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14 Sustainability trends that will drive business transformation

Published 31 December 2021 in Magazine • 11 min read

Senior executives are facing a clarion call to scale sustainable business models amid unprecedented pandemic disruptions and a looming climate crisis.

While global leaders at the COP26 United Nations Climate Change Conference made major commitments to cut methane emissions, end deforestation and shift away from coal, government declarations are insufficient for a sustainable future. Business transformation is needed to ensure global warming is limited to 1.5°C above pre-industrial levels and securing a just economic transition to a low-carbon economy, where we can live well within our planetary boundaries.

Leading firms are revamping their supply chains, embracing new forms of financing, and reinventing products and services to ensure that they are future-ready and accountable for their Environmental, Social and Governance (ESG) performance. New government and banking regulations as well as investor scrutiny and supply chain transparency are accelerating this transition. IMD experts identified key trends that will drive further sustainable transformations in business strategies, corporate roles, operations, financing, stakeholder engagement and impactmeasurement in 2022 and beyond.

Four global forces that will impact the world of sustainability in 2022

Businesses’ sustainability strategies are being shaped by big global forces that are likely to become even more important in 2022, according to IMD experts.

Global leaders at the COP26 Climate Change Conference in Glasgow made major commitments to cut methane emissions and end deforestation with the aim of limiting global warming to 1.5°C above pre-industrial levels, but here are four other major trends that business leaders need to be aware of.

We are in the middle of one of the greatest transfers of wealth in human history, with the next generation (largely Millennials and digital natives) taking over the reins and moving into powerful positions in business and politics. The new generation comes in with a fresh mindset, new ideas and they feel a great sense of responsibility to become agents of change. They are wired somewhat differently to their predecessors. It is not uncommon that they express a profound interest in matters of ESG, sustainability, philanthropy and impact investing. As innovators and entrepreneurs, they dare to take the necessary steps to deploy their own wealth for a greater purpose. They take a more entrepreneurial approach to doing good with a sustainable impact and “business case” long-term viability at the center.

Peter Vogel, Professor of Family Business and Entrepreneurship 

Malgorzata Kurak, Postdoctoral Research Fellow at the Debiopharm Chair for Family Philanthropy  

Activist investors increasingly are using proxy votes to drive systems change and encourage companies to disclose and improve their commitments to people, profit and planet. In a milestone of what’s come to be called “stakeholder capitalism”, Nia rallied 94.3% of the proxy vote in April 2021 to force IBM to release data on the effectiveness of the company’s diversity, equity and inclusion (DEI) programs. With 467 shareholder resolutions on ESG issues already proposed in 2021 in the US alone, shareholder activism is poised to grow next year and beyond. BlackRock, the world’s largest asset manager, agreed to give its investors the ability to vote on shareholder proposals, which by some estimates would transfer votes to investors representing as much as $1.5 trillion in indexed assets. 

Vanina Farber, Professor of Social Innovation and Entrepreneurship 

When President Xi announced China is cutting its estimated $50 billion investments in overseas coal-fired power plants, the UN General Assembly – and the world – drew a breath. China has been making big strides domestically in the last years by reducing its reliance on fossil fuels to greener (and more secure) energy such as wind, solar and waterpower. China has added five times more wind power capacity in 2020 than the US, making it the largest in the world. But at the same time, China had been financing overseas coal-fired power plants, making global observers skeptical of its intentions. This may have changed with China’s line in the sand on overseas coal production. Cautiously optimistic, the year 2022 will prove critical to understand if China becomes a global carbon game changer.

Mark Greeven, Professor of Innovation and Strategy 

Between 2016 and 2019, the EU experimented with iBorderCtrl, an automated border control system which uses machine learning for lie-detection, and facial recognition to measure the affective state of immigrants – to reveal their personality and emotions through their facial features. State-of-the-art scientific research does not support the notion that we can deduce emotions from facial expressions. Yet here we are, using such applications supported by government institutions, taking automated decisions that affect millions of lives.

AI can truly change the world – but we have a responsibility to ensure that these systems are developed free of bias, truly measure what we want them to measure, and are not discriminating against certain groups for the sake of efficiency. Regulations pushing for explainable and transparent AI are a welcome trend for 2022. Proposed first by the EU, then followed by China, we will see more countries introducing oversight and responsibility expectations for AI use.  We want AI to amplify humanity’s best, not automate its worst.

