on the planet and on animal wellfare.

Beyond environmental considerations, the sector needs to confront current and future demographic trends - an ageing population, growth of urban populations and higher levels of education amongst other factors

Ultimately, with a middle class that will quadruple in size between now and 2030 (note 3), the rapid growth of developing countries provides an excellent expansion opportunity for organisations in this sector. By 2025 annual consumption in emerging markets will reach $30 trillion. Meanwhile, these countries face limited resources, are strongly impacted by climatic events and are increasingly affected by diseases linked to changes in consumer habits. Organisations need to adapt their business models and products to respond to local demand and to promote more responsible consumption.

2030 Sustainability Stress Tests

Sustainability Stress Test n°1: providing food and basic amenities to a growing population: is your business model compatible with the 9 billion threshold? 925 million people are chronically malnourished (note 4) today, and 2.8 billion people live in areas with significant water shortages (note 5) Between now and 2030 the earth will need to support 1.4 billion additional people and the number of middle class consumers across the world is set to triple (note 6).

To feed the world’s population, by 2030 food production needs to increase by 50% relative to the 2006-2007 period (note 7), if dietary requirements remain unchanged. Yet, if agricultural practices do not change, this objective cannot be achieved without dramatic consequences for the environment. The farming industry currently generates 15-18% of greenhouse gas emissions worldwide, (note 8) is responsible for 90% of deforestation and consumes 70% of the planet’s fresh water resources (note 9). A third of agricultural land has been abandoned since 1960 because its soil has been depleted to the point of being unusable. Meanwhile, ten billion hectares are lost each year due to erosion, salinisation or over-exploitation and the growing effects of climate change make yields increasingly uncertain.

The consumer goods sector is equally dependent on the shrinking pool of natural resources that make up the ingredients and components of its products, not least water and energy. For example, in October 2011, Gap mentioned it reduced its growth forecasts by 22% following poor cotton crops in Texas because of a drought. It is vital therefore, that organisations in this sector ensure continued access to resources, but also minimise the impact of their production to guarantee availability in the longer term – all the while continuing to respond to the growing needs of their customers.

"Mars is one of the world's major food manufacturers, and our long-term business depends on a sustainable supply of high-quality cocoa. As part of our commitment as a responsible global company, we are striving to make cocoa a vibrant, environmentally sound industry from farm to factory." Mars website

Sustainability Stress Test n°2: are you committed to changing your clients?
Producers of mass-market goods have both the opportunity and the responsibility to propose new products and communication mechanisms that will help consumers reduce their impact on the environment.

For the majority of mass-market products, consumer usage is responsible for a large proportion of the impacts accumulated across their lifecycles. For example, by analysing greenhouse gas emissions across lifecycles of more than 1600 representative mass-market products (food, but also health and cleaning products) Unilever showed that this phase made up 68% of total emissions. Consumers have a direct impact on the environment due to how they transport, conserve, use and dispose of the products they buy.

The organisations in this sector are ingrained in the daily lives of billions of human beings. This gives producers of massmarket goods both the opportunity and the responsibility to propose new products and communication mechanisms that direct consumers towards choices that reduce their impact on the environment. While consumers appear increasingly sensitive to environmental arguments, a gap is apparent between their declarations and their behaviour. While 96% of Europeans say that protecting the environment is important, only 75% are prepared to buy products that respect the environment and just 17% do so regularly (note 10). It is responsible to consider that a specific brand proposition, accompanied by appropriate information and marketing messages would encourage changes in consumer behaviour. 

"We aim to engage all of our 21 million customers with Plan A. Our new commitments will mean Plan A is built into every one of the 2.7 billion individual Marks & Spencer products our customers buy from us each year. We also aim to help 3 million of them develop their own personal Plan A by 2020. We believe that business and government need to do the ‘heavy lifting’ by taking the lead, driving change and making it easy for them to get involved when they can make a difference." Marks and Spencer, 2010 Sustainability report    

Sustainability Stress Test n°3: are you ready for 360° traceability and transparency of your products?
Food habits have triggered global health issues. In numerous OECD countries, more than 50% of the population is overweight and the number of people afflicted by diabetes grew 2.3 times between 1980 and 2011 (note 11). In addition, by 2030, it is estimated that 23.6 million people will die from cardiovascular diseases each year. Some consumers, ever more conscious of the above increasingly put health at the heart of their buying decisions. In 2010, the market for products contributing to health and well-being exceeded 600 billion dollars (note 12), compared to 200 billion dollars in 2002 (note 13).

The same tendency can be observed for mass-market products. Consumers show a growing mistrust of chemical substances sometimes included in products or packaging, such as Aspartame, Bisphenol A, preservatives, pesticides or weed killers, and seek access to clear information about product composition, safety and quality. This demand is partially reflected in strong global growth of organic and natural products, considered as more healthy and better for the environment, which rose from 13 billion dollars in 2000 to 60 billion dollars in 2010 (note 14).

Organisations should make sure that their products and ingredients contained do not have a negative impact from ‘field to fork’, and maximise their positive impact on consumer health while preserving their functional and alimentary qualities (if health has become a key factor in purchasing decisions, the effectiveness or taste of products remain important note 15) To this end, organisations should involve stakeholders in reformulating their products: for example, assisted by some of their most faithful customers, HJ Heinz Co reduced the amount of salt in their ketchup by 15% while increasing their market share. Organisations should also incorporate product information (ingredients, nutritional value etc.) on packaging in a way that is clear, visible and understandable by the majority of consumers.

Sustainability Stress Test n°4: are you glocal?
By 2030, the middle class will include 3.1 billion more people, 85% coming from developing countries (note 16). Making up a proportion of global GDP which will increase from 49% in 2010 to 60% in 2030 (note 17), such countries offer strong growth potential for the consumer goods sector. However the collective environmental and social pressures described before are exacerbated in these countries. The proportion of the population affected by a lack of water in developing countries may reach 80% in 2030 (against 63% in 2005 note 18). About three quarters of undernourished people live in rural, low-revenue areas. And more than 80% of deaths linked to cardiovascular illnesses occur in countries with low or medium incomes (note 19).

Rather than simply replicating models used in Europe or North America, a key requirement is adapting to local needs and constraints to minimise difficulties. In turn, this requires dialogue with local stakeholders to design the form, content and usage of products. Cultural differences and consumer aspirations are equally important in these markets, as illustrated by BoP (Base of the Pyramid) experiences of Western companies who did not always take such factors sufficiently into account. Equally, to develop local economies and increase positive economic impact, both know how transfer and creation of local production capacity are necessary. Environmental benefits will also be evident due to reducing distances between production and consumption locations. The entire value chain can therefore be positively affected.

"The challenge is to find solutions that enable this growing population to be fed without wasting limited natural resources. This will be difficult to achieve with existing models. We must innovate." Danone, 2010 Sustainability Report

Corporate strategies and implementations
What will be “the next palm oil”? Besides minimising their use, some organisations work hard to protect and secure their access to specific strategic resources they depend on.

A clear trend is emerging around sustainability approaches: in the past internal drivers such as reduction of costs, protection of brand image, mitigation of risks or regulation compliance, have caused organisations in the consumer goods and distribution sectors to act. As these companies look to the future, they envision bolder and more transformative approaches, motivated by factors such as the quest for resources access, the ability to drive innovation and develop mutually beneficial relationships with external stakeholders.

