Renewal for sustainable business, how and for whom?

Recent research shows that 86% of people want a more equitable and sustainable world after the pandemic. Companies find themself in need to jump forward two to five years in their digitalization journey following the Covid-19 pandemic and balance the sustainability challenges faced due to climate change.

 

 

On the 30th of September, the Digoshen network ran a Live Session on the topic “Renewal for sustainable business, how and for whom?“. The event was facilitated by the Digoshen team, led by Liselotte Engstam and Fernanda Torre.

The discussion’s framing focused on boards’ need to balance their work between four main challenges: sustainability, reporting, business priority, and innovation.

  • Sustainability: The first board challenge, of course, includes the actual sustainability base challenge. It consists of the health challenges we face, including the pandemic and the challenges connected to the usage of resources, climate change, and societal problems at large.
  • Reporting: On the board level, the reporting challenge refers to the increase in required regulatory reporting. Much of the board discussions may end up around wich of the many reporting standards to follow.
  • Business Priority: To this, we add business priority as a challenge. The business priority is complex as boards and businesses are increasingly dependent on other partners and society to manage the business, drive improvement, and find systemic solutions.
  • Innovation: In this context, businesses and boards will need to innovate and find new ways of working under the questions: can business be a force for good? And can boards be the Sherpas for the change?

 

The presented challenges lead Liselotte Engstam to point to some specific areas for action:

  • Reimagine purpose, corporate strategy, revisit & discuss directions from owners
  • Transform business models, where can circular, subscription, and platform be considered
  • Change scorekeeping and rethink transparency.
  • Lead a purpose-filled organization
  • Build corporate statesmanship
  • Elevate board governance to support above

We then dived into the critical concept of materiality. Materiality is the area with the most significance to impact the business. It comes with different definitions pending on the origin. Auditors identify financial items that have the risk of causing the highest negative impact on the company. For the sustainability area, materiality is defined as slightly broader. Materiality is the topic that directly or indirectly impacts an organization’s ability to significantly affect the economic, environmental, and social value for itself, its stakeholders, and society at large.

Unfortunately, boards and management often get presented with a ready-made final analysis of materiality developed by experts. For management and boards to take ownership of the actions, they must take an active part in identifying and prioritizing. Boards also need to take an active part themselves, in workshops or similar,  and guide management to take an active role in determining the company’s materiality.

Following the identification of actions to address materiality, boards need to consider linking them to company policies and executive management remuneration schemes. And boards need to guide management to ensure a strong bias for action (BFA).

 

Fernanda Torre then introduced a framework for sustainability lead innovation, developed by Dr. Richard Adams, Dr. Sally Jeanrenaud, Dr. John Bessant, Patrick Overy, Dr. David Denyer, and Hannah Metcalfe. This is a 3 stage framework to guide the organization on a transformation towards sustainable business.

 

Organizations in Stage 1 add environmental and social criteria to existing quality or profit criteria. The result is reducing the harm caused by business as usual. Examples of activities at the company level are pollution controls, renewable energy use, and reduced packaging.

Organizations in Stage 2 see the business opportunity in producing new products or services that serve human needs and benefit the environment. This can be described as devising a business model around “doing good.” Examples include disruptive new products that help people, replacing products with services, etc.

A well-known example is Phillips pay-per-lux, that offers light-as-a-service. In this case, the owner of office space pays a monthly membership fee to Phillips for delivering the best light solution matching the needs of office users.

Organizations in Stage 3 are positive change agents who view themselves as part of an interconnected ecosystem – existing to benefit and improve society. A good example comes from

B Corporations. Conceived in the United States but now existing in dozens of countries worldwide, B Corporations are organizations legally obliged to deliver societal benefits. Well-known examples include ice cream producer Ben & Jerry’s, e-commerce platform Etsy and cleaning product manufacturers Method and Seventh Generation.

As you move from left to right in the framework, companies come closer to the ideal of truly sustainable business: Systems Building.

It is useful for boards to place this framework in a governance context of time and value: McKinsey’s three Horizons, developed by McKinsey in 1999. The three-horizons framework suggests that boards should think of value-creation as a balance between improvement initiatives, i.e., horizon one all the way up to radical innovation, i.e., horizon 3.