Oyku IsikProfessor of Digital Strategy and Cybersecurity  

Four business strategies for sustainability in 2022

Businesses are integrating sustainability into their strategies and business models in new ways. IMD experts take a look at a range of approaches used, whether top down or bottom up, and how these might develop in 2022. Firms are increasingly integrating sustainability into their brands as a strategic decision, and the luxury sector is reinventing its business model to engage with the circular economy. Companies are also taking actions to regenerate nature. 

Although luxury brands thought they were doing their sustainability bit thanks to the high quality and high durability of their products, it has become obvious that this was insufficient. Following pioneers such as Stella McCartney, we have seen mainstream brands engaging in carbon efficiency transformations. But these initiatives will leave them short of the reinvention that consumers, policy makers and investors are expecting from them. Reinventing the very business model of luxury is more fundamental. And that means engaging more forcefully in the circular economy at every stage of the value chain.  Luxury brands will jump on the circular economy bandwagon and develop emerging business models for a more purposeful luxury. In 2022, expect more changes and investments.

Stephane J.G. Girod, Professor of Strategy and Organizational Innovation 

Companies are setting ambitious goals to regenerate nature. Unilever aims to be deforestation-free by 2023, leveraging a regenerative agriculture program for its suppliers. IKEA strives to be climate positive by 2030 using reforestation. The trend is accelerating quickly in sectors that heavily depend on natural resources such as agriculture and forestry which are now facing instability and shortages along the supply chain. It is particularly important for these sectors to restore nature’s innate capacity to renew, but also an important next step for corporate sustainability by moving from “being less bad” to impacts that positively effect on ecosystem health. Regenerating nature will require working closely with local communities and natural scientists to understand complex ecosystem functioning. Approaches need to restore nature to a regenerative state while minimizing unintended consequences and improving local communities. Ecosystem health is important for society; it is closely linked to climate change, food security, and issues of income inequality.

Amanda Williams, Research Fellow 

Two great sustainability champions? Neste and Grameen Bank. Why? Both have great sustainability impact. What characterizes them?  Neste has become a global recycling champion, using technologies and a circular business model to create products from biological waste.  Grameen Bank is a social innovation, the creation and scaling of microfinance. The social impact is tremendous, allowing loans to the impoverished without requiring collateral in turn.

Whereas Neste is top-down sustainability, Grameen Bank is bottom-up sustainability. Both are the very best sustainability champions. We will need both types to create a truly sustainable business transformation at scale.

Knut Haanaes, Professor of Sustainability 

Firms have historically relied on a piecemeal approach to integrating sustainability into their brand strategy, opportunistically picking a few causes that align with the brand mission. The result was at best a weak positive association, often a greenwashing exercise picked up by NGOs, and sometimes even a communication disaster. Leading firms are becoming more sophisticated, integrating sustainability in their brands as part of a strategic decision. First, they consider whether sustainability could help them to compete in an adjacent playing field; Mahindra used sustainability in India to go from simply selling tractors to helping farmers succeed and build “a nation of champion farmers”. Reckitt’s Vanish went from being a stain remover to becoming a player in fashion circularity. Second, they assess whether the sustainability benefits should be delivered to customers “upon purchase” or whether they should enlist consumer participation. For example, Finish detergent partnered with dishwashing firms and media companies to encourage consumers to skip the rinsing stage.

Frederic Dalsace, Professor of Marketing and Strategy 

Goutam Challagalla, Professor of Strategy and Marketing 

Three ways sustainability is changing the roles of business leaders at the start of 2022 

The growing importance of sustainability for businesses is changing the way CEOs, senior executives and company boards do their jobs. IMD experts detect some important shifts in the roles of business leaders that are likely to gather pace in 2022. CEOs are becoming more engaged in social and environmental causes, and sustainability is increasingly being made a part of all C-suite roles, but boards may be lagging behind.

 The past 18 months have seen much engagement from CEOs in social and environmental causes, from promoting social equity to steering efforts to curb climate change. Historically, business leaders endeavored to influence markets and regulation to improve the bottom line, but rarely shared their voice on politically sensitive causes that could endanger reputation. So why speak up now? We are witnessing a new generation of corporate leaders with relentless conviction that business must be a force for good, embracing purpose and transcending mere shareholder value creation. Markets also drive this trend with growing expectations of businesses to lead social value creation: research in the US has shown consumers and employees prefer companies whose CEO advocates for social issues to the point of Millennials and Gen Zs becoming activists to drive change.

