By IESE Insight
By Fabrizio Ferraro*
Experienced executives, and anyone who bothers to learn about the history of sustainability, will be tempted to dismiss the recent wave of green enthusiasm as a passing fad. We did experience, in fact, a similar wave of societal and corporate attention to the environment, and more broadly the social responsibility of corporations, back in the 1970s, only to see it wane over the years.
But this time is different, and sustainability concerns are not just expressed by social movements and concerned citizens but increasingly come from corporate leaders. I believe we are at the tipping point of a sustainable leadership revolution in corporations.
First, climate change presents humanity with a global challenge unlike anything we have ever faced before. Given its scope and systemic complexity, climate change will require actions from both the public and the private sectors, and from all of us – as consumers and producers, managers and workers alike. If COVID-19 served as a global stress test to gauge how prepared we are to deal with the kinds of challenges we will face because of climate change, we did not fare particularly well!
Second, governments are finally starting to act. Despite decades of neglect, timid aspirations are starting to be translated into more credible commitments. We already have the U.N. Sustainable Development Goals, providing specific targets for 2030. The European Union has been working on numerous initiatives, of which the Green Deal is just the latest. And if, as is promised by the incoming Biden Administration, the United States succeeds in rejoining the Paris Agreement, this would represent another boost to collective government action on sustainability.
Third, the financial sector – whose traditional emphasis on maximizing shareholder value has been one of the main reasons given by CEOs for why they can’t introduce more sustainable policies – is increasingly integrating environmental and social performance metrics in its processes. We are now more likely to see investors concerned about companies not doing enough on climate change, rather than about them doing too much.
So, we have an urgent existential threat, governments are mobilizing and investors are changing their tunes. Nothing to worry about then: Surely, the might, power and ingenuity of the private sector will solve things, just like in the 1980s with the Montreal Protocol. Remember that international treaty to phase out production of substances harmful to the ozone layer? Thanks to collective corporate action on that front, the world managed to eliminate ozone-depleting chemicals, helping the hole in the ozone layer to grow smaller.
Unfortunately, the kind of comprehensive decarbonization needed today is much more complex. It will require monumental capital reallocation and fundamental changes for entire industries, for corporate strategies and for business models. And although this transition will generate new jobs in some sectors and regions, it is also likely to cause job losses in others. To ensure a just transition, we will need to ensure that we have policies in place to help those who will suffer the most from the changes.
We are at the tipping point of a sustainable leadership revolution
The profound transformation we need corporations to make will also require a profound rethinking of corporate leadership. Sustainability cannot be bolted on to existing strategies but needs to be at their core. Corporate leaders, especially in large firms, need to accept their systemic role in society, assume responsibility for it, and act decisively to reduce their negative footprint while maximizing their positive impact in all areas:
- Strategically, they will need to explore novel business models, being mindful of how any changes they decide to make there may well endanger their own competitive position.
- Financially, they will need to shift investments away from legacy systems and technologies toward sustainable ones, in line with science-based decarbonization targets.
- In their marketing efforts, they will need to encourage more sustainable consumption and, in some cases, even discourage consumption – a marketing heresy.
- Operationally, they will need to rethink their entire supply chain.
- Organizationally, they should implement flexible ways of working that minimize employees’ carbon footprint.
- As leaders, they will need to inspire and energize the entire organization to embrace and internalize these novel goals, strategies and practices.
This radical rethink extends beyond the boundaries of the firm. Corporate leaders must exercise system leadership, engaging suppliers, consumers, NGOs, governments, scientists and other external stakeholders in novel collaborations. Rather than lobbying against stricter environmental regulation, sustainable leaders should be proactively designing regulation to create a global level playing field that limits arbitrage opportunism between countries, regions and jurisdictions.
Above all, sustainable leaders should not fall for simplistic ideas that have plagued much corporate sustainability discourse, that a win-win solution can always be found. Actually, a serious commitment to ambitious environmental and social goals will present trade-offs, and win-win solutions will not always be possible. Successful corporate strategies have never been easy to identify and execute, so we should not expect it to be any easier this time. There are no magic wands.
The world needs sustainable leaders not because the environmental and social challenges are easy to solve and obviously profitable, but precisely because they are wickedly difficult, and we need to reorient the creative power of business toward the development of solutions.
Sustainable leaders, it is time to act.
*Fabrizio Ferraro is Professor of Strategic Management and Head of the Strategic Management Department at IESE.
This Report forms part of the magazine IESE Business School Insight #157. See the full Table of Contents.