The world is heating up, rising carbon emissions are giving rise to catastrophic events and yet most businesses still fixate on the same financial metrics that drive behaviors and culture that are not fit for purpose.
In our recent Green Rush research, 72% of respondents in Europe and 75% in the US said they believe that the lack of certainty of returns on investment is the biggest inhibitor to their environmental sustainability goals. Our takeaway: Legacy thinking and business success metrics are hampering progress.
Many sustainability initiatives are new and complex; some need to percolate for an extended time before any tangible benefits to both the environment and the business can be measured and realized. As such, imbuing an organization with an environmentally sensitive business culture that is carefully and clearly demonstrated by executive leadership is critical to catalyzing progress on sustainability. Not surprisingly, European leaders are significantly ahead in this area, according to our analysis of Green Rush study data.
In the US, 71% of respondents believe that senior executive commitment to sustainability initiatives is a challenge, whereas in Europe, this figure stands 10 percentage points lower at 61%. The difference in leadership is stark but companies on both sides of the pond need to do more: New ways of measuring the success of sustainable investments, harnessing government incentives and overhauling business culture are urgently needed.
Traditional ROI-based metrics that demonstrate the success of a particular sustainability investment in terms of cost savings or revenue increase often fall short when tracking the near-term returns of a successful project. The reason: Sustainability projects, by their very nature, take time to deliver results and are designed as much to mitigate operational risk as they are to improve the environment.
Risks are undoubtedly proliferating, ranging from insurance companies refusing to provide coverage to businesses that consume large amounts of fossil fuels, to the breakdown of supply chains due to environmental damage caused by adverse weather. Business case frameworks need remodeling to accommodate the effect a proposed initiative has on risk, the opportunities that arise from their mitigation, and the short- and long-term benefits they bring — which can be effectively measured against key performance indicators (KPIs).
The risks now facing businesses are broader than just those with direct operational impact. The ways in which customers engage with businesses continue to shift in light of climate change, so much so that 75% of millennials are now willing to pay more for a company’s products if they are deemed by them to be sustainable. As newer, more politically and culturally aware generations evolve into the largest consumers of products and services, businesses that haven’t baked in sustainability initiatives could lose market share to those companies that have.
To counter this threat, we propose that organizations embrace a return on sustainability (ROS) approach that can shape a range of KPIs. Together, these KPIs can help reduce risk and, eventually, lead to greater profitability. They will also offer access to new capital sources via government incentives for green financing plans that are beginning to proliferate. Adopting ROS metrics mitigates the risk from rising consumer consciousness as well as the burden of compliance as governments regulate carbon production and businesses deliver the benefits to both shareholders and society.
ROS KPIs that should be considered within remodeled business cases include:
ROS will take some time to drive increased profitability, but with government regulation of carbon production, a negative impact on company performance may hit old-school ROI of other projects soon. This may explain why European respondents are more confident in their leadership’s support of green projects compared with counterparts in the US.
For example, the European Union’s ETS allocates a price to carbon emissions, creates a market for them and incentivizes carbon reduction in strict financial terms. The mechanism has reduced emissions by 42.8% over the past 16 years in the EU’s energy-intensive industries. No such program exists in the US (so far) and, as such, any progress made is largely due to action taken by individual organizations or states, such as California’s climate law. But our survey shows that the uncertainty around ROI remains a concern for European companies and signals the need for a wider cultural transformation to continue toward a low-carbon economy.
Along with the external perception of a company regarding sustainability, the way in which its own employees regard ESG efforts is critical. The famous quote by management guru Peter Drucker, “Culture eats strategy for breakfast” is prescient. For a business to implement its strategy, incorporate returns in sustainability to its business cases and ensure its operations are not hindered by regulatory risk, its employees need to be bought in and assured of authenticity, from top to bottom. Unfortunately, a simple page on the company intranet professing to care about sustainability isn’t enough; it’s not even table stakes.
As detailed in an earlier study we conducted on modern corporate culture, the employee voice needs to resonate up and down the organization; communication lines and forums must be open at all times. Net zero initiatives need proving with real-time analytical data to mitigate accusations of greenwashing, and employees should feel part of the process, rather than feel like they are having it done “to” them. If the right company culture is built around sustainability — with authenticity in leadership, inclusiveness and ready access to information — not only will this be beneficial to the bottom line in terms of staff retention, but it will also activate all other areas of strategy that can be powered with an enthused workforce.
Over time, this investment in culture will prove itself in tangible terms, as organizations avoid the operational risks of transitioning toward a net zero future, as well as future employees and customers who choose a business that is authentic and responsible.
This article was written by Euan Davis, an AVP who leads Cognizant’s Center for the Future of Work in Europe, and Rouzbeh Amini, Senior Director – Head of Cognizant’s Sustainability Practice, EMEA.
To find out more about sustainability opportunities and business benefits, read our white paper, “Green Rush: The Economic Imperative for Sustainability,” or contact us at the Center for the Future of Work.