Three quarters of the organisations that we interviewed in this sector admitted to approaching sustainability in a mostly defensive manner in the past. A major goal of previous initiatives had been to protect their brand image or to prepare against the risks inherent to their activities (e.g. delinquent suppliers in their supply chain, compliance to regulations, safety risk prevention etc). A number of organisations have reviewed their impact on consumer health, as well as the social and environmental impact of substances and ingredients contained in their products, like palm oil or GMOs which had been the subject of great controversy. Today, such risks are clearly understood by organisations, and are indeed addressed by most.

For example Carrefour wanted to position itself as a leader in this area and today has a clear set of policies. The signpost is fixed on the objective of “zero deforestation by 2020” for products based on wood, paper or wood fibre, certain products which contain agricultural materials whose use may have an impact on forestry, and a number of non-commercial products (marketing collateral, sales slips etc.) The company has identified and supports responsible sources for palm oil and soya, replacing such ingredients in a nutritionally viable way. It is also active in responsible fishing, fair trade and anti-GMO campaigns. While risks are only one of the factors in defining future actions, they will remain a major cause of concern as they can be difficult to anticipate: which product will be involved in the next scandal? What will be “the next palm oil”?

Today, interviewed companies are conscious that their Brands’ Sustainability attributes can become real differentiators and act as Brand Ambassadors towards consumers. This is the case for Diageo, who states: “Reaching customers via brands can help change their attitudes and behaviours – whether through responsible consumption of alcohol or concerning other social and environmental topics. In this way, our brands can maximise the impact of our sustainability programme.”

Equally, cost reduction is cited as a factor which most motivated the engagement of companies into a responsible development approach. PC Mall cites simple actions such as LED installation as a good start for a sustainability strategy. Sustainability initiatives implemented by the British supermarket chain Asda saved some 70 million pounds (85 million Euros) in 2010. The organisation has just started on a number of new objectives and it is hoped these will result in savings of 800 million pounds by 2020. Today, some organisations believe that cost reduction will continue to drive their sustainability initiatives, notably as a response to economical downturn. However, they also believe that when the low hanging fruits will have been plucked, they will have to focus on other areas.

Product innovation will remain a priority, as both innovations and the benefits sought will inevitably progress. The objective for innovation in this sector has traditionally been to penetrate the emergent market of organic/ecological products, for example by creating specific ranges of products like Carrefour’s ‘Agir’ range in 2006. Much more recently however, organisations have targeted larger problems through product innovation, such as reducing the impact of the product during its use, responding to the needs of developing countries, or tapping health and nutrition segment, where the market is clearly booming. DSM has for instance developed a range of products for the World Food Program targeting malnutrition issues. Unilever has set ambitious objectives to reduce the impact of its products and to address the needs of developing countries: changing the habits of a billion consumers in Asia, Africa and Latin America by 2015 by making them wash their hands at key moments in the day, getting 50 million children and adults to clean their teeth morning and night by 2020…

Organisations in this sector see securing access to raw materials as an increasingly important element of their business strategies, which will become crucial in the medium to long term. As resources were previously considered through a lens of cost and impact, they have therefore been the object of plans to minimise their use. In recent years however, this topic has gained importance due to accelerating shortages of certain resources. Beyond minimising their use, organisations have looked to protect the resources they see as necessary to their activities. For example, the Coca Cola Company’s Water Stewardship programme aims to give back, to nature and communities, a quantity and quality of water equal to that which the organisation has taken for its drinks. Similarly, the Clarins group has launched initiatives focused on some of the key ingredients of its cosmetics. Other organisations have started first by defining the priority resources for their activities, and the issues which they raise, then by implementing internal programmes which target specifically these key resources and/or focusing on the awareness and training of suppliers. For example, Glanbia has initiated a strong sustainability initiative, focused on promoting sustainable farming among its milk suppliers and ensuring compliance with sustainability principles through an assurance system at farm level.

Beyond minimising their use, organisations have looked to protect the resources they see as strategic to their activities          

Today however, the majority of players in this sector agree they will not be able to resolve these problems by themselves and advocate the creation of partnerships with competitors or organisations sharing the same challenges. Multiple approaches have been seen to date, including the “Better Sugar-cane Initiative”, the “Roundtable on Sustainable Palm Oil” (where IOI Group is active), the “Common Code for the Coffee Community” (4C)… this trend looks set to grow.

The need for transparency and open relationships with stakeholders have not been the main drivers, but will become
crucial elements of their future initiatives      

Finally, organisations in this sector note that to date, the need for transparency and open relationships with stakeholders have not been the main drivers, but will become crucial elements of their future initiatives. With regard to transparency, numerous organisations fear the impact of new technologies and the instantaneous and globally accessible knowledge these provide consumers with about companies, which the latter describe as a “changing dynamic of data ownership” (M&S). For organisations in this sector, one solution would be to preemptively supply information on the content of their products across their lifecycles.

With regard to external partnerships, two major themes emerge. On one hand, some organisations say that sustainability initiatives will only be successful if they succeed in engaging their consumers. Some initiatives are already working towards this: 10% of investment in Marks and Spencer’s Plan A is dedicated to engaging and involving consumers. Much effort is still needed before succeeding in engaging the majority of clients, however.

On the other hand, for commercial, strategic or ethical reasons, organisations are increasingly conscious of their responsibilities in the sustainability of communities impacted by the manufacturing or sale of their products. A subset is also looking to evaluate the economic, social
and environmental impacts of their activities on such communities. Coca-Cola discusses this in its sustainability report: “Our products are purchased millions of times per day by consumers across the world, which makes the sustainability of our business model dependent on the economies’ sustainability.” To support this, the organisation creates opportunities for economic empowerment across geographies.

Internally, sustainability is becoming a component of corporate culture, improving the brand’s image as an employer of choice. ICA AB mentions it as an enabler to retain talents, motivate employees and to upgrade the image of the retail sector in the eye of the general public.

Key Takeaways

• Actively develop partnerships around strategic resources with suppliers, partners and peer network
• Engage consumers through Brands’ sustainability attributes, introduce much more innovative products, and implement transparent processes on product sustainable performance
• Be a ‘good neighbour’: contribute to local development in manufacturing and sales locations, extraction sites etc.

Financial Services

The finance sector enjoys a unique position in the global economy. The decisions it makes have a massive direct and indirect impact on both the world markets and their stakeholders: individuals in terms of their consumer habits; nationstates via their economic and social development; corporate organisations and their investment decisions.

The finance sector has been suffering a trust crisis for several years. Trust is one of the most sought after attributes for keyplayers in the sector. The entire sector success and acceptance depends upon the quality of its relationship with the general public, countries, companies: without trust, it cannot grow. The most important Sustainability Stress Test confronting the
sector is without doubt that of transparency, inherent in the question of confidence. The financial crisis of 2007-2008 brought to the fore the lack of transparency in areas such as credit terms and sale of structured products, the complexity of financial products and how they could conceal major risks.

The most important Sustainability Stress Test confronting the sector is without doubt that of transparency, inherent in the question of confidence

To help restore this fractured confidence, the sector should treat future issues in a proactively transparent manner. While transparency was not always seen as a major priority by financial institutions, it will become a major factor in years to come, not least from an environmental perspective.

In another note, recent studies provide a scorecard for the sector with respect to climate change. While a good pupil concerning greenhouse gas emissions caused directly by its activities (note 20), the finance sector is in fact one of the largest generators of indirect greenhouse gas emissions due to its investments in particular industries, not least the energy sector (note 21). Some 99.9% of emissions assigned to the finance sector are indirect, linked to investments and project financing from banking establishments (note 22). Finance sector organisations thus have an opportunity, indeed a responsibility, to use their influence (articulated through investment criteria) to directly impact the trajectory of greenhouse gas emissions.