But tensions exist between pursuing economic goals and tackling complex environmental and social challenges. As this trend gains strength, how will CEOs succeed to reconcile those tensions? 

Victoria Kemanian, Director Business Transformation Initiative 

Corporate leaders are merging sustainability with strategy to gain competitive advantage, embedding sustainability into every aspect of a firm’s operations. This will lead to new business models where every function has a stake in social and environmental impact. C-Suite roles are setting the tone from the top. For example, at Schneider Electric the Chief Sustainability Officer is also the Chief Strategy Officer. At Lafarge-Holcim, the function of Chief Sustainability Officer is elevated to the Executive Committee, also holding the title of Chief Innovation Officer. The Chief Financial Officer reports on ESG and responds to investor pressures. The Chief Operating Officer reduces waste, builds a transparent supply chain and creates circular solutions. The Chief Marketing Officer addresses new types of customer preferences. The Chief Human Resources Officer ensures equity, diversity and inclusion and builds a strong pipeline of new ESG capabilities. This is the key step towards ensuring KPIs and incentives down the line are aligned with ESG ambitions.

Natalia Olynec, Head of Sustainability

Asset owners and investors around the world have declared their appetite for ESG. In contrast, more than a third of board members thought in 2020 that institutional investors were putting too much pressure on environmental or diversity issues. Are boards lagging the ESG trend?

Only half of all directors think their board understands the ESG issues impacting the company. And while integrated reporting may help the transition, the reality is that leveraging ESG towards positive financial performance entails a true transformation of board work. As intangibles have taken a predominance in company value, culture has become a key competitive advantage that the best boards will steward towards their own excellence in ESG.

Didier Cossin, Founder and Director of the IMD Global Board Center 

Three ways sustainability is impacting business operations as we enter 2022 

The integration of sustainability into businesses’ strategies have real implications at the operational level. IMD experts look at three ways in which companies are incorporating sustainability into their operations, in finance, digital technologies and impact measurement. 

Green Bonds will play an important role in 2022 and beyond.  A new body of academic literature and banking practices give us two important insights:

1. The environmental performance of companies issuing green bonds is positive as their environmental rating increases by 7% and their carbon emission is reduced by 13 tons for each $1m of assets;

2. Companies that issued both standard bonds and Green Bonds at the same time (the so-called Twin Bonds) found it easier to market (i.e., more demand) for their Green Bonds rather than standard bonds (at the same yield).

After COP26, companies will need to find financing instruments that back up their sustainable transition promises. Green Bonds seem to be an answer to their financing needs that is both environmentally and financially sound.

Salvatore Cantale, Professor of Finance 

The importance of technology for driving sustainable business transformations is reflected in many recent industry shifts. Consider the move from fossil fuels to renewables in the energy sector, or the on-going electrification of the transportation and mobility industry.

We will witness an even stronger convergence of digital technologies and sustainability in 2022, giving rise to: 

  • New “everything-as-a-service” (XaaS) business models at the core of a more circular and regenerative economy. 
  • Novel smart city solutions for sustainable urbanization. 
  • Enhanced precision agriculture and nutrition alongside automated and improved land, water and pesticide use. 
  • New levels of transparency and traceability in the upstream supply chain. 

The role of digital technologies for supporting the transformation toward sustainability cannot be underestimated. By its very nature, digital technologies are highly suited for scaling processes – and, by implication, for achieving greater and faster sustainable impact.

Julia Binder, Professor of Sustainable Innovation and Business Transformation 

That more and more firms make official GHG emission reduction commitments is great news. Even better is that an increasing number of these firms have their pathways validated by applying to the Science-Based Target initiative (SBTi). The SBTi is a partnership between the Carbon Disclosure Project (CDP), the United Nations Global Compact, the World Resources Institute (WRI) and the World Wide Fund for Nature (WWF). The organization examines the firms’ intent against science-based criteria, provides feedback and eventually validates the project. Started only two and a half years ago, this initiative is becoming a major success. As of November, more than 1,000 firms from 60 countries, representing a total market cap of $23tn, have validated their emission reduction projects, helping them move away from “greenwashing” and towards real action.  

Frederic DalsaceProfessor of Marketing and Strategy 

Authors

Natalia Olynec, Head of Sustainability at IMD

Natalia Olynec

Head of Sustainability at IMD

Natalia Olynec is the Head of Sustainability at IMD, where her work focuses on research, program development, strategy, governance, reporting and advisory. She has worked in sustainability management, consulting and education for more than 15 years.

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