The Importance of Sustainable Strategies Today
HBS professors discuss the latest trends
In this article, Harvard Business School Professors Robert G. Eccles and George Serafeim, cochairs of Innovating for Sustainability, discuss the latest trends in sustainability, the importance of innovation, and how the program prepares corporate leaders to position today’s firms for future success.
What is sustainability, and why is a sustainability strategy important?
Eccles: Let’s start by distinguishing between a sustainability strategy and a sustainable strategy. A sustainability strategy connotes something that is ancillary and peripheral to the firm. It has to do with environmental, social, and governance issues. When George and I talk about a sustainable strategy, we’re talking about a strategy that enables the corporation to create value for shareholders over the long term.
Serafeim: A sustainable strategy requires an engaged, well-equipped workforce that can deliver great services and products, as well as the financing to invest in the future and deliver long-range value. Related to this, over the past few years all types of stakeholders—employees, customers, and investors—have begun expecting corporations to play a broader role in society.
Eccles: The point that George is making about changing expectations is an important one. It has long been clear that companies have to pay attention to stakeholders such as customers and employees, and today the ability to operate is even more dependent on these relationships. Those companies that truly have a sustainable strategy, as opposed to a sustainability strategy, have a very deep engagement with all of their stakeholders—including shareholders—so that they’re creating value over both the short and long term.
What are some of the challenges to creating a sustainable strategy?
Serafeim: One of the biggest challenges is the lack of clear price signals in the market. There are external factors that have no prices, so trying to understand them and trade them is difficult. For example, in many jurisdictions there is no price on carbon, and bribery and corruption are often left unchecked. As a result, corporations can find it very difficult to do business. Another challenge is that we don’t have clear measurement standards for reporting and measuring those effects. A third challenge is the emphasis on the short term in our markets—which, in many ways, is an impediment to future thinking and investing.
Eccles: These are very fundamental points. Without price signals—and without clear measurement standards for financial information and environmental, social, and governance issues—you really can’t build business models. We talk about business models that show the relationships between financial and nonfinancial performance. So, how does good performance around managing energy contribute to financial performance? That turns out to be an easy question to answer, because there is a price on energy.
Serafeim: A sustainable strategy is very much about generating revenues and reducing risk. And the lack of some essential elements—standards, price signals, a committed workforce, more engaged and loyal customers—causes companies to struggle. For the most part, companies have picked the low-hanging fruit. They’ve gone with those things where there are price signals.
Eccles: This usually has to do with cost savings around energy, water, and natural resources. The frontier is extending into the social domain—the community, employees, customers, and supply chain. When you start talking about the supply chain, you start getting into risk, and that takes you into reputational risk.
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