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20 hours ago • by Benjamin Von Wong in Audio articles
Published 13 May 2024 in Sustainability • 9 min read
As far back as the 1960s, scientists began sounding alarm bells about the detrimental effects of pollutants, emissions, waste, and climate change. In the 1970s, the term ‘corporate social responsibility’ was first coined and adopted, recognizing that companies should contribute to the needs of society. COP conferences and new regulations followed soon after. Then, suddenly, everything took off. In the last few years, the imperative to act has taken on a whole new sense of urgency. This change can be understood through five shifts in attitudes and conditions.
From future challenges to current crisis
Climate and environmental considerations have shifted from vague concerns that may need to be addressed in the future to critical topics that demand immediate attention. With more than 99% of peer-reviewed scientific literature linking climate change to human activity, these once-abstract concepts have materialized into global catastrophes, affecting our daily lives. From the recent surge in extreme weather events of the past summer to the alarming warning signs about air and sea temperature records that scientists are tracking, it has become abundantly clear that we must address these environmental crises with a sense of urgency.
From awareness to anxiety
In the 1970s, the environment was primarily a concern for environmental scientists. Today, there is widespread awareness in civil society about climate change and the profound impact it could have on the environment and our lives. This heightened awareness has triggered a noticeable shift in people’s emotional connection to these crises, with an increasing sense of anxiety, particularly among young people.
From government responsibility to business imperative
Looking back at the Rio Earth Summit in 1992, the prevailing consensus was that governments held the primary responsibility for taking environmental action, while companies were expected to adapt to regulatory changes. Fast forward to today and that is no longer the case. Now, both society and governments expect businesses to step up and take a central role in addressing the climate crisis. Companies are no longer bystanders but are seen as pivotal players that need to actively work to reduce their environmental impact and craft sustainable solutions that drive positive change.
From voluntary communication to mandatory disclosure and reporting
Just a decade ago, few companies reported on the environmental impact of their activities. So-called ‘corporate responsibility reports’ were written at the discretion of companies, driven primarily by the marketing or communications department. With society seeing the important role business plays in the environment, companies are no longer just encouraged to support sustainability efforts. Increasingly, governments are creating new laws to ensure that companies take responsibility and disclose the environmental impact of their activities, including emissions, waste, water usage, and harmful chemical use.
From solo efforts to team sport
Finally, we see increased awareness about the need for collaboration among companies and between the public and private sectors. The crises we face require work and coordinated efforts along value chains and deep systemic transformations in specific sectors. These alliances are expected to drive impactful and lasting change by combining expertise, resources, and influence. As these partnerships continue to strengthen, their potential to mobilize collective action against climate change is poised to grow exponentially, offering a beacon of hope for a more sustainable future.
In numerous industries, businesses are confronting climate change-related threats, stemming from droughts, extreme weather events, or even geopolitical consequences. These risks can manifest in the form of resource scarcity, supply chain disruption, market fluctuations, or threats to employee safety. According to a recent Deloitte survey, 97% of the more than 2,000 C-level executives surveyed have noticed the effects of climate change on their business, and about half say that supply chains and business models have been disrupted. This underscores the urgency for business leaders around the world, and in every industry, to consider climate change as a crucial aspect of protecting their business activities.
Next to preparing for future risks, there are six important reasons why companies should set goals and strategies to help safeguard the climate and environment.
1. Civic engagement and consumer action
Movements like Fridays for Future and Extinction Rebellion are gaining momentum, demanding urgent and ambitious climate actions from governments and businesses. Activist investors increasingly use their influence to push companies towards adopting sustainable practices and setting ambitious climate goals. Additionally, climate litigation is spreading worldwide, with governments and companies finding themselves in court for failing to integrate climate considerations, for the failure to adapt to the requirements of the climate crisis, for pollution responsibility, and, increasingly, for climate-washing. Consumers are also showing growing concern, including choosing sustainable options or indicating they would like to select more environmentally friendly products or reduce consumption. While their purchasing behavior doesn’t always align with their verbalized intentions, due to a lack of knowledge or financial resources, the intention-behavior gap is closing, especially in categories such as food, cosmetics, and fashion. Consumers are increasingly aware and expect the companies they purchase from to take responsibility. In particular, younger generations – the market of the future – trust companies more if they engage in sustainability. Companies should ensure their activities align with society’s larger needs to remain relevant for consumers and retain their license to operate.
2. Regulatory imperative
The regulatory imperative is increasingly shaping the business landscape as regulations and disclosure requirements shift from voluntary to mandatory. For example, in the EU, companies will have to comply with the Corporate Sustainability Reporting Directive (CSRD), whereby they will have to conduct a double materiality assessment to identify and report on the sustainability topics most relevant to their business and stakeholders. Furthermore, companies are facing a growing array of new regulations that demand they take responsibility for areas such as labor standards, chemical pollution, emissions within their supply chains, and the end-of-life management of their products. To remain compliant with these evolving regulations, businesses must stay ahead of developments in the regions where they operate. Companies that proactively research and address environmental concerns specific to their industry gain a competitive edge. This proactive stance also positions them as valuable contributors to the development of sector-wide standards. These standards, in turn, foster a level playing field for all companies, ensuring entire sectors meet ambitious environmental targets.
