How are investor and customer demands shaping sustainability?


Blog by Purvish Shah
Published on October 11, 2022

Only in the span of last one year, the regulatory landscape around sustainability has grown by a large extent. In the U.S, Securities and Exchange Commission (SEC) released reporting requirements for large, publicly listed companies in the U.S. The European Financial Reporting Advisory Group (EFRAG) announced even broader disclosure requirements that will apply to roughly 50,000 companies with operations in the EU. India’s SEBI has released mandatory disclosures for Top 1000 listed companies under BRSR and similarly Singapore’s MAS has mandated disclosures of GHG emissions.

Companies that do business in the EU or the U.S. must have the ability to track and report how their operations impact the environment, as well as how climate-related risks can potentially affect their operations. They need solutions and tools for sustainability reporting, and they need them now, as some companies will need to demonstrate compliance in FY 2023. And no industry is exempt. For countries such as US, India, Japan, Germany which are export driven, there will be a large push from cross-border customers to provide accurate information about sustainability.

What exactly do we mean by Sustainability?

In its broadest sense, the term covers three areas: environmental, social, and governance—or ESG for short. Specifically, ESG encompasses the degree of responsibility that companies assume—irrespective of what they are legally required to do—for sustainable development in the three areas mentioned. For many, sustainability is primarily about our use of natural resources and the climate impact of our actions. This is also highly relevant for consumer-goods manufacturers. As a rule, it is not enough to look only at one’s own value creation. After all, a typical consumer-goods company’s supply chain generates far greater environmental costs than in-house operations: for instance, it is responsible for more than 80 percent of greenhouse-gas emissions and more than 90 percent of the impact on air, land, water, biodiversity, and geological resources.

How are consumers driving the change?

The consumer-goods industry is facing a huge environmental challenge: if it intends to meet the current EU climate targets, it will have to more than halve its greenhouse-gas emissions by 2030. Given that prosperity and consumption will continue to grow in the coming years, a fundamental change in thinking is required; new business models—especially those relating to the circular economy—will have to gain an increasingly firm footing. Consumers today no longer see sustainable products as simply an alternative. They are partly basing their purchasing decisions on the sustainability of products and companies. Granted, what some refer to as an “attitude–behavior gap” remains. In other words, consumers don’t always make purchasing decisions that are consistent with their sustainability preferences as expressed in surveys. That said, two-thirds of consumers now say they are changing their consumption habits in favor of a lower environmental impact1 —and are staying true to their word: brands, such as oat-drink maker Oatly, that promote the ecological benefits of their products are recording above-average growth rates.

How investors are creating a pressure on the companies?

Increasing demands for sustainability stem partly from investors’ risk management and partly from the increasing incidence of loans linked to sustainability criteria. Furthermore, sustainability-oriented funds are more resilient, as studies show: on average, 77 percent of ESG funds established ten years ago continue to exist today. Compare that to only 46 percent of traditional funds that have survived over the same period.

Bracing for 'Greener' Competition

“Green” start-ups are increasingly gaining market share in consumer-goods segments—be it in the footwear market, where the Californian–New Zealand start-up Allbirds has made a successful entry, or in the food segment, where products made from plant proteins (among others) are increasingly gaining popularity. According to the Green Startup Monitor 2021, three-quarters of all newly founded companies in Germany view their environmental and social impact as relevant to their strategy. In the consumer-goods sector, for example, 57 percent of all newly founded companies are now green start-ups. Take, for instance, the marketplace Cirplus, which has set itself the goal of simplifying the currently complex and confusing global trade in recyclates and plastic waste. In view of the growing pressure from all sides, for established consumer-goods companies, it is no longer a question of whether or not they need to operate sustainably—and most are also clear about what they need to do; however, there is still great uncertainty when it comes to how. What is needed is a sustainability strategy and, above all, a road map to implement the strategy in the context of a transformation.

How can companies achieve sustainability goals for business outcomes?

Effectively implementing the envisaged sustainability goals is an all-encompassing organizational challenge and often means change for both the product portfolio and the organization, including its culture. Given the scope involved, it is not enough to launch individual initiatives sporadically and hope for success. Instead, sustainability must be seen for what it is: a transformation of company operations spanning the entire supply chain. Four elements are crucial here:

1. Set the right target level

The first step begins with a realistic outside-in assessment: What are regulatory expectations? Where are competitors raising the bar? What are the expectations of customers and other stakeholders, including investors? It is usually strategically advisable to take the lead in a small number of relevant dimensions and determine what the future minimum requirements will be in all other dimensions. The level of the targets and the speed of their achievement should be based on realistic assumptions and plans. Knowledge of the levers and the technical possibilities to arrive at a realistic ambition is of particular importance.

2. Plan the transformation and set the framework

Once the target level has been set, senior management should make the transformation a visible priority for everyone and plan it in detail. To this end, measures need to be developed and incorporated into an overall road map. Governance is also crucial for successful implementation at this point; thus, instituting a sustainability officer at the senior-management level is an important framework condition. This does not necessarily have to be the chief sustainability officer, as long as the organization ensures that the central team works effectively with the operational units and can not only create initiatives but also enforce them.

3. Secure and track implementation

For the implementation process, it is worth setting up a transformation office that regularly measures the degree of target achievement. This enables the prompt adoption or reprioritization of countermeasures. It is also imperative that adequate resources be made available. To change ways of thinking and behavior within the company, it also makes sense to recruit employees as change agents. In this context, the communication and anchoring of sustainability goals in the organization—for example, through incentive systems—should also be addressed.

4. Create transparency

Last, investments should be made in data and transparency because retailers, consumers, regulators, and investors are increasingly demanding it. In particular, traceability across supply chains poses a challenge. This makes it all the more important for companies to deal with the sustainability data of their own products right from the start and to develop the corresponding analytical skills.

Nurture Collaboration

No function is left untouched when changes of this magnitude are needed: everyone is involved and responsible for bringing sustainability to life in their area—from purchasing to production and logistics to marketing and sales (Exhibit 3). For successful implementation, the key actors in the individual divisions need to develop both function-specific and overarching measures.
We at Carboledger constanlty strive to bring in multiple internal and external stakeholders on same platform to enhance sustainability efforts of the organisations by creating seamless data integrations. Interested to know more? Reach out to us for a demo today and learn how Fortune 500 companies leverage our solutions.

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