 

Horizon 1 represents those core businesses that provide the most significant profits and cash flow and refers to innovation from improvements.

Horizon 2 relates to emerging opportunities that are still somewhat in line with the current business in terms of offers or market (i.e., same offer in a new market, or same market with a new offer). These opportunities represent an extension of your core business.

Horizon 3 contains ideas that imply a more transformation change in business and aim at more radical innovations.  These require considerable investment in exploitation and often involve research.

The horizons are closely connected to time, but as stated by McKinsey, this “should not be interpreted as a prompt for when to pay attention—now, later, or much later. Companies must manage businesses along all three horizons concurrently.” All of a firm’s activities don’t need to reside within a single stage. The ambidextrous organization is one that works on all horizons.

 

The short framing presentations were followed by a poll, focusing on how the participants addressed sustainability in their board practices. Two of the most interesting questions had the following results:

 

In these questions, we see that 80% do not agree that the board is clear about the company’s prioritized materiality challenges,  and 80% reported that the company does not assess how climate change impacts business in the long term.

 

The participants where then invited to discuss how boards can be most effective at engaging in sustainability guidance.

  • Some board members reported that the sustainability challenge is still missing from board’s agendas. Following the sustainability lead innovation framework, these organizations would be in stage 1 or even previous, not discussing or addressing climate change or materiality.
  • Some other boards reported a very strong dedication to sustainability, built on the final offers and purpose.
  • A point of discussion was how a strong CEO and leadership team could make a huge difference. If the leadership team engages in sustainability questions, then the work is easier for the board. Boards, therefore, need to consider the CEOs focus on sustainability, how can they encourage or even use it as selection criteria in succession planning
  • Boards should also follow the business’s transformation, for example, from a polluting business to a sustainable business. In this case, it is essential that boards do not micro-manage the operative situation and do not see sustainability as a separate topic but instead integrated into business strategy.
  • Boards could also be evaluated on their engagement to sustainability, it could be a concrete part of the board work as sustainability becomes a more significant issue for society at large. One way is to understand how investors evaluated them on the Environmental, Societal and Governance, ESG, metrics.
  • It is important that the board engage and understand the sustainability requirements from a business perspective and support the leadership team to drive the change.

We summarized the session with the following three insights:

  • Business can be a Force for Good and for change
  • Boards can be the Sherpas with BFA (bias for action!) – not only once a year but also as drivers for business.
  • And boards should guide innovation towards sustainable businesses.

 

Learn more about Boards and Sustainability

Boards need to ensure to engage in sustainability, as required by our planet and people, and as increasingly requested by all of its stakeholders.

Digoshen has pulled together a content library of great resources on sustainability that can guide Chairs, Board Members, and Investors in their pursuit of guiding and supervising on sustainability. The ambition is to keep adding valuable resources as they are published.

 

The curated content library includes tools, frameworks and inspiration for boards to proactively manage the opportunities and risks that arise, including climate and social issues. It provides content links to

  • Learning about climate as a board director – a one day free course via UK Chapter Zero and a Learning hub on Climate related Finance disclosures via TCFD (Taskforce on climate-related financial disclosures).
  • Planning for Climate Strategy handling as a board, incl a Boardroom Toolkit, and the transitions the Change Management Toolkit also via UK Chapter Zero.
  • Corporate sustainability reporting inspiration and status in the 2019 Europe Research via Alliance for Corporate Transparency.

It also points to inspirational collaboration efforts as

  • “Transform to Net Zero” with companies as Maersk, Mercedes, Microsoft, Nike, and Starbucks.
  • “Step Up Declaration” with companies as Autodesk, Ericsson, HP, Nokia, and Salesforce.

And it includes initiatives and solutions as

  • The seven key required initiatives and 36 solutions suggested in the Exponential Roadmap.

For more inspiration and insights, you are also welcome to follow our Weekly Newsletter on Sustainability and follow the curated set of Sustainability Podcasts; links are available at

>>Digoshen Sustainability for Boards.

 

Learn more from Digoshen Exploring Leaders

If you are a practicing board member or a business executive with a board role that want to find a safe ground to discuss the board’s guidance of corporate renewal, we welcome you to join our Open Live Sessions:

Open Digoshen International Live Sessions.

And to apply for membership and we will let you know when we are opening for our next master program and membership acceptance.

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