Sustainability & Business

MBAEDGETM

Sustainability & Business: What Every MBA Needs to Know

Executive Summary

Resource depletion, income inequality, climate change, waste, biodiversity loss, racial injustice, gender inequity, corruption, and human rights are just a few of the sustainability issues societies are wrestling with right now. In today’s economy, business is expected not to sit on the sidelines, but to take a lead role in creating more responsible and just institutions, and contributing to a more sustainable world.

It’s also in their interest to do so. Companies have found that managing social and environmental issues reduces risks and creates opportunities for value creation and competitive advantage. Reducing corporate energy use, water use, and waste can generate operational cost savings. Developing sustainable products and services creates new market opportunities. Business leadership on sustainability “We are committed to and can enhance brand value and reputational value with invested in sustainability employees, customers, and investors. because it’s a win all

Once an option for business, corporate sustainability is now a around—it’s good for the mandate for today’s companies. Some organizations are even planet, for business, for our tying managerial pay to sustainability outcomes (see, for example, Deutsche Banki). MBAs today need to understand the customers, and for our drivers and opportunities for sustainability and be prepared to communities.” think about sustainability implications for their business department, no matter where they sit in the company. Finance - Amazon, 2021

managers can expect to be asked questions by investors about https://www.aboutamazon.com/planet environmental, social, and governance (ESG) risks. Marketing and brand management professionals need to think about sustainability-minded consumers and the implications of circular economy trends. Operations and procurement professionals are required to evaluate and improve supply chain sustainability. And, of course, there are also dedicated roles for MBAs to work in corporate sustainability departments.

The Issue

Corporate sustainability is “a comprehensive approach to management of organizations which is focused on creating and maximizing long-term economic, social, and environmental value” (Deloitteii). It is predicated on the foundation that managing social and environmental impacts is inextricably linked to financial performance and firm valuation in today’s business context. Many firms also use the terms “corporate social responsibility (CSR),” “corporate citizenship,” or the phrase “environmental, social, and governance (ESG)” to encompass sustainability efforts (with some nuances between terms).

The focus of corporate sustainability efforts can vary by industry, company, and social/political context, but the scope often includes management of: water, energy, and raw material consumption; waste and emissions; climate change impacts; labor and human rights; workforce diversity and inclusion; community and social impacts; anti-corruption practices; and corporate governance. Focusing on which issues are most material to the firm’s business and most important to the firm’s stakeholders can help managers strategically identify, prioritize, and develop a sustainability strategy.

Lead Authors: Jacob Gwilliam, MBA’21, EDGE Fellow, and Katie Kross, MBA, Managing Director, Center for Energy, Development, and the Global Environment (EDGE), Duke University.

Business drivers

Sustainability as a business issue entered mainstream business in the 2000s, with companies like Walmart announcing high- profile sustainability initiatives and publishing their first sustainability reports. Today, consumers, employees, and investors expect companies to be addressing environmental and social sustainability issues as a matter of corporate practice. Of the 100 largest companies in the U.S., 98% publish a sustainability report.iii Most companies have a dedicated corporate sustainability department, and consulting firms like McKinsey & Co. offer sustainability Source: “From Sustainability to Business Value: Finance as a Catalyst,” ING, 2018. strategy consulting. https://www.ingwb.com/media/2266556/ing-sustainability-study-2018.pdf

Underlying the increased attention on sustainability, of course, are the urgent and increasingly visible environmental and social challenges that threaten global communities—many of which are directly attributable to corporations. These include:

. Water. Two-thirds of all freshwater consumption originates in corporate supply chains, which contributes to water shortages.iv . Climate. The top 20 fossil-fuel companies originate 35% of all emissions through their operations and the consumption of their products.v . Resource scarcity. Global resource consumption now exceeds the earth’s biological capacity to renew itself by 56 percent.vi . Waste. The world’s economy generates over 240 million tons of plastic waste per yearvii—8.3 billion metric tons since its invention, 91% of which isn’t recycled.viii Worldwide, food worth $400 billion annually is wasted post-harvest during transport, storage, and consumption.ix . Labor & human rights. Globally, 16 million people are working in forced labor (modern slavery) in the private economy.x Millions of others are working in substandard conditions that violate basic labor rights principles. . Social inequity. Realized CEO pay ratios, which averaged 320 times that of a typical worker in 2019, have increased fifteen-fold in the past 55 years, contributing to global income inequality.xi