3. Investor action
Investors are responding to mounting public pressure, evolving regulatory frameworks, and the urgency of our environmental crises. An increasing number of investors are actively seeking opportunities to invest in companies that make a positive impact. This shift places substantial pressure on pension funds, institutional investors, and family offices, who in turn feel the weight of expectations from their clientele. Beyond merely looking at ESG ratings, these investors are asking a more pointed question: What are companies actively doing to reduce their environmental footprint and improve their positive impact (their so-called “handprint”)? For businesses, this translates into a compelling imperative. To be considered for inclusion in the array of climate-forward investment options offered by financial firms, they must convincingly demonstrate their commitment to sustainability. While standardized norms for ESG reporting may be lacking at the moment, these are anticipated to become increasingly prevalent with the advent of the International Sustainability Standards Board’s (ISSB) new standards and the CSRD, which will apply to medium to large companies operating in Europe. To attract – or not lose – investors, companies need to ensure that their environmental goals are aligned with the expectations that investors set for themselves and their customers.
4. Market opportunity
Across industries, business leaders see that it is possible to provide value and reap benefits by setting goals and developing strategies to benefit society and help protect our environment. McKinsey estimates the market for net-zero businesses across 11 value pools could amount to $12tn by 2030. Companies moving in this direction are exploring new market opportunities, innovating product designs, and implementing circular business models. In emerging markets, there are enormous opportunities to develop clean infrastructure, housing, electricity, logistics, and healthcare services. In more developed markets, opportunities lie in creating products with lower environmental footprints through innovative materials and crafting service models with minimal material footprints and emissions. For those working in the energy transition specifically, it is estimated that to reach net zero in 2050, 70% of capital outlay will be spent on low-emission assets. By studying the evolving needs of society, companies can uncover new markets and customer segments.
5. Technology
Ranging from recycling solutions to the expansion of renewable energy infrastructure, technology aimed at safeguarding the environment is continuously evolving. This evolution presents an increasing array of possibilities for companies to reduce their ecological footprint. In the context of energy, the barriers to reducing Scope 1 and Scope 2 emissions are falling quickly. According to the International Energy Agency, “annual capacity additions [for renewable energy] have more than doubled from 2015 to 2022, rising by about 11% per year on average.”
Like governments and individuals, businesses can help drive this movement. Some companies are adopting blockchain technology to better track, measure, and improve the environmental footprint of their products throughout the value chain. Additionally, artificial intelligence can provide opportunities to improve efficiency in different industries. Beyond the more visible developments valid for all industries, in every sector, technology is being developed to lower material footprint, recycle materials, improve efficiency, and help feed back positively to the earth. Hence, investing in the right technologies can provide opportunities to advance business and reduce impact.
6. A source of innovation
Rather than being seen as a burden, the focus on climate and environmental protection has the potential to ignite innovation. Companies worldwide have come to realize the urgency of transitioning to cleaner energy sources. They are pioneering innovations that aim to make renewable energy infrastructure lighter, smaller, more circular, or cheaper. The demand for hydrogen, especially in the transport sector, is significant, and energy companies are working hard on developing technologies and structures to provide green hydrogen at scale. Digital solutions are sought to reduce energy consumption, increase efficiency, or improve product offerings. In 2022, consulting company BCG assessed climate to be a top imperative for innovation, estimating the green-tech market size to $45-55bn a year, expecting it to grow at 25-30% annually.
The food industry is another source of innovation. Today, this industry is a major driver of emissions and deforestation. This necessitates a system transformation that inspires companies to develop healthier, plant-based products, adopt regenerative agriculture methods, and seek out new technologies for more efficient farming using less water and chemicals. In every industry, improvements are needed. As the expression goes: “Necessity is the mother of invention.”
We are at a renewal moment for business. The climate extremes witnessed in recent years highlight the urgency we face to tackle the climate crisis collectively. As the effects of climate change become even more evident and the discourse widens, the pressure on the private sector to act will continue to grow. Increasingly, companies will feel the pressure from society, investors, and government to act. Leveraging expertise, resources, and reach, industry leaders are developing new products and strategies to minimize the negative impact on the environment while opening new markets and opportunities. For businesses yet to actively address climate, the time is ripe to engage and take action now.
Lundin Chair Professor of Sustainability at IMD
Knut Haanaes is a former Dean of the Global Leadership Institute at the World Economic Forum. He was previously a Senior Partner at the Boston Consulting Group and founded their first sustainability practice. At IMD he teaches in many of the key programs, including the MBA, and is Co-Director of the Leading Sustainable Business Transformation program (LSBT) and the Driving Sustainability from the Boardroom (DSB) program. His research interests are related to strategy, digital transformation, and sustainability.
Professor of Sustainable innovation and Business Transformation at IMD
Julia Binder, Professor of Sustainable Innovation and Business Transformation, is a renowned thought leader recognized on the 2022 Thinkers50 Radar list for her work at the intersection of sustainability and innovation. As Director of IMD’s Center for Sustainable and Inclusive Business, Binder is dedicated to leveraging IMD’s diverse expertise on sustainability topics to guide business leaders in discovering innovative solutions to contemporary challenges. At IMD, Binder serves as Program Director for Creating Value in the Circular Economy and teaches in key open programs including the Advanced Management Program (AMP), Transition to Business Leadership (TBL), TransformTech (TT), and Leading Sustainable Business Transformation (LSBT). She is involved in the school’s EMBA and MBA programs, and contributes to IMD’s custom programs, crafting transformative learning journeys for clients globally.
Senior research writer on sustainability at IMD
Bryony Jansen van Tuyll is a senior research writer on sustainability. After starting her career as a management consultant, she went on to focus on sustainable innovation and strategy. She later founded and ran two non-profit organizations aimed at knowledge sharing among sustainability experts and fashion professionals. Her main interest is to support companies to thrive while safeguarding our planet and its people.
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