Robert G. Eccles

George Serafeim

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">Idea in Brief</h4>
 <div class="ideainbrief-contents">
  <p>Investments in sustainability programs often require trade-offs in companies’ financial performance, but this doesn’t have to be. By strategically focusing on the environmental, social, and governance (ESG) issues that are the most relevant—or “material”—to shareholder value, firms can simultaneously boost both financial and ESG performance.</p>
  <p>Firms must do four things to achieve this:</p>
  <ul>
   <li>Identify which ESG issues are most critical in their particular business. Materiality Maps that the Sustainability Accounting Standards Board is creating for 88 industries can aid this process.</li>
  </ul>
  <ul>
   <li>Quantify the financial impact that improvements on those issues would have.</li>
  </ul>
  <ul>
   <li>Undertake major innovation in products, processes, and business models to achieve the improvements.</li>
  </ul>
  <ul>
   <li>Communicate with stakeholders about those innovations. Integrated reporting, which combines financial and ESG performance information in one document, is an effective way to do this.</li>
  </ul>
  <p>To facilitate the process, companies must break down barriers to change—namely, incentive systems and investor pressure that emphasize short-term performance; a shortage of required expertise; and capital-budgeting limitations that fail to account for projects’ environmental and social value.</p>
 </div>
</article-ideainbrief><p>By now most companies have sustainability programs. They’re cutting carbon emissions, reducing waste, and otherwise enhancing operational efficiency. But a mishmash of sustainability tactics does not add up to a <em>sustainable strategy.</em> To endure, a strategy must address the interests of all stakeholders: investors, employees, customers, governments, NGOs, and society at large. To do that, it has to increase shareholder value while at the same time improving the firm’s performance on environmental, social, and governance (ESG) dimensions.</p>

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<p><span class="reprint">Reprint: R1305B</span> </p>
<p>Too often, companies launch sustainability programs with the hope that they&#8217;ll be financially rewarded for doing good, even when those programs aren&#8217;t relevant to their strategy and operations. They fail to understand the trade-offs between financial performance and performance on environmental, social, and governance (ESG) issues. Improving one typically comes at a cost to the other. But it doesn&#8217;t have to be this way. It&#8217;s possible to simultaneously boost both financial and ESG performance&#8212;if you focus strategically on issues that are the most &#8220;material&#8221; to shareholder value, and you develop major innovations in products, processes, and business models that prioritize those concerns. </p>
<p>Maps being developed by the Sustainability Accounting Standards Board, which rank the materiality of 43 issues for 88 industries, can provide valuable guidance. And broad initiatives undertaken by three companies&#8212;Natura, Dow Chemical, and CLP Group&#8212;demonstrate the kind of innovations that will push performance into new territory. Communicating the benefits to stakeholders is also critical, which is why integrated reports, which combine financial and ESG reporting, are now gaining in popularity.</p>

The Performance Frontier: Innovating for a Sustainable Strategy

Reprint: R1305B Too often, companies launch sustainability programs with the hope that they’ll be financially rewarded for doing good, even when those programs aren’t relevant to their strategy and operations. They fail to understand the trade-offs between financial performance and performance on environmental, social, and governance (ESG) issues. Improving one typically comes at a cost to the other. But it doesn’t have to be this way. It’s possible to simultaneously boost both financial and ESG performance—if you focus strategically on issues that are the most “material” to shareholder value, and you develop major innovations in products, processes, and business models that prioritize those concerns. Maps being developed by the Sustainability Accounting Standards Board, which rank the materiality of 43 issues for 88 industries, can provide valuable guidance. And broad initiatives undertaken by three companies—Natura, Dow Chemical, and CLP Group—demonstrate the kind of innovations that will push performance into new territory. Communicating the benefits to stakeholders is also critical, which is why integrated reports, which combine financial and ESG reporting, are now gaining in popularity.

The Performance Frontier: Innovating for a Sustainable Strategy

Summary.

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