The lessons for corporate sustainability champions are:

1. While it may not seem that investors care about sustainability, their interest is steadily growing and will become very visible in a few years.
2. The cost savings for companies from sustainability and rising expectations of limited partners are driving the interest in these investments.
3. This trend will accelerate when the metrics for monitoring investments improve, which seems to be taking place now.  Nearly half of all shareholder resolutions typically have to do with sustainability.

Sustainable and responsible investing (SRI) accounted for one out of every nine dollars under professional management in the US, according to a recent, comprehensive study.

In 2012, $3.74 trillion in US-domiciled assets were engaged in sustainable and responsible investing practices.  $3.31 trillion of the investment managed by institutional investors, money managers, and community investment institutions had ESG criteria applied to them.  This was a healthy 30% growth over 2010.

On the investment front, 60% of private equity investors say that corporate cost savings from sustainability and rising expectations of limited partners are the biggest reasons for their increased focus on ESG issues.

A key challenge is the lack of well-defined, consistent metrics for monitoring and measuring ESG issues.  Another study shows that while US-based investors mainly focus on eco-efficiency initiatives, EU-based investors consider a wider range of ESG issues in making investment decisions.

Measuring the indirect value of ESG efforts, e.g., on customer loyalty and brand value, is one of the biggest challenges in driving sustainable investments.

ESG-related shareholder resolutions comprised $1.5 trillion in assets. In 2012, there were 110 resolutions related to sustainability, of which 44% resulted in corporate commitments.  ESG-related resolutions comprised 45% of all shareholder resolutions, which testifies to its importance for activist shareholders.

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The lessons for corporate sustainability champions are:

• Risk management for climate change and other environmental threats must become part of enterprise risk management.  If it isn’t, then you’re really in the minority.
  You need to make it a priority within your company.
• Focus on business resilience, not just to extreme weather events that disrupt supply chains and operations, but also to the threat of resource constraints.
• These risks vary considerably by industry. Find out what the risks are for your industry and company in particular. The field is moving fast in this area and risks are becoming more specific byindustry.

Corporate planners saw the writing on the wall this year. 83% of the S&P 500 is incorporating climate change into its business processes for managing enterprise-level risk. This concern with business resilience to climate change increased considerably in 2012, when 81% of companies identified physical risks from climate change, compared to 71% in 2011. That number is expected to go up in 2013.

After all, extreme weather events had accounted for 90% of all natural disasters last year, while total losses from natural disasters were estimated at $380 billion globally. Only a third of these losses were insured. 2012 is likely to break this record, with just one disaster, Hurricane Sandy, already clocking in at $50 billion in the US alone.

This growing evidence has resulted in more sophisticated analysis of business risks by industry sector. One of the best publicly available analysis summarizes the short and long-term physical and economic impacts of climate change on business sectors such as agriculture, food and beverage, apparel, electric power, mining, insurance, oil and gas, and tourism.

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2012 was the year in which natural capital (also called biodiversity and ecosystems services) began to get on business’ radar. This is a theme that has real staying power.  

Advice for the Corporate Sustainability Champion:

•  Stay up-to-date with this important, rapidly developing area of sustainability. It appeals to business executives because it is easier to grasp conceptually.
• Show why natural capital matters to your company. The way to do so is through a pilot evaluation of its materiality to business.
• Join the coalitions that are beginning to form in this area, such as the TEEB for Business Coalition and the EP&L Consortium.

Business began to recognize the vast scale of its impacts and dependencies on nature. Nature provides $72 trillion worth of free services to the global economy every year. Yet, we’ve now significantly degraded 60% of the earth’s ecosystems and lose about $6.6 trillion in natural assets every year due to water contamination, soil erosion, drought, deforestation, overfishing, and other impacts. This could jump to $28 trillion a year by 2050.

Well-publicized corporate actions included PUMA’s Environment P&L Coalition  (which focuses heavily on natural capital), Dow’s partnership with The Nature Conservancy to launch pilots on evaluating natural capital, Unilever’s supply chain initiatives around protecting biodiversity, and hundreds of other companies that initiated ecosystems services-related projects. The year also saw the establishment of the TEEB for Business Coalition to drive corporate action on natural capital.