The impact of both climate change and the increasing frequency of natural disasters on the costs of insurance claims also requires a number of insurance models to be reviewed. Equally clearly, the entire global economy of tomorrow will need to be financed, in terms of both traditional industries and clean industries or those which are limited emitters of greenhouse gases. Changing business models will be accompanied by transformations that institutions in the finance sector need to anticipate – or from which they will find themselves excluded.

Finally, numerous studies confirm the economic and social potential of solutions to support the economic development of low-income populations (for example micro-credit or micro-insurance). However a number of controversies and recent publications have offered timely reminders of the difficulties in implementing business models that are both profitable and which have a proven positive social impact. Organisations in the finance sector therefore need to design approaches that deliver on both economic and social goals, simultaneously: this is what ‘(Positive) Impact Finance’ is expected to deliver.

Sustainability Stress Tests 2030

Sustainability Stress Test n°5: are you trusted?

As mentioned, the finance sector relies on confidence. This has been shaken by a number of recent financial crises, not least because the general public has become worried about some opacities within the sector. To restore confidence, financial institutions need to build client understanding by showing complete transparency, both in their investments and the intricacies of their products and services.

Today, we are only seeing weak signs of this happening: for example the Dodd-Frank act in the United States (July 2010), whose purpose is to improve the transparency and integrity in the US financial system23, or the creation of the European Banking Authority (EBA) in January 2011, which aims to improve the stability of the financial system, the transparency of markets and financial products, and assure the protection of depositors and investors (note 24).

Some organisations are already playing the transparency card, like the small european bank Triodos (240,000 customers) which lists the projects in which it invests on its website. This kind of approach can and should be broadened to all players, not only those with an ‘ethical’ positioning.

"Deutsche Bank’s motto is “Passion to Perform.” Performance, for us, includes acting responsibly. And as a leading global bank, we know that we have a special responsibility. It is in our own interest to live up to it. We can only remain successful in the long-term if people trust us." Josef Ackermann, CEO of Deutsche Bank

Sustainability Stress Test n°6: is your model crisis-proof?
While global environmental negotiations struggle to deliver any form of short-term solutions, the question of climate change becomes increasingly present – and pressing. The record CO2 emissions in 2011 (34 Gt produced note 25), cumulated with those of previous years, will have increasingly serious consequences, some of which we are already experiencing: in the same year, 950 natural disasters hit the planet, affecting nearly 300 million people. Nine out of ten of these catastrophes have been linked to climatic events. By 2030, according to certain scientists, the number of catastrophes (and associated costs) will at least triple (note 26).

Unsurprisingly, the insurance sector is feeling an increasing impact. Recent estimates show that it could face 150 billion dollars in annual losses linked to extreme climatic events between now and 2030 (note 27). The broader financial sector could lose 530 billion dollars in total between now and 2030 (note 28) due to changes in the quality of the credit portfolio for borrowers and investors, of increasing risks of default on loans, of write-offs and falling value of assets. The finance sector clearly has an interest in minimising risks inherent to climate change, for which it is indirectly one of the principal responsible parties.

The sector could take advantage of its unique position, directing the economy towards a lower-carbon trajectory by systematically establishing environmental, social and governance (ESG) investment criteria for the definition of new products, and for supporting decision-making. Leading banks tomorrow may be the ones who will have let emerge, through a ‘Positive Impact Finance’ approach, tomorrow’s highly needed new business models, future green cities, frugal operating models, cleantech, or else the carbon emission markets.

"Many global companies understand that longterm shareholder value is enhanced by both embedding sustainability into their long-term strategy and by disclosing fully their progress. Only when investors have business-relevant information at their finger-tips, will they be able to assess one company relative to its peers and allocate capital accordingly. Stock exchanges now have a significant role to play in taking obvious and important next steps to create truly sustainable capital markets." Georg Kell, Executive Director,
United Nations Global Compact

Sustainability Stress Test n°7: are you financing tomorrow’s economies & infrastructure?
Indeed with 9 billion human beings (note 29) to feed, house, transport, and deliver required quantities of energy while meeting ‘factor 4’ environmental ambitions set by governments and international organisations, the challenge for the businesses, towns and financial institutions that accompany them is huge. For banks and insurance firms, this goes beyond measuring the impact of investments or targeting currently-excluded client bases. The challenge involves creating capacity not to adapt, but to predict and anticipate tomorrow’s economies, and indeed those further into the future.

Insurance companies acting in a preventative role can help drive virtuous behaviours such as sports or eating healthier food. Risk premiums can be indexed against climate risks – a practice already being implemented, following the French Federation of Insurance Companies’ (FFSA) recommendation in February 2011 to implement modular premiums as guarantees against natural disasters based on the exposure of goods to the vagaries of the climate (note 30). Their portfolios could equally include products and services adapted to the constraints of organic agriculture (in which soil quality is better and ecosystems are preserved, but where yields are less certain than in an agriculture relying on pesticides and chemical fertilisers note 31).

The challenge is equally great for banks, for whom the opportunity exists to target investments at innovations that enable the Sustainability Stress Tests to be met, such as agriculture (necessity for better yields, reduction in available land mass). The French bank Crédit Agricole, which finances 75% of the French agriculture, mentions feeling responsible and committed to drive change in this sector. Community financing will also grow in significance for example as towns look to develop clean modes of transport, confronted with pollution problems. To respond to the many challenges faced by communities, banks can for example prioritise renovation of buildings to achieve better energy efficiency (thus helping combat climate change) through preferential loans, or invest in new technologies that enable broader access to healthcare (note 32).

A number of interviewees mentioned the survival of the financial sector depends on its capacity to finance and support today the market segments which will be critical in tomorrow’s economies, as they will help reduce CO2, improve agricultural practices, provide access to finance to a broader public, etc..

Sustainability Stress Test n°8: are you geared up to serve the lower end of the citizen pyramid?
The finance sector plays a critical role in the economic development of the poor, helping them to allocate resources more effectively. Today, less than 10% of the 2.5 billion people in the world living on less than 2 dollars a day have access to financial services (note 33). The micro-credit market, with nearly 200 million borrowers at the end of 2010 (note 34), and micro-insurance market, with more than 135 million insured people (note 35), represent a real opportunity for the finance sector. Given that by 2030 the middle classes in developing countries are set to triple in numbers (note 36), many of today’s micro-finance clients will be among the middle classes by 2030. By being present in these markets, financial institutions can build brand recognition and awareness, guaranteeing future revenues.

Despite these compelling prospects, such activities face the major hurdle of how to be both economically viable and socially beneficial. Micro-finance has been strongly criticised in the past two years, notably in the Andhra Pradesh state, considered to be India’s “epicentre” for micro-finance, where authorities have established a law that significantly reinforces licensing conditions for micro finance institutions, to ensure these dual objectives are respected. A number of mishandlings have tarnished the image of micro-finance and could have adverse repercussions not only across institutions, but also on the economic development of beneficiaries who depend heavily on access to credit with a controlled rate of interest (note 37). Financial institutions therefore urgently need to define an appropriate framework of rules that works across the range of activities with which they are involved.

Equally, micro-insurance faces issues around deploying products to best respond to local needs at the same time as being profitable: for example, limited ability to pay premiums, lack of knowledge and understanding about the value of insurance, absence of reliable market data etc. Organisations in this sector therefore consider, amongst other things, improving education around the benefits of micro-insurance, and investigate innovative solutions to improve the effectiveness and accessibility of products (note 38), for example by forming partnerships between financial institutions, NGOs and local regulatory bodies.

