Chief officers (aka the C-suite) need to care about the bottom line. “The business of business is business,” as the late economist Milton Friedman said. And that is how leaders in the business world have justified their view of externalities like post-consumer plastic waste and its impact on communities along a supply chain. They are simply that—external.
But what happens when measures of sustainability and the externalities of unsustainable operation start to affect the bottom line?
Stakeholders are increasingly sensitive to carbon emissions, water usage, de- and reforestation, and all the other ways that people and the planet are affected by a company’s operations. In the twenty-first century, the C-suite is realizing they’d better start caring, too.
3 Reasons the C-Suite Should Care about Sustainability
1. New Markets Care
Consumers, regulators, and stakeholders care about sustainability because they see and feel it affecting their lives. There is an undeniable, deep impact on our environment and marginalized communities. Serious pressure is mounting on companies to become sustainable.
Think of Patagonia owning the reality of its clothing production. “Everything we make has an impact on the planet” is the latest declaration on the company’s website. But in fact, Patagonia has always been a leader of sustainability and impact transparency, placing itself at the head of the sustainable fashion trend. The company has spent years sharing bold sustainability reports with stakeholders. And now it’s reaping the benefits.
Patagonia’s consumer products command huge premiums and brand loyalty in mid-upscale consumers. The company stands apart from a crowded, problematic industry with a long history of exploitative and extractive supply chains. Patagonia shows the market the hidden costs and benefits of looking beyond price. It gives customers—at least those with the means, privilege, and conscience to choose where their clothing comes from—a clear choice.
It’s well worth mentioning that the C-suite needs to look beyond (or “below”) their affluent customers for truly sustainable strategies and real impact among the vast working class markets for essential goods.
2. Investors Care
Environmental, social, and governance (ESG) metrics measure a company’s performance beyond old standards of profitability, liquidity, debt, efficiency, and price. Investors of many types are applying pressure to see ESG competency reflected alongside financial statements.
A small but growing segment of venture capital and private equity funds has set sustainability metrics as core qualifying criteria for investments. Decarbonization, the circular economy, and social equity have begun to frame entire portfolios. Even major pension, sovereign wealth, and passive index funds managed by a huge capital manager like Blackrock are making aggressive proclamations on ESG performance.
The age of greenwashing is at an end. Data and sustainability reporting are exposing these shameful legacies, and investors want nothing to do with companies that aren’t making real steps forward.
Your financial survival in new markets with new investors will depend on three things: your ESG performance, the sustainability of your model, and operational reality.
Shareholders are looking closely at how viable any given company will be in the mid and long term. It’s no longer speculation whether negative environmental and social impacts will cost more than they return, even on the old bottom lines.
Can you survive without incorporating sustainability? The answer is definitive: No.
Think of the huge divestment and devaluation of energy companies with fossil fuel-reliant business models. The cost of carbon offsets to pay for production is on the rise, all while the supply of capital shrinks. Financial projections for unsustainable energy won’t attract any new investors, even if the current returns manage to keep some old ones around for the time being.
So yes, C-suites need to care about sustainability. But how do you connect the dots from current incentives and priorities to the measures of the future? How do you actually move environmental and social impact into the core financials every C-suite uses to measure value?
The true value of a company is measured not only by its quarterly performance, but also by strategic investments and long-term projections. Investors want to lower their risk and see prospects for higher returns. Consumers, regulators, and investors are asking for performance reporting they can trust—and change they can believe in.
Sustainability-adjusted financials are a clear way to account for new, external-as-internal costs and liabilities on the bottom line. They can also add new assets and revenue on the top line.
Consider carbon impact as an environmental cost. An energy company may seem to have had a great quarter on a conventional financial sheet by producing and selling oil. But their emissions and carbon impact from that production likely tell a different story. By using reported emissions, carbon can be quantified to adjust down earnings and count carbon as a direct cost to the company. Carbon offsets are available to purchase—in fact, more and more regulators require them. But the cost of offsets is rising, clearly signaling that this kind of energy production will be unsustainable in the near future. Soon, sustainability-adjusted financials will become standard to reflect this risk.
After a decade of work, the Sustainability Accounting Standards Board (SASB) has started seeing adoption of its SASB Standards for sustainability-adjusted reporting. SASB Standards complement other initiatives like the Global Reporting Initiative, Carbon Disclosure Project, the International Integrated Reporting Council) and the Taskforce for Climate-related Financial Disclosures.
Yet even with all the new reporting standards and global efforts emerging, there is still a gap between the data and how it’s used to measure sustainability. This is where opportunity lies for a C-suite to gain trust, build a positive reputation, and attract new investments.
After all, going above and beyond always sets leaders and companies apart.
So what can a C-suite do to show they take sustainability seriously and understand their company’s unique responsibility?
First, every C-suite should answer the question, “What is material to our company?”
This question requires deep reflection and broad input. The answer will depend on your industry and the role you play in your supply chain. Use a materiality matrix to visualize what you are concerned with, what you seek to address, and what you care about. Remember, materiality reflects your values. Competitive advantage in your industry starts with leading your pack so you can all lead your industry.
If you’re a little overwhelmed with where to start, good news: there are lots of materiality and ESG reports to reference. Leaders like Unilever, Lloyd’s Bank, and ABN AMRO have been lauded for their transparency, boldness, and ownership of impact and change. They also present their assessments in accessible formats.
2. Chief Sustainability Officer(s)
This is not a trophy position. CSOs perform a core function reflected in those crucial sustainability-adjusted financials.
DEI officers and directors are often the only people actively working on diversity, equity, and inclusion. A sustainability officer faces the same siloing and lack of support, collaboration, and investment.
Don’t let that happen.
Your company needs new sustainable values and a new strategy. It needs bold commitments. All that cannot be left to a single person, or even multiple leaders. Commit to collaboration. Discuss with your C-suite and managers. Include teams at all levels. Bring on a CSO, and give them a meaningful voice.
3. Sustainability Impact Committee
What do your front-line people have to say about sustainability? What unsustainable practices need to change? How can you measure change and improvement?
Don’t just form a sustainability committee for your company—advance it. Give it a focus on measurable impact and accountability. Let your sustainability impact committee lead, set, and iterate materiality company-wide to create buy-in for the materiality matrix. This is how you’ll not only make progress on sustainability metrics, but connect that progress to both company and employee performance.
A Call to Action & Opportunity
Sustainability used to be an afterthought. It’s not anymore.
The latest reports from the Intergovernmental Panel on Climate Change show the grave trajectory of human civilization and the fading potential to change fast enough to save ourselves from the worst of it. We know there’s a direct connection between economic activity, production, and company responsibility for massive, positive impact. Markets, investors, and consumers are looking for leadership and proof of performance.
All of this is a call to action for C-suites to reform their supply chains, their operations, and their measures of success. The question is no longer why they should, or even how they should. The question for C-suites is simply, “Will you seize your chance or miss your opportunity to survive?”