Many organizations drove the natural capital agenda globally. WBCSD’s report on accelerating public policy initiatives around ecosystems services got attention. WRI came out with some good reports on integrating ecosystems services into business operations. BSR produced a report describing how corporate expectations around ecosystems services are evolving.

The Corporate Eco Forum (CEF) produced perhaps the best strategic report on how companies are deploying natural capital for reducing risks, cutting costs, enhancing the brand, and driving growth.

As corporate experience in this area expands, what is needed is a framework for corporate change that accelerates the adoption of natural capital in companies (Disclosure: I am leading a project in this area for TEEB for Business Coalition).

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Sustainable energy strategies need to recognize three key themes: the resurgence of natural gas in the mix of fossil-fuel energies, the mixed picture with regard to clean energy technologies, and the slowing down of energy efficiency gains.

Advice for the Corporate Sustainability Champion:

1. Keep a close eye on the rapidly changing fossil-fuel energy mix. The glut in natural gas availability is a mixed blessing since it could lead to complacency.

2. For the long-term, renewable energy sources are still the surer bet in terms of predictability and price, despite their slowing growth in the last year

3. Once the low-lying fruit have been picked on energy efficiency, further gains will require more careful planning and focused commitment.  Persistence is key.

Natural gas production was the story in 2012, at least in the US.  As a result, the EIA’s 2012 projections are that despite continued growth in demand for energy over the next 25 years, US reliance on imported oil will reduce as domestic production of natural gas and domestic crude oil (from tight oil and shale resources) exceeds consumption. Coal-fired plants are being retired at an increasing rate. 2012 put this retirement at 31 GW from a total US coal-fired fleet of 300 GW.  Natural gas and renewables will each grow by 5% (from 24% and 10% respectively) in the energy-mix and bring down coal’s share of power generation from 48% in 2008 to 38% in 2035.  As a result, energy-related carbon emissions will grow slowly but remain under 2005 peak levels (2% between now and 2035 levels of 5.8 billion tonnes). The big challenge is that emissions need to reduce for global warming to be contained at 2°C.

The global outlook for clean energy was both good and bad news in 2012.  The good news is that mature clean energy sources such as hydro, biomass, solar PV, and onshore wind made good progress, with countries such as China and India and many corporations making significant investments. The bad news is that the less mature clean energy sources, such as carbon sequestration and capture (CCS), offshore wind, and concentrated solar power, are not growing enough to contain global warming to 2°C.  The lack of progress on CCS is a real problem.

The other big problem is that the demand for fossil fuels is continuing to grow, locking in a high-carbon infrastructure that’s closing the window for containing warming to 2°C.  On the whole, despite some good news, progress in clean energy in 2012 was far too slow and much too alarming.

Despite corporate attention to energy efficiency, the worldwide lack of progress on it has been equally alarming. Energy efficiency needs to help reduce energy intensity, i.e., energy input per unit of GDP, by two-thirds in 2050 for 2°C containment.  This means that the 1.2% improvements we have seen annually in efficiency need to double to 2.4% by 2050.  This is not happening because of a lack of incentives and other barriers. But energy efficiency continues to be a real opportunity, despite the lack of progress.  In the US alone, potential savings of $1.2 trillion by 2020 are projected with millions of new jobs opening up in this sector, if energy efficiency is tackled aggressively through national policies.

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As you go about developing or revising your sustainable business strategies, it is worth reviewing last year’s key developments in important areas of business strategy.

They will only grow in importance this year.

Rather than focus on particular stories ably summarized elsewhere, here are key strategic themes and the underlying research that you can use as practical guidance.

Core capabilities

Markets

Governance

Stakeholder management

Resource management

And that was the year for sustainable business strategies.