"Despite past successes and future ambitions, there are still a number of obstacles that hinder the growth, reach and impact of micro-insurance. In addition to greater education around the benefits of micro-insurance among the poor, there is also a need to explore innovative solutions around technology to improve efficiency and reach, which will help make micro-insurance a more viable business." World Business Council for Sustainable Development


Between 2000-2004, one out of twenty inhabitants in developing countries were affected by climate change, verses one out of a hundred in developed countries. With agriculture employing about 75% of the population, the revenues of many in these countries depend directly on climate and weather conditions. The frequency of climatic catastrophes can cause a vicious cycle, reversing the process of human development by leaving people no choice but to restrict food intake, invest less in their children’s education or selling assets they own to generate one-time income. It is therefore critical that financial institutions improve both access to and understanding of their services; notably micro-insurance, to help people resist climatic
disasters and to work towards achieving the Millennium Development Goals.

Corporate strategies and implementations

Some banks are engaging in dialogue-based relationships with stakeholders affected by their investments. It appears highly likely that regulatory constraints will oblige companies to become more transparent.

Banks and insurance companies are coming under increasing pressure from nation states and the general public regarding their impact on the environment and on society. To date, they have responded by protecting themselves to the maximum against risks (particularly legal ones), and have tentatively set down the product innovation track to protect their brand image.

This largely defensive model will move towards more proactive approaches in years to come. The organisations interviewed confirmed their desire to anchor sustainability more systematically into their product portfolios, and to increase their level of dialogue with stakeholders. As mentioned, the sector depends on consumer confidence and therefore brand image lies at the core of these organisations’ thinking.

Evaluate, measure, plan… Risks of all kinds make up the front line activities of many financial staff. Those linked to environmental and social impact of investments and financial transactions are to be considered in day-today activities, and will likely be treated with increasing priority for a number of reasons. First, since the start of the millennium, financial institutions have looked to mitigate longer-term reputational and economic risks by evaluating organisations using ESG (Environmental, Social, Governance) criteria, which are core to Socially Responsible Investment (SRI). Originally created to provide protection from scandals by investing in organisations with limited negative impact, today ESG criteria can be considered as a supplementary filter enabling preemption and reduction of longer-term financial risks.

In 2010, SRI assets made up 5% of investments out of a total of 1,200 billion euros.39 In its “SRI Navigator” methodology published in 2009, Société Générale described the relevance of these criteria: “The current crisis has brought into the foreground the role and influence of hidden risks that are elements of the investment portfolio. We believe this should be accompanied by moving towards an objective view of risks relating to environment, society and governance.” Such a transition from qualitative towards quantitative measurement is underway in the majority of financial sector organisations.

While facing growing risks linked to social, environmental and governance issues, a new trend is emerging in the way that the sector, insurance in particular, plans for known risks, especially in developing relationships with its clients. Prevention is a recurring theme and indicates a genuine transformation in the approach that insurance companies take with their customers.

For example Groupama allocates 4 million euros to road safety programmes every year, annually training 40,000 people to drive in difficult conditions. To better prepare for the risks linked to an older and increasingly dependent population, MACIF created the “Helpers and Helped” (Aidants & Aidés) programme in 2009, aiming to improve the autonomy of older people and the well-being of their caregivers. Similarly, some banks are engaging in dialogue-based relationships with stakeholders affected by their investments: as part of its IDH Sustainable Trade Initiative project, Rabobank participates in round tables and working groups with representatives from NGOs and local organisations for both reforestation projects in Brazil and sustainable cotton growing in India.

Some banks are engaging in dialogue-based relationships with stakeholders affected by their investments

By involving themselves on the ground, developing a close relationship and a dialogue with stakeholders and taking their issues and problems into account, insurers and banks prepare innovatively for certain risks, ensuring both the sustainability and the positive social and environmental impacts of their investments. Because they support the creation of trust or even intimacy with their clients, these activities can also have a commercial return: they may therefore be further encouraged in coming years.

The creation of responsible products also requires a fundamental shift for banks and insurance companies, further driving their desire to anchor environmental and social concerns into the core of their businesses and turn them into a commercial advantage. In retail banking for example, we can see the birth of micro-credit initiatives, ‘green’ or ‘eco’ loans, mutual savings and profit sharing schemes. For BNP Paribas for example, micro-finance is a major lever of its campaign against exclusion, both in mature countries, where more than 11,000 loans have been made in the past 6 years (in partnership with French microfinance organisation Adie), and in emerging countries with 123,000 clients financed via Micro-Finance Institution (MFI) partners. This approach targets dual objectives: first, banks and insurers (via micro-insurance) can develop a new client base by focusing on unaddressed localities and populations; second, it seeks to regain the confidence of traditional markets and clients by proposing products with a strong social element, tackling exclusion. This trend, while still tentative in terms of turnover, will be developed to play a more important role in the coming years.

Such innovations, which are gradually having a growing impact on the finance sector, help to restore brand image, both for the external public in terms of increased confidence, but also for an internal audience. At Colonial First State Bank, being seen as “Doing the Right Thing” is a major motivation for sustainability initiatives. The impact on Corporate culture for institutions incorporating microinsurance or SRI approaches is strongly positive, generally increasing employees’ enthusiasm and engagement. Since 2007 for example, BNP Paribas has piloted internal mechanisms valuing responsible innovation, such as its Innovation Prizes which prompt growing interest from employees each year (in 2011, 442 proposals were entered, compared to 76 in 2007). Given that employees see themselves increasingly looking for positive purpose in the workplace (note 40), it seems appropriate that organisations in this sector reflect these aspirations to strengthen their sustainable strategy and actions.

It appears inevitable that regulatory constraints will become harder, obliging institutions to communicate more about their business models and investments

To summarise, a fundamental transformation is needed not only to serve the image of the institutions concerned but also because it accompanies the new approach mentioned: transparency. As UBS, who mentions transparency as a pressing issue, all organisations interviewed seemed to agree. While 360° transparency is not currently a key concern for many organisations, it appears inevitable that regulatory constraints will become more intense, obliging institutions to communicate more about their business models and investments. Whatever comes in the future, by planning for these changes now, all businesses in this sector can stay one step ahead; reaching the Holy Grail of both market and customer confidence through a genuinely innovative attitude.

Key Takeaways

• Restore trust with society as a whole: integrated ESG criteria into new and existing product lines, more transparent processes
• Instil a new dynamic internally, restoring positive purpose among finance professionals
• Work towards financing tomorrows projects and companies
• Align with transforming economies through innovative financing and insurance models and by striving for greater levels of responsibility

B2B industry sector

The B2B industry sector consists of a variety of activities: chemical manufacturing, iron and steel, car makers, construction and public works… all of which are industries having a number of sustainability challenges in common.

First, the sector is a major consumer of extracted resources (oil, natural gas, coal, minerals, rare earths, metals). Its survival is closely linked to the increasing scarcity of such resources and its ability to respond to it. How do industrial companies see the future of welding for example, given that the global stock of tin could be exhausted in 40 years’ time (note 41)?

Some sub-sectors are highly polluting and therefore have an obligation, for regulatory reasons as well as local and global acceptability, to take their environmental impact into account and work towards aggressively reducing it.

In addition to the risks that weigh on the activities of this sector, there are many opportunities that need to be considered: for example the demand for highly energy-efficient products continues to grow, as demonstrated by the returns on Siemens’ “green products” portfolio which is expected to rise from 30 billion euros in 2011 to 40 billion in 2014 (note 42).

As with the growth of the “green” market, the B2B industry, as builder of tomorrow’s infrastructures, is seeing runaway growth in urbanisation that should add 2 billion inhabitants to cities and towns by 2030, mostly in developing countries.

