Corporate strategy in the age of sustainability

In the race to conform to the latest sustainability trend, companies are losing sight of the bigger picture.

In the race to conform to the latest sustainability trend, companies are losing sight of the bigger picture. They need to redefine their strategies to cope with the new realities.
There is a lot of talk these days about issues of corporate sustainability and social responsibility (CSSR, for brevity).

In addition to the endless discussion around environment, social and governance (ESG) data, green "strategies", responsible investments and the latest reporting standards, we are experiencing a shameless propagation of buzzwords, mindless imitation tactics and the proliferation of self-proclaimed sustainability gurus who, based on no rigorous research or data, claim to know how to transform organisations.

Losing sight of the bigger picture

It is time we moved away from this confusion about CSSR, returned to the strategic basics, and tried to understand the extent of the challenge CSSR poses for corporations. Many companies have already lost sight of the bigger picture because they face multiple pressures to conform to the latest trend without first reflecting and subsequently developing a cohesive understanding of CSSR issues.

How do we define corporate strategy? The consensus that emerged in the early 80s, and is still being taught to first-year MBA students, is that strategy is about "above average (superior) sustainable performance". In other words, it is about the perpetual ability of the corporation to deliver returns to its shareholders and do so in a way that is superior within its industry.

CSSR, which is emerging as a result of increasing social and environmental pressures such as climate change, social inequality, and extreme poverty, is redefining the foundations of corporate strategy.

Environmental performance can't replace financial performance

Corporate performance is no longer defined and perceived exclusively in terms of profitability, it is also measured by environmental and social performance. Although it is important to note that environmental and social performance does not substitute for financial performance as a corporate objective; it exists in addition.

Companies must become more sophisticated to survive within the environmental and social context they operate. For example, Starbucks established a traditional competitive advantage and has been profitable. Yet, if the tax avoidance issue in the UK is any indication, the company is still struggling to sustain this advantage within its social context.

CSSR and strategy constitute two sides of the same coin. Contemporary strategy is about developing and implementing a business model that generates financial as well as environmental and social value. Unfortunately a distorted understanding of what CSSR actually is often leads companies astray in terms of their strategic decision-making. A case in point is the false language, originating from economics, that labels social and environmental issues as "externalities". There is nothing "external" about these issues for any company, apart from one with a dangerously unrealistic model of what a corporation's strategy is about.

Many companies proudly present their energy efficiency or water efficiency targets, but an exclusive focus on operational efficiency is for strategy what short-termism is for financial markets. Having such targets may tick several boxes and temporarily satisfy the demands of some stakeholders but it begs the question of whether the bombardment of ESG data requests to companies is actually creating major strategic blind-spots by deteriorating strategy into a mindless and fruitless box-ticking exercise.

Embedding sustainability into strategy

Redefining strategy as a mix of environmental and social as well as financial value has massive implications for all stakeholders. To establish a sustainable business model, companies need to engage in and explore a social and environmental domain that is relatively new and unfamiliar. This entails great risks as well as great opportunities and has dramatic implications for human capital recruitment and retention. What is the right set of knowledge and skills that business leaders will have to possess in order to understand these issues and provide solutions? What do we, as business academics, need to teach MBA students to break the rigid mind frames that have traditionally focused on financial issues and metrics alone?

There are important implications in terms of organisational design and structure. How separate should the strategy and sustainability functions be within a corporation? What should the relationship between the CFO and the Chief Sustainability Officer (CSO) be? Current corporate mindsets consider CSSR issues as peripheral or at best, as separate issues, and therefore there is a clear distinction between strategy and CSSR functions. This is an artificial and dangerous segregation. In fact, for a company that truly understands what strategy will look like in the age of sustainability, the CFO and the CSO should be the best of friends, or even, the same person.

Strategy in the age of sustainability will perhaps challenge the way we understand the role of the corporation in society, and may help reinforce or even accelerate the current social and environmental trends and expectations that we, as a society, place on organisations. Yet, to the extent that such pressures are effective in further pushing the same or other organisations towards fundamentally rethinking what their strategy is all about, and in doing so, addressing the world's biggest social and environmental issues, then in the longer term challenging the current mindsets will almost certainly be beneficial.

Ioannou will be hosting a panel discussion at London Business School's flagship event the Global Leadership Summit on 20 May 2013.

This blog was first published in the Guardian 29 April 2013

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