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Feeding the future world when water is constrained will be a daunting challenge . Food production will need to increase by 70% by 2050 in order to feed the projected global population of 9 billion.  Extreme weather will exacerbate the production of food and increase food prices disproportionately affecting developing countries where 70% of the household budget goes to food (the US figure is 13%).  Rising food prices have pushed 44 million people into poverty globally just in the past two years.  One tragedy is that smallholder farmers comprise 50% of the undernourished, even as they grow food themselves. Unfortunately, the prices of staple foods could double by 2030.

The food value chain is highly wasteful: 30%-50%, or 1.3 billion tonnes, is wasted from reaping to consumption worldwide.  While 1 billion are malnourished, 2 billion overeat worldwide (the US alone spends $150 billion each year on obesity-related medical costs).  In the US alone, $165 billion, roughly 40% of the food currently gets wasted . That’s roughly 20 lbs./person/month.  There is associated waste in water, energy and land, since 80% of freshwater, 10% of energy, and 50% of land goes to food in the US.

By 2030, the worldwide demand for water is expected to exceed supply by 40%.  45% of the expected worldwide GDP  of $63 trillion in 2050 will be at risk because of business-as-usual practices for water management.  Since water impacts are local, sustainable business strategies need to emphasize local solutions and working with stakeholders at the watershed level, even while creating global policies.

Corporate disclosure of water risks are growing rapidly.  For example, 27% of US companies now report exposure to water risks in their supply chains, compared to 10% in 2009.  But, corporate disclosure of water footprint is still relatively rare.  Boardroom attention to water is missing in many cases, even as risks are increasing.

As water becomes more constrained, the value of water to US industries is seeing a major shift.  Industries most dependent on water are oil and gas, chemicals, mining, electric power generation, food and beverages, and semiconductor manufacturing.  Sustainable water strategies are focusing on community partnerships and zero liquid release policies are getting more popular.

The lessons to corporate sustainability champions are clear:

1. Pay close attention to the escalating worldwide and regional problems with food and water and identify your company’s exposure to them.
2. Begin to build corporate momentum around a business strategy for dealing with these risks and identifying your corporate footprint.
3. Food and water are issues every individual can relate to – find ways to build support for dealing with them.

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The clear message of 2012 is that sustainability mega forces are accelerating in strength, which makes it a corporate strategy challenge and opportunity. One of the best reports on these megatrends describes a world in 2030 that is radically different from today: greater individual empowerment, shift in power to a multipolar world, much greater urbanization and migrations, and a demand-supply gap for food, water and energy that creates a dangerous nexus.

2012 also saw some excellent analysis of how industries are being exposed to these forces differentially. The year saw the popularization of the “zero-impact growth” concept and its application to companies, with Unilever, PUMA, Nestle, Nike, Natura and Ricoh leading the pack.

The top five factors that drove corporate sustainability initiatives in 2012 were energy cost cutting, changes in customer demand, brand risks, higher shareholder expectations, and competitive threats. Another interesting fact: 40% of shareholder resolutions that became proxy ballots were sustainability-related.

Since organization structures follow strategies considerably, the sustainability function increasingly depends on business unit strategies and sponsorship. In many F1000 firms, there is hesitation to even create a corporate sustainability function. Timberland’s experience is part of a broader wave of sustainability becoming more decentralized in its organization.

The lessons for corporate sustainability champions are:

1. Increase awareness in your company of the sustainability megatrends driving business and your industry in particular.

2. Pay close attention to the types of sustainability initiatives that are gaining traction. They are moving beyond cost reductions to markets and risks.

3. The way the sustainability function is organized is itself undergoing tremendous changes. For many companies, it is going the way of quality by becoming more a business unit responsibility.

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2013 will be the year in which the business risks of climate change impacts get understood much more clearly. This is a CEO-level issue because it affects corporate strategy and performance.

As a result, I expect widespread incorporation of risk management strategies for climate change into enterprise-level strategic planning, at least among the Global 500 corporations.

First, there is a much higher corporate acceptance today that climate change is causing increasingly frequent and extreme natural disruptions. Every year breaks the record in terms of the economic impacts of such disasters.