The ability of these organisations to offer solutions adapted to the social and environmental priorities of tomorrow’s urban areas will become a commercial differentiator.

Sustainability Stress Tests 2030

Sustainability Stress Test n°9: have you increased your share of renewable resources?
Today, the entire industrial sector (B2B and B2C) greatly depends on extractive industries. First and foremost, fossil fuels such as coal, gas and oil, are in greater demand as the industry consumes about 35% of total global energy (note 43). Driven by industry in developing countries, this can only increase between now and 2030, – for example, natural gas demand in BRIC (Brazil, Russia, India and China) countries will double between 2010 and 2030 (note 44). Moreover, the future of the industrial sector is closely linked to stocks of minerals and metals delivered via extractive industries. Nickel, tin, lead, zinc and other rare earths or metals are of prime importance for the majority of the sector. These resources, the market for which was about 1.25 billion dollars in 2008, rising to 3 billion dollars in 2015, are indispensable in all high-tech industries, civil or military (arms systems, wind turbines, electronics…).

Furthermore by 2030, the question of diminishing resources will become significant. First, the physical dimension of this trend is worrying. Current reserves of fossil fuels are likely to run out soon: known reserves will exist for up to 40 years for oil (note 45), 60 years for natural gas, (note 46) 100 years for coal (note 47)… and increasing these reserves will have serious consequences for the environment. Burning all available fossil fuel at current pace would trigger excessive climate change consequences. Equally worrying, though less discussed, are non-energy resources: the planet contains known tin deposits to last another 40 years, silver for 29 years, lead for 42 years (note 48).

Moreover, the economic and political dimensions to these shortages are of concern. Given that some resources are only found in a very small number of countries, industrial groups depend on the economic and political decisions they take. For example, in 2011, in a list of 52 minerals considered crucial by Europe, China is the main producer of 27 (note 49), notably rare earths, where the country represents nearly 95% of global production (note 50).

Moreover, some countries offer prices of 15-20% lower for their local markets compared to global prices, and China is plans to ban exports of some resources by 2015 (note 51).

Given such political and economic issues, the question of protecting access to resources becomes fundamental. Some organisations have taken this into account by partnering with key players in the countries concerned: in 2009, OSRAM, a subsidiary of Siemens specialised in lighting, created a joint venture in China (the 2nd largest global producer of phosphorus note 52) with China Rare Earth Holdings Ltd. Managed by OSRAM, the business plan is to produce and sell phosphorus-based products to the industry sector.

Equally important is for industry players to be innovative in their search for substitutes for ingredients (energy-related and otherwise) that are too hard to find, too expensive or too polluting. This was clearly seen in the early 2000’s, when lead was increasingly replaced by tin for welding alloys in the electrical and electronic industries, mainly for reasons of toxicity. Ultimately, faced with expected limitations on resources and the price rises that will likely accompany them, challenges around recycling and reuse will become of primary importance for all industry players if they are to hope for sustainable growth.

"From a European point of view, increasing mineral scarcity is particularly worrisome, because only very few metallic mineral deposits worth exploiting are found on the continent. For a large number of metallic minerals, Europe is overwhelmingly dependent on foreign supplies to satisfy its industries’ demand, particularly in the high-tech sector." The Hague Centre for Strategic Studies; Scarcity of Minerals – A Strategic Security Issue, 2010

Sustainability Stress Test n°10: will your operations impacts be acceptable?
The industrial sector is constantly being called out for its direct impact on the environment. For example, the B2B industrial sector currently contributes 20% (note 53) of global greenhouse gas emissions: the chemical industry makes up 7.5% (note 54), the steel industry 4.2% (note 55). This sector also makes up nearly 20% of global water usage (note 56). Add to this the creation of harmful waste products, 50% of which in the United States are generated by chemical and pharmaceutical companies (note 57). As well as highly polluting production processes, a number of disquieting risks weigh on this sector with regard to communities in close proximity to production sites: incidents such as the explosion of Union Carbide’s production plant in Bhopal (note 58) in 1984, or the accident at an aluminium plant in Ajka (note 59) in Hungary in 2010, have dramatically increased safety requirements.

Conscious of its image, this sector should be irreproachable in its respect for the environment and for safety. All the more given that regulations are becoming increasingly tough, as illustrated by recent European directives – REACH (note 60), WEEE, (note 61) RoHS (note 62) – or the Kyoto Protocol, which obliges organisations to cut greenhouse gas emissions by around 5.2% between 2008 and 2012, relative to 1990 levels. The corollary is that the demand for technologies and products that respect the environment and which are highly energy efficient is going to grow and represents a genuine opportunity for the sector.

The demand for technologies and products that respect the environment and which are highly energy efficient is going to grow and represents a genuine opportunity for the sector

Two clear issues emerge that have an impact on the capacity for the sector to innovate. First the impetus to develop efficient production processes which minimise environmental impact, like Toshiba whose 2050 objective is to multiply by 10 its eco-efficiency relative to 2000, while halving its environmental impact (note 63). The Japanese company has already implemented a proactive policy in these areas: whilst gaining ISO 14001 certification across its production sites, the company reduced its CO2 emissions by nearly 16%, its waste products by 34%, and its greenhouse gas emissions by nearly 62% between 2000 and 2009.

"Ecomagination is a competitive force for growth across GE’s businesses. With US$85 billion in sales and services since 2005, Ecomagination is a business strategy that represents an area of continued strength for the company. We’ll continue to make bold investments to help solve customer problems and deliver strong returns for our investors and shareholders." Jeff Immelt, CEO, GE

The second aspect and a source of commercial opportunity is how the industry can deliver “eco-products” to its clients: innovative technologies that target the reduction of global warming and stabilisation of energy production. Thus for example, GE, by way of its Ecomagination programme launched in 2005, invested nearly 1.8 billion dollars in research and development of clean technologies in 2010, increasing its “eco” portfolio to 110 products and solutions (note 64). Another example can be leveraged from NEC’s development of «Smart» Battery-charging Infrastructure, in anticipation of the forthcoming electric vehicle age.

Sustainability Stress Test n°11: have you anticipated massive urbanisation in developing countries?
In 2008, the proportion of town dwellers in the world finally passed the 50% mark. If this rate continues, it will reach 60% by 2030 (note 65) due in large part to developing countries, where urban populations will go from 2 to 4 billion people by 2030 (note 66). Between 2010 and 2050, urban areas will receive as many new residents as between the years 1800-2010, namely about 3 billion (note 67).

Such demographic growth in urban populations is without precedent and will require the transformation of towns and cities, most importantly, augmenting infrastructure quickly to ensure access to basic services (energy, water and sanitation, transport, accommodation…). By 2030 for example, India is going to need to build nearly 7,400 kilometres of underground lines to respond to urbanisation, about 20 times more than it has built in the last decade (note 68) In total across India, nearly 1,200 billion dollars of investment will be needed between now and 2030 (note 69) to respond to demands created by urbanisation. Growth also needs to be sustainable for towns, both through building infrastructure that respects the environment, and ensures social balance by implementing inclusivity mechanisms (note 70).

As supplier of infrastructure and construction materials, the sector brings life to urban areas: through construction of housing, it enables access to water, electricity, transport… thus shaping our environment, our way of life and the way society is organised

Faced with these significant urban challenges, industry has a prime role. As supplier of infrastructure and construction materials, the sector brings life to urban areas: through construction of housing, it enables access to water, electricity, transport… shaping our environment, our way of life and the way society is organised. Thus companies that propose solutions adapted to the local environment – both in terms of business models and technologically, for localities with urgent needs and limited finances – will give themselves a visible competitive advantage. For example, Lafarge launched a project in Medan (Indonesia) within the framework of its “Affordable Housing” programme: by partnering with Real Estate Indonesia (the real estate agency association), the Indonesian government and municipal authorities, the initiative guaranteed deliveries of cement to agencies. Within a year, this innovative partnership enabled 820 houses to be built, generating half a million dollars of cement sales (note 71).