Sustainability challenges often involve complex interlinkages between environmental impacts, social justice, and inequality. For example, a Stanford University study asserted that the gap in economic output between the world’s richest and poorest countries is 25% larger today than it would have been without climate change.xii Likewise, social ills can thwart environmental progress. The UN and the IMF have both shown that corruption—a key social sustainability metric in which business plays a leading role—robs developing nations of $1 trillion or more annually.xiii

Corporate action

When addressing sustainability issues, companies focus on both their own footprint (e.g. the social and environmental impacts of the firm’s operations and supply chain) and their contribution to solving societal sustainability challenges. In 2020, Microsoft announced that it will become “carbon negative” by 2030, and will also establish a $1 billion fund to invest in climate technologies to help address the larger climate crisis. Bank of America announced a $1 billion commitment in 2020 to help communities address economic and racial inequality, in addition to setting its own corporate sustainability goals. In today’s political environment, companies’ sustainability strategies also include taking a public stand on social issues—from voter registration lawsxiv, LGBTQ rightsxv, and racial injustice protestsxvi, to hate speech on social media.xvii For many consumers and employees, it is no longer acceptable for companies to avoid taking direct action on social justice issues.

Establishing clear and meaningful sustainability priorities for a company can be facilitated by processes like materiality assessment. Reporting guidance is provided by frameworks such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Task-Force on Climate-Related Financial Disclosures (TCFD) (among others). The global community has codified the most urgent societal sustainability priorities in the United Nations Sustainable Development Goals (SDGs), which were established in 2015 as part of the UN’s 2030 Agenda. Many companies have integrated at least some of these 17 SDGs into their corporate sustainability programs. While efforts like these can create common platforms for sustainability action, businesses vary widely in their commitment to transparency and their ambition for setting meaningful goals.

Business Risks GreenBiz: Top Sustainable Business Trends of 2021 In addition to their daunting societal impacts, failure to sustain people and the planet also has profound 1. Ocean-based sequestration heats up implications for business. Just one issue—climate 2. The ‘S’ in ESG gains currency change—is expected to create additional future 3. Community investments pay dividends costs of $1 trillion, including $250 billion in write-offs, 4. Aquaculture becomes a net-positive for the world’s leading companies.xviii These 5. Industrial decarbonization picks up steam estimates represent a real threat to corporate value 6. Nature takes root on the balance sheet stemming from supply chain disruptions, climate 7. Sustainable mobility drives the newest perk migration, and regulation-induced obsolescence. 8. Aviation plots a sustainable course 9. The circular economy shows its human side One of the most important imperatives facing 10. Corporate advocacy gets louder managers today is how to prioritize, plan for, and © 2021 GreenBiz Group, State of Green Business, 2021. mitigate potential sustainability risks. https://www.greenbiz.com/report/2021-state-green-business-report

Operational risk Supply chains are exposed to physical climate risks, including sea level rise and extreme weather events. In one example, heavy rains and flooding in the spring of 2019 prevented U.S. farmers from planting almost 20 million acres of crops. This included more than 12% ($8.2 billion) of the nation’s potential corn production, a loss that doubled the previous record set eight years earlier.xix Geopolitical issues also have supply chain implications. Ongoing concerns over human rights violations in China have led to strict penalties for companies who purchase goods from certain regions. The complexity of modern supply chains amplifies the chance that even companies without direct overseas operations may face costly disruptions and penalties for failing to closely examine and address business practices along the entire value chain.

Market risk Access to key customers may depend on meeting sustainability standards—which may be different for each supplier, channel, or jurisdiction. In 2012, Walmart and The Sustainability Consortium created THESIS, an index used to measure and benchmark the sustainability of merchandise sold at Walmart. Access to Walmart’s 20 million weekly customers suddenly became contingent on working toward sustainability,xx creating what became an economic imperative for many of Walmart’s 2,800 suppliers to begin improving their practices.

