Invitation to Reflection for Executives
September - Edition #2
Long term, life on the planet is becoming unsustainable in several areas, from environment to human rights, from ethics to discrimination by gender and race, from poverty to working conditions. From an environment standpoint, science has done its job and offered undeniable evidence that the climate has changed dramatically, and the future of the planet is at risk. Those who still try to argue against, will soon lose their last drop of credibility.
There is little doubt that significant progress has been achieved in recent decades in most of those areas, but the challenges ahead will prove such progress to be insufficient.
The awareness of these realities and the recognition of the planet's unsustainability are, in general, globally accepted, and surely the phenomenon of globalization and new technologies will continue to exponentially increase this consciousness.
In this context, companies have a fundamental role to play, in the sense that they have the resources, capacities and processes to operate the necessary changes.
What brings us to the key question for the definitive involvement of companies: Is there a "Business Case" for a strategic path towards sustainability?
As in any Business Case, value creation must result from lower cost, price increment or volume increase. Or at the very least, avoiding the destruction of value, especially when the company's reputation is at risk.
On the direct relationship between sustainability strategy and superior financial performance, there are already several credible studies in the recent past (to which we will refer in future messages) that indicate a clear link between the two. But for many, the only possible conclusion still is that... "there is not a negative impact", which is very little for companies to pursue this path.
"I believe that if companies do not turn into socially and environmentally responsible companies because it is the best for the world, then they must do so because it is the best for their business."
So, the big question (the only question?), becomes: what is the long-term vision in which we believe? What probability do we attribute to a scenario of a consumer and citizen increasingly available to follow (read: to buy more and perhaps more expensive products) companies that genuinely care about these topics?
If we assign a high probability to this future scenario then everything gains clarity. Clarity in costs, clarity in prices, clarity in volume, and surely clarity in risk mitigation. This is the clarity that big investors already have, that the management of large companies already have, and, by acting accordingly, will drag the entire ecosystem of small and medium-sized companies that gravitate around them.
In addition to the success stories of companies such as Unilever, Patagonia, Lego, Danone (and so many others), the greatest evidence that this macrotrend “is here to stay”, is in the famous letter of Larry Fink (CEO Black Rock) in January 2018 (“Sense of Purpose”) and reinforced in 2019 with the letter “Purpose & Profit”. As they say in Wall Street, there's "BL and AL”, meaning there is a time before and one after the letter. When a character like this (CEO of $7 trillion, something like the GDP of two Germanies), addresses all of his "Asset Managers" focusing on the long term, and clearly stating that long term can only be guaranteed by the ESG (Environmental, Social and Governance) metrics, then something is actually changing. Short-term performance interests little if not substantiated in the enhancements of ESG metrics – it's not me who says it, he wrote it. This was very evident over 2018 with strategic reviews operated by a significant number of companies, to better adjust their path to these new challenges.
In the future, value creation will only be sustainable when the interests of all relevant "stakeholders" are considered in the definition of the corporate strategy. The current, almost exclusive, concern with the interest of shareholders will tend to phase out. Companies that do not recognize this reality today and adapt, will have a lot of difficulty surviving in the future.
Along these same lines, is the recently published Business Roundtable statement from hundreds of the most relevant American CEOs. Trying to redefine the role of business in society and specifically what their purpose should be, they tried to break with decades of the long-lasting Friedman approach ("all that matters is profit"). They argue that "Company purpose" should consider all the relevant stakeholders, must "invest in their employees, protect the environment, support communities, deal fairly and ethically with their suppliers, create value to customers”.
These new challenges mean that customers (and "stakeholders" in general) will not simply be available to buy products and services, but rather to buy sustainable (in the holistic sense of the concept) products and service. Time has come for citizens and consumers to place trust and hope in leaders of "responsible" companies. Only companies have the resources, processes and skills to be a force of change and, driven by consumers, a force for good.
Citizens and consumers make daily decisions about what to do to protect the environment and about "what to buy and from whom to buy." Market studies indicate a clear trend for consumers to buy products and services from companies that are recognized as making a difference in sustainability. This virtuous circle will increasingly empower these companies to further drive the sustainability agenda.I finish with one of my preferred quotes: "I believe that if companies do not turn into socially and environmentally responsible companies because it is the best for the world, then they must do so because it is the best for their business".
Nuno Moreira da Cruz
Center for Responsible Business and Leadership at Católica-Lisbon School of Business & Economics