Building companies also surf the wave of Green buildings, which provides them with flagship examples and real life laboratories for innovations. By contributing to the building of the CII-Sohrabji Godrej Green Business Center, the Godrej Group has added a Platinum LEED Certified building to its credentials and has explored innovative ecological solutions. In addition, as specifier for town builders (construction companies, town planners, agencies…), the sector has a central role to play in awareness raising and educating the decision makers who will build the towns of tomorrow. To this end, Siemens created a “Green City Index” – a classification of the environmental impact of the world’s capital cities – which is genuinely useful for raising awareness of the environmental impact of towns in general.

"Our “European Green City Index” should help cities adapt their decisions to available resources and reduce their environmental impact, notably through optimising their energy and ecological efficiency across areas such as energy distribution, transport systems and construction." Philippe Carli, former Chairman, Siemens France

Corporate strategies and implementations

Companies can only attract new talent by promoting responsible working practices and compelling training policies. The B2B industrial sector appears highly aware of the importance of sustainability. Faced with external pressures and numerous regulations, it has had to adapt progressively to meet environmental and social requirements. Its focus of action has evolved gradually, viewing sustainability today more as a business opportunity than a straight regulatory issue.

The unique characteristic for the industrial sector is to integrate aspects of sustainability in quality standards (ISO 9001) and the many regulations imposed on the sector (REACH, RoHS, WEEE,...). Hence for the majority of organisations in this sector initial motivations were due to operational risk and image issues. Many such risks are increasingly being brought under control: in 2008 for example, Vallourec engaged in the Cap Ten Safe programme, to counter workplace accidents, the number of which halved, from 400 to about 200 per year. While still highly relevant today given the level of regulation, this riskbased approach will remain a priority in the years to come.

Meanwhile, organisations in this sector have been quick to understand the opportunities represented by sustainability. Enacted through proactive strategies to reduce the quantities of raw materials and energy used in production processes, cost reduction appears as a primary reason for participation. For example Interface Flor, maker of carpet tiles for the business market, uses measurable targets to monitor reductions in consumption of raw materials and creation of waste. The company launched its Mission 0 programme in 1996, with a goal to reduce negative impacts on the environment to zero by 2020. The programme has saved 433 million dollars in waste treatment costs to date. As a result of such programmes, organisations confirm that cost reduction will remain a priority driver for deploying sustainability mechanisms in years to come.

However, it is in product innovation that the impact of sustainability will be felt more strongly. As such, entering the market for “green” products and services that help reduce energy consumption is a primary goal for many organisations. For example GE, which has already sold nearly 85 billion dollars’ worth of Ecomagination products since launch in 2005, has forecasted to double the rate of growth in turnover for these products during 2010-2015, relative to total turnover for the corporation.

Stating a fresh and effective strategy for sustainability is important to attract talent

Product innovations that respond to sustainability needs are seen as credibility leverage for organisations who can thus claim to be environmentally responsible. In 2011 for example, Siemens enabled its clients to reduce their CO² emissions by around 300 million tonnes. This theme will be seen as a growing priority in coming years, enabling a new positioning for some players based on promoting sustainability.

This is illustrated by Schneider Electric’s 2012 slogan, “Let’s share our energy for a more effective world,” which is directly supported by its product and service catalogue.

Organisations in this sector are taking sustainability on board based on the same principles: the creation of a corporate culture, driven by two core objectives: Internally, to support employee motivation and collaboration through projects with a sustainable purpose. For example, 70% of Interface Flor employees said that their organisation’s Mission 0 programme was motivational. Externally, organisations confirm that stating a fresh and effective strategy for sustainability is important to attract talent.

A real challenge for the survival of industrial organisations suffering from a reduction in talent availability, particularly in R&D, is that companies can only attract new talent by promoting responsible working practices and compelling training policies. For example, Johnson Matthey, a British manufacturer of speciality chemicals and world leader in advanced materials technologies, incorporates in its “Sustainability 2017” vision a section dedicated to the recruitment of new skills which runs in parallel with groupwide sustainability awareness raising.

Other drivers for such initiatives include the appetite of younger generations for projects with purpose. For example, Schneider Electric’s BiP-BoP project (the aim of which is to give energy access to households earning less than 2 dollars per day) has continued to attract many candidates into the organisation since it was launched in 2008. Organisations confirm the future growth of such initiatives, and their willingness to strengthen corporate cultures through their own involvement.

Finally while relationships with key stakeholders have been relegated to second place in the responsible business strategies of all but a few leading organisations in this sector, this focus will be a deciding factor in coming years. Organisations appear convinced that for activity to be sustainable, it needs to create value across all stakeholders. For example, Siemens identified and consulted with 30 stakeholders in 2010 to define its 2011 Sustainable Development Route Map. For many companies, engagement-led approaches offer indispensable learning environments for a more secure future. This principle drove the launch of GE’s open innovation challenge in
2010, run within its Ecomagination programme. The organisation allocated 200 million dollars to bring together entrepreneurs, associations and start-up businesses to share ideas on the theme of future electricity grids. By researching new models and innovations to respond to future needs, organisations demonstrate the need to listen to stakeholders and build innovative partnerships. This is clearly a requirement when tackling emerging markets, as illustrated by Lafarge which, jointly with an NGO (Care) and a microfinance institution, developed its Affordable Housing programme in Indonesia, aiming to enable access to housing for vulnerable people. Such partnerships are major assets when understanding and accessing emerging markets, also offering research mechanisms to help gain a different perspective on traditional value chains.

Key Takeaways

• Massively reduce forward impact: deploy more effective production processes with a less negative impact on the environment
• Support tomorrows’ decision makers from emerging countries (in towns and communities) move towards a sustainable model, by offering innovative products adapted to rapid growth and with minimal environment impact
• Be at the forefront of ‘open’ innovation: increase consultation with stakeholders and collaborative development

Across sectors, the same question is asked – How to get there? Embedding sustainability into the company

To establish, evaluate and articulate expected positive business impacts is a key element of a sustainability embedding approach.

The model we propose gives CEOs and other C-level executives a global overview of the approaches their organisation can adopt to prepare for the world of 2030. However, responding to these 2030 Sustainability Stress Tests represents a major challenge, often involving broad transformations across the entire value chain and within numerous corporate functions, whatever the industry sector. As organisations take the Sustainability Stress Tests into account within their strategies, the role of decision makers in this area should focus on adapting to best practice in sustainability across all areas of the business, and to recognise its growing importance at the heart of strategic decision making.

The evolution of the sustainability function in the coming years remains a real question, as demonstrated by this study: does “360° intelligence” need to be the sole focus of specialist teams? Or should they work towards making themselves redundant, enabling the faster and more comprehensive spread of sustainability best practice into the heart of the business? The end goal is that each person undertakes their day-to-day activities while integrating these ambitions (and sometimes, contradictions) at their own level.

Many leaders believe that sustainability should follow a similar approach to quality management, however covering a much broader range of objectives, some of which are clearly strategic

While opinions and approaches vary on this subject, a greater number of ‘mature’ leaders believe that sustainability best practice should follow a similar approach to that of quality management: to exist independently but with a light touch, and with a goal of transforming operations across the organisation. However, if quality refers generally to processes and consistency of execution, sustainability covers a much broader range of objectives, some of which are clearly strategic. To consider other possible comparisons, one can equally observe the innovation or strategy function, closer to ‘the business’.