In 2011, extreme weather events accounted for 90% of all natural disasters. The total losses from natural disasters were estimated at $380 billion globally, of which only 33% was insured. 2012 is likely to break this record, with just one disaster, Hurricane Sandy, already clocking in at $50 billion in the US alone.

The link between climate change and natural disasters such as more intense and frequent storms, floods and droughts is now getting a lot clearer. The next step is a lot easier as you follow the economic dots to the trail of disruptions throughout the business value chain.

With this accumulating evidence, 2013 will also see a lot more sophisticated analysis of business risks by industry sector. One of the best publicly available analysis currently summarizes the short and long-term physical and economic implications of climate change on business sectors such as agriculture, food and beverage, apparel, electric power, mining, insurance, oil and gas, and tourism.

As economic impacts get better understood, risk mitigation and management becomes imperative. The thrust of these efforts is to increase the resilience of the business, a topic that calls for another blog.

Corporate SoS is our series about Succeeding on Sustainability in the corporate context.

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The goal of integrated reporting is a more accurate and complete picture of the company’s performance, governance and strategy, and its future prospects.

To achieve this goal, integrated reporting tries to pull together financial information about the commercial, social and environmental context of the company in the same report.

The big problem with current reporting is that this information tends to be scattered across financial disclosures and corporate sustainability reports. Even if found together, the social and environmental aspects are not monetized.

2012 was the year in which three key related developments began to come together.

First, the environmental impacts of business began to get quantified financially through outstanding work by the TEEB for Business Coalition, PUMA’s pioneering Environment P&L Coalition, Dow’s natural capital evaluation pilots, and other initiatives. Social impacts, while more difficult, are not be far behind.

Second, a framework for integrated reporting began to be put together through the outstanding efforts of the International Integrated Reporting Council (IIRC). This was a follow-up to a terrific and highly readable position paper on integrated reporting published the previous year.

Third, the effort to create accounting standards for sustainability reporting got started through the Sustainability Accounting Standards Board (SASB). These voluntary standards will provide the broader context in which reporting and other activities can take place.

On the whole, while these trends are very new, they will come together quickly as the pressure on companies to treat sustainability as a financial issue begins to increase.

Here’s what you can do as a corporate sustainability champion in your company:
1. Stay up-to-date on these changes through the TEEB for Business, IIRC and SASB.
2. Even better, join these organizations and help shape their work.
3. Keep your CFO in the loop, so that they are ahead of these developments.
4. Explore the business case for these initiatives, at least through an evaluation.

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Key Sea Change Takeaway: Sustainable companies perform better than other companies over the long-term. This is true whether you measure stock market or traditional P&L performance.

Clearly, the business case for a particular sustainability project depends very much on the project and the company. In particular, it’s easier to quantify the business value for many efficiency or waste reduction projects.

Yet other projects, with a lot of intangibles, are much harder to quantify:
• How do you quantify the benefits from reduced employee turnover or greater employee engagement due to a sustainable business?
• How do you capture the value of increased market reputation from being a sustainable business?

Eventually, all these intangibles work their way into market value, which is one of the most important corporate performance measures. At this highest level, the case for corporate sustainability is beginning to come together rapidly.

Take carbon disclosure for example. Many CEOs fear that corporate reputation will take a hit if they disclosed carbon emissions. But there was clear evidence this year that making voluntary disclosures actually increased shareholder returns!

Some of the best work this year was by Prof. Bob Eccles and his colleagues at the Harvard Business School (HBS). They studied a matched sample of 180 companies with high and low levels of sustainability maturity and concluded that sustainable companies outperform others over the long-term in market value and accounting performance.

Sustainability champion action items:
• Argue for more disclosure, because the changes it triggers signal good management practices to the market.
• Focus attention on market value, where reputation and other intangibles from sustainability cascade up. Use the HBS research as evidence.

The next time someone sounds skeptical on the business value of sustainability, you have some empirical evidence to help you. Of course, you will still need to build the specific business case project-by-project, but the general evidence is strong.

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