Strategic risk Companies face an increasing threat to their strategic advantage in the marketplace as sustainability issues gain greater urgency and attention. A 2018 study by Allianz analyzed the degree to which the economic viability of various industries is at risk due to depletion of natural resources. Sectors for which this natural capital risk was in the danger zone included oil and gas; mining; food and beverage; and transportation.xxi

Access to capital In 2019, a record 700 investors and asset managers became members of the Principles for Responsible Investment (PRI), a network for responsible investment that collectively controls investments worth nearly $103 trillion.xxii According to BlackRock, investment in sustainable assets nearly doubled in 2020. These are just two signs of what BlackRock calls a “fundamental reallocation of capital” toward sustainable investment that will make accessing capital markets increasingly dependent on a firm’s commitment to responsible ESG practices.xxiii Firms that do not proactively address their sustainability impacts may find themselves shut out of opportunities in the growing ESG investment space.

Regulatory risk Multinational businesses need to watch bellwether regulations emerging in global markets. In 2020, the French government passed a groundbreaking law that will prevent companies from destroying unsold or returned items, and mandates all plastic to be recyclable by 2025.xxiv The UK government is also planning new proposals which will extend producer responsibility for textile wastexxv, while the European Commission will require sustainability disclosure from 49,000 companies in Europexxvi and South Korea’s Financial Service Commission will require ESG disclosure beginning in 2025.xxvii Companies that are unprepared for emerging sustainability regulations may find themselves at a competitive disadvantage.

Reputational risk Again and again, consumers have demonstrated their willingness to turn from companies that fail to act responsibly. Brands such as Nike, Nestlé, and Fruit of the Loom famously suffered boycotts in response to environmental or labor exploitation. A survey showed that roughly one-third of U.S. working adults boycotted a company or product in 2018.xxviii

Pressure on companies is coming not only from consumers, but importantly, from employees and investors as well. In 2019, 7,700 Amazon employees formed a group called Amazon Employees for Climate Justice and spoke at the company’s shareholder meeting to call for stronger climate action. Yale conducted a survey of MBA students in 2015 in which almost half of business school graduates said they would accept a lower salary from an employer that they saw as being more committed to sustainability.xxix

Business Opportunities

Paul Hawken, author of The Ecology of Commerce, wrote that “sustainability is one of the most certain paths to innovation for companies seeking a competitive edge.”xxx Significant growth opportunities exist for businesses that are willing to improve their social and environmental impact, as well as organizations that are positioned to capitalize on sustainability-related market opportunities.

There are many (and constantly evolving) market opportunities in addressing sustainability—from low-carbon transportation options to eco-tourism, sustainable real estate, infrastructure, and consumer goods. Below, we highlight a few of the trends; see additional ideas in graphic at left.

Source: Better Business, Better World, Business and Sustainable Development Commission, 2017. https://d306pr3pise04h.cloudfront.net/docs/news_events%2F9.3%2Fbetter-business-better-world.pdf

Corporate sustainability The Best Corporate Citizens of Corporations that choose to operate sustainably are often rewarded for 2020 doing so. Consumer-facing companies with highly visible commitments Ranked by 3BL Media and Institutional include Apple (which shifted 100% percent of its power consumption to Shareholder Services (ISS) renewable energy in 2018) and Microsoft (which plans to be “carbon negative” by 2030). Efforts like these can earn firms recognition in 1 Owens Corning rankings such as Wall Street Journal’s World’s Most Sustainably 2 Citi 3 General Mills Managed Companies and Corporate Knight’s Global 100 Most 4 Cisco Sustainable Corporations—as well as sustainable investment indices, like 5 HP the Dow Jones Sustainability Indices. 6 Intel 7 Ecolab Mission-driven companies & B corporations 8 General Motors Some companies have made sustainability an explicit part of their 9 Hess purpose. Companies like Warby Parker and Bombas have earned 10 Accenture consumer loyalty with their “buy a pair, give a pair” social impact models. 11 Merck Tony’s Chocolonely describes itself as “an international impact company 12 CVS Health 13 Newmont that makes chocolate,” while Patagonia’s mission states, “we are in 14 Microsoft business to save our home planet.” Such commitments can be codified 15 Nielsen by companies becoming certified “B Corporations”—or “for-benefit 16 Xylem companies”—which allows them to make their social impact objectives 17 Caesars Entertainment an explicit part of their operating mission. 18 Johnson Controls 19 Nike Sustainable consumer products 20 Xerox Nielsen reported that U.S. consumers spent nearly $130 billion on sustainable consumer packaged goods in 2018. This segment is growing Source: https://100best.3blmedia.com/ at four times the rate of comparable non-sustainable products and may be worth up to $150 billion by the end of 2021.xxxi Millennials and LOHAS (“lifestyles of health and sustainability”) consumer segments drive this trend as they seek and promote products that they see as organic, eco-friendly, fair-trade, or socially responsible. Apparel companies like People Tree (fair trade), PACT Apparel (organic cotton), and Reformation (sustainable operations) market their products to these consumer segments. The food and beverage industry likewise offers sustainable product options—from organic and hyper-local produce to alternative proteins (like Beyond Meat).

Sustainable packaging / plastic alternatives The highly visible ocean plastic crisis has given rise to increased customer backlash against plastic, leaving companies scrambling to reduce packaging and come up with alternatives. Single-use plastics like grocery bags, takeout containers, straws, and beverage bottles are especially under fire. Entrepreneurs with packaging alternatives (for instance, Notpla’s edible film made from seaweed) or products that replace plastics (like silicone zip-lock bags and metal straws) are seeing increased demand.

Circular economy, resale, and reuse solutions A “circular economy” is one in which products are completely reused or recycled into new products at the end of their first use (as opposed to a Source: “Meet the 2020 consumers driving straight path from production to landfill). The World Economic Forum change,” IBM, 2020. estimates that the global opportunity for material savings in consumer https://www.ibm.com/downloads/cas/EXK4XKX8 goods value chains could be as much as $700 billion per year.xxxii Interest in the circular economy is giving rise to new product design, engineering, and remanufacturing systems. Also in demand: product rental services (like Rent the Runway), markets for resale products (like Worn Wear), and services that facilitate resale supply chains (like Trove).

Clean energy & sustainable mobility Addressing the climate challenge requires a massive transformation of the energy system from one fueled by coal, oil, and gas to one powered by wind, solar, and batteries. The energy sector is changing rapidly, with renewable energy sources such as solar and wind expected to pass petroleum as the primary energy class

globally within 25 years.xxxiii Corporate demand for renewable energy (linked to companies’ sustainability goals) is driving this growth, as is individual consumer interest in clean energy and clean transportation options (ie, electric vehicles). Expect these sectors and their related industries (hydrogen fuel cells, battery manufacturing and recycling, EV charging, mobility-as-a-service) to continue to grow.

Sustainable finance / ESG investing BlackRock, the world’s largest asset manager, outlined its “fiduciary approach” to sustainability. In an open letter to clients: “Integrating sustainability can help investors build more resilient portfolios and achieve better long-term, risk- adjusted returns.”xxxiv The widespread acceptance of this view is illustrated in the remarkable growth of ESG investments which, at $17.1 trillion in 2020, represent one- third of all U.S. assets under management.xxxv The growth of responsible investing has, in turn, created demand for transparent, unified standards; more effective investment screening methods; and detailed measurement and disclosure from portfolio companies.

Sustainability consulting and reporting services An ecosystem of experts and services has grown up around the push to make business more sustainable. Consulting firms like McKinsey & Co. and Deloitte maintain sustainability practices, alongside sustainability strategy consultancies like BSR and Context. Meanwhile, other firms focus on specific areas of expertise, like greenhouse gas accounting, sustainability reporting, lifecycle analysis, or marketing and public relations. New entrants like Persefoni,see opportunities in aggregating