We have assessed the roll-out of sustainability ambitions into the core of the firm, through their integration in each department. The ‘embedding’ of sustainability: the organisations interviewed described their degree of ‘embedding’ of sustainability themes according to four levels of management:

  • Strategic: has the company formalised a ‘sustainability vision and plan’? Do the strategy and values of the organisation include social and environmental targets, led by the CEO and clear to stakeholders? Do medium term budgets and plans express these targets? Do they anticipate the parameters of tomorrow’s world?
  • Governance: what resources does the organisation allocate to these goals? Is sustainability reflected in roles and responsibilities? Does it underpin the repository of risks, and the performance evaluation process? Are social and environmental performance measured using indicators that are integral to the way “business” is steered at senior management level? Does it have a bearing on the remuneration of managers?
  • Operational: is the organisation re-inventing its business and operational model to be more responsible, more efficient, to minimise its footprint? Are environment and social aspects being taken into account within R&D, marketing, purchasing, client relations, logistics, finance, HR…?
  • Support: are the company’s support functions subject to its sustainability targets? Are environment and social aspects taken into account by the organisation’s information systems, property, infrastructure, transport…? Do asset and investment decisions integrate clear sustainability criteria?

The responses collected in this study taught us six principles or lessons for the effective and realistic embedding of sustainability into the company.

Lesson 1: Sustainability is change: it requires 100% support and alignment from employees, as ‘change agents’

First of all, if an organisation really wants to integrate sustainability, it needs to internalise sustainability into the activities of each of its employees. From this objective results a 360° embedding: each function and position should be reviewed (at least in part) with the goal of integrating sustainability. For example, Purchasing will ensure suppliers are audited and work in partnership with them; R&D will include eco-design; HR will prioritise workplace wellbeing and diversity, etc…

If an organisation really wants to integrate sustainability, it needs to internalise sustainability into the activities of each of its employees

The willingness to deploy sustainability principles across all areas of the organisation was clearly explained by Mars Drinks, subsidiary of the Mars Group: 2015 sustainability objectives are included in the roles and responsibilities of each team member of priority teams (marketing, procurement…), with the goal of extending this integration across all departments. Similarly, LVMH group directly incorporates sustainability performance indicators into the performance measures for each key department (innovation, procurement, logistics) at both group level and for each of its 60 brands (Louis Vuitton, Sephora, Guerlain, etc).

Beyond involving each individual, more advanced organisations allow for a certain amount of local initiative – capacity to personalise – aiming to avoid giving too much weight to “top-down” practices. The underlying idea is that sustainable practices should adapt themselves to local contexts (national, regional, sector-based etc.), and that nobody is better placed to understand local needs than employees on the ground.

Lesson 2: CEO endorsement is a must: no bold transformation can be expected without it

An organisation’s management team plays a critical role in strategy definition, and even more so in enacting sustainability activities. Among the organisations we met, a good number confirmed the initial and continued importance of the CEO and other board members, notably for example at Carrefour and RSA. While not interviewed for this study, we could equally mention Paul Polman (Unilever), Indra Nooyi (Pepsico) and Franck Riboud/Emmanuel Faber (Danone), who quite literally run the sustainability initiatives for their businesses.

To establish, evaluate and articulate expected positive business impacts is a key element of a sustainability embedding approach

Beyond the initial impetus from top management, to ensure the success of a sustainability embedding project in the organisation, a comprehensive internal communications campaign should take place. For example, the sustainability director from Interface Flor explained how the CEO links sustainability into the daily agenda of each employee and takes personal responsibility for assuring links are clear between business and sustainability imperatives. This confirms the first principle: if everyone has a role to play, the CEO also needs to play his or her part in the success of the exercise. At the other end of the spectrum, the danger is that without the CEO’s involvement, everything will collapse. Quite clearly, the number of obstacles is enormous: frequent conflicts between short- and medium-term objectives, and the all-too-human desire not to change are such that a flood of persistent leaders and visionaries is needed to drive any change.

Lesson 3: Sustainability is Business: do not restrict Sustainability to sheer philanthropy or extended responsibility
To embed sustainability in the organisation, accepted and sustained by all parties, it should not be considered as a “gesture”, a luke-warm responsibility or the result of simple generous nature, but clearly understood as a necessity, not only towards society and the environment, but also serving the goals of the business. Without this latter point, sustainability approaches are condemned to be limited to peripheral activities that do not transform the organisation or prepare it to confront the Sustainability Stress Tests of tomorrow’s world.

To embed sustainability in the organisation, accepted and sustained by all parties, it has to be clearly seen as serving the goals of the business

Establishing, evaluating and articulating expected positive business impacts is a key element of a sustainability embedding approach. The goal is to instil a desire, to convince the organisation of the need to integrate sustainability goals into the heart of working practices. To firmly fix this aim, it is essential to explain to managers in clear terms how any additional activity or new process will be beneficial to them and their business areas. This can be done using traditional motivation techniques, as we have seen in a growing number of organisations, and as the study participants have clearly illustrated.

One practice that we have discovered from our interviews is the will to link environmental performance to remuneration of managers: more than a quarter of interviewees confirmed this was already in place in their organisation, or they intended to deliver it. Similarly, some leaders integrated sustainability topics as well as goals, into the heart of their business functions. This is the case for Mars Drinks for example, where it applies to Research and Development teams, and equally for Friesland Campina, where sustainability methods are incorporated into the overall processes for product quality assurance.

Lesson 4: Think bold and mid-term, implement step by step
The risk with any project aiming to embed sustainability throughout the firm is stakeholder indigestion. In practical terms, just because one has 360° perspective and the ultimate goal of involving everyone, this does not make it necessary to attempt integrating sustainability everywhere, simultaneously. It is more sensible to move forward step by step, starting with areas with the biggest challenges, or where the opportunities are the greatest. For example, Nestlé’s sustainability strategy has the global objective of “Creation of Shared Value”, presented as three pillars: nutrition, water and rural development. The topics chosen by Nestlé are closely linked to the core of the business, and can positively contribute to the bottom line: reduction of production costs and dependencies (water), protection of supply of raw materials (rural development), opening up new markets (nutrition)… By selecting priority areas of major concern to the organisation, Nestlé assures not only a clear understanding, but also that stakeholders adhere to the sustainability strategy. Another method of avoiding indigestion, which does not exclude the above, is to prioritise areas that are either simpler to deliver (or “quick wins”), or that can clearly demonstrate the overall direction followed.

Lesson 5: Leverage IT to scale things up
Using core operational IT systems to integrate measures that enable the embedding of sustainability into the organisation is a key success factor. In real terms, if objectives and indicators are not monitored automatically by traditional IT systems, not only will the act of measurement require additional effort, which will hinder acceptance, but it also communicates the message that the sustainability strategy is not an integral part of the day-to-day management of the organisation, that it is “at arm’s length”. This works directly against any intent to embed sustainability at the heart of the organisation.

Fairly advanced initiatives were highlighted during our interviews, such as Deutsche Post’s integration of KPIs on CO² efficiency as a decision factor in route planning, or Johnson & Johnson’s investment on databases integrating sustainability ratings into supplier purchasing decisions for R&D.

Having said this, achieving this goal remains the exception: only two of the leading organisations that we interviewed said that they had already integrated sustainability performance management into their core IT operations. Two others informed us of their firm intention to do so, and a number confirmed their interest in pursuing such an approach.

Lesson 6: From Strategy to Operations: each layer should impact and reflect
sustainability ambition levels
Any organisation wanting to embed sustainability into its business models should, as with all such business-related topics, not only define an objective and roadmap, but also integrate performance measurement tools and prioritise activities appropriately. None of the four embedding levels (strategic, governance, operational and support) should be left out.

While the organisations we spoke to generally address these areas, half of them admitted that they put more emphasis on the ‘strategic’ aspects. Ten of these have even created a branded mission statement based on their sustainability policies, such as “Plan A” for Marks and Spencer, “Forever Food” for Iglo Group and “Mission to Zero” for Interface Flor. Even leading organisations recognised that they need to fulfil several more objectives on the way to ensuring that the four levels are profoundly aligned with their strategic sustainability goals.

Notes and Bibliography

  1. WBCSD 2008, Sustainable consumption facts and trends
  2. Managing Environmental Sustainability in the European Food
    & Drink Industries – CIAA
  3. Population growth and rapid urbanization: food insecurity on
    the rise in urban setting, World Food Program, January 2009
  4. The Food and Agriculture Organization of the United
    Nations (FAO)
  5. OECD 2030 Environmental Outlook
  6. Managing Environmental Sustainability in the European Food
    & Drink Industries – CIAA
  7. Who Will Feed the World? Oxfam Research Report, April 2011
  8. 2007 IPCC Fourth Assessment Report on Climate Change
  9. World agriculture: towards 2015/2030 - FAO
  10. Eurobarometer 39, Attitudes of European citizens towards
    the environment – This study, undertaken in 2007, showed
    that while 75% of European respondents state that they are
    prepared to buy products that respect the environment, only
    17% have done so in the month preceding the study.
  11. World Heath Organisation (WHO)
  12. Euromonitor, October 2011
  13. Paul Zane Pilzer, The New Wellness Revolution, 2002
  14. A study by Walley et al. 2009 showed two factors causing
    the European population to buy organic products:
    that consumers found such them healthier (48%) and
    environmentally friendly (16%). According to the 2009 U.S.
    Families’ Organic Attitudes and Belief Study, nearly threequarters
    (73%) of U.S. families buy organic products at least
    occasionally, chiefly for health reasons.
  15. Food 2020, the consumer as a CEO (Ketchum 2008) 74%
    of consumers cited taste as key, and 73% cited quality.
  16. The emerging middle class in developing countries, OECD
    working paper n°285, January 2010
  17. Perspectives on global development: Shifting Wealth,
    OECD 2010
  18. OECD 2030 Environmental Outlook
  19. OMS
  20. Carbon Disclosure project, 2010 Financials sector report
  21. Companies and Climate change – Global carbon footprint
    of 10 business segments, WWF - Vigeo
  22. Idem 2
  23. PricewaterhouseCoopers, A Closer Look at Dodd-Frank Wall
    Street Reform and Consumer Protection Act, Mars 2011
  24. http://www.eba.europa.eu
  25. International Energy Agency (IEA)
  26. Oxfam
  27. Climate change: risks and opportunities for global financial
    services, Oliver Wyman 2007
  28. Idem 21
  29. World Population to 2300, United Nations 2004
  30. “Prévention et assurance contre les catastrophes naturelles”,
    Fédération Française des Sociétés d’Assurances,
    February 2011
  31. FAO Inter-departmental Working Group on Organic Agriculture
  32. Examples taken from the report Sustainable economy in
    2040 - a roadmap for capital markets, Forum for the Future
  33. World Bank estimates
  34. State of the Microcredit Summit Campaign Report 2012
  35. Insurance in developing countries: exploring opportunities
    in microfinance, Lloyd’s
  36. The emerging middle class in developing countries, OECD
    working paper n°285, January 2010
  37. What are Clients doing Post the Andhra Pradesh MFI
    Crisis?”, MicroSave, November 2011
  38. Reducing the Risks of the Poor through Micro-insurance:
    Allianz, WBC SD case study
  39. Sudip Hazra, ESG Disclosure & Research
  40. 90% of the employees interviewed for a research study by
    MIT Sloan in 2008 believed that it was important that their
    organisation had a CSR policy (Source: MIT Sloan Winter
    2008, Using Corporate Social Responsibility to Win the War
    for Talent).
  41. New Scientist; Earth’s natural wealth: an audit, 2007
  42. Siemens Web site http://www.siemens.com/sustainability/
  43. EIA (US Energy Information Administration), Annual Energy
    Outlook 2011, 2011
  44. BP (British Petroleum); BP Energy Outlook 2030, 2011
  45. BP; Statistical Review of World Energy, 2009
  46. IAE (International Energy Agency), World Energy
    Outlook 2009
  47. IAE (International Energy Agency); World Energy Outlook
    2009, 2009
  48. New Scientist; Earth’s natural wealth: an audit, 2007
  49. British Geological Survey; Risk List 2011, 2011
  50. PBL Netherlands Environmental Assessment Agency;
    Scarcity in a Sea of Plenty?, 2011
  51. Chinese Ministry of Industry and information Technology;
    Internal report, 2009
  52. USGS (US Geological Survey); Minerals Year Book –
    Phosphate Rock; 2006
  53. IPCC (Intergovernmental panel on climate change);
    Assessment Report 4, Summary of policymakers, 2009
  54. Companies and Climate change – Global carbon footprint
    of 10 business segments, WWF – Vigeo, 2009
  55. Companies and Climate change – Global carbon footprint
    of 10 business segments, WWF – Vigeo, 2009
  56. UNESCO; World Water Development Report, 2009
  57. UNEP; Training resource pack for hazardous waste, 2009
  58. On the 3 December 1984, an explosion at a Union Carbide
    pesticide factory in Bhopal, India caused 3,500 deaths.
    Having sent 40 tonnes of gas into the air, the catastrophe
    ultimately caused the death of more than 10,000 people.
  59. On the 4 October 2010, following a leak in a reservoir of
    approximately 1.1 million cubic metre capacity, the Ajka
    aluminium factory, Hungary, spread hundreds of thousands
    of cubic metres of toxic red mud across an area of more
    than 40 km2, reaching the Danube three days later.
  60. Registration, Evaluation and Authorisation of Chemicals.
    This regulation imposes responsibility on the industrial
    sector to monitor and manage risks caused by chemical
    products, and to supply adequate safety information to
    their users.
  61. Waste Electrical and Electronic Equipment: a directive
    which aims to improve the collection, treatment, reuse and
    recycling of waste electrical and electronic equipment.
  62. Restriction of the use of certain Hazardous Substances in
    Electrical and Electronic Equipment: aims to reduce the
    concentrations of dangerous products in electrical and
    electronic equipment: lead, mercury, biphenyls, cadmium…
  63. Toshiba; Toshiba ecostyle , 2010
  64. GE; 2010 Ecomagination Annual Report, 201065
  65. UN-Habitat; Global Report On Human Settlements 2009:
    Planning Sustainable Cities, 2009
  66. UNPF; State Of The World Population 2007: Unleashing The
    Potential Of Urban Growth, 2007
  67. UN; World Urbanization Prospects, 2007
  68. McKinsey Global Institute; India’s urban awakening:
    building inclusive cities, sustaining economic growth, 2010
  69. McKinsey Global Institute; India’s urban awakening:
    building inclusive cities, sustaining economic growth, 2010
  70. UN-Habitat; State of the world’s cities 2010/2011, bridging
    the urban divide, 2010
  71. F. Perrot; Les entreprises multinationales au bas de la
    pyramide: un cadre d’analyse des stratégies, 2011
Connect with us

The latest industry insights from the BearingPoint Institute - straight to your inbox

Subscribe now
Follow us


Access the latest research and the full BearingPoint Institute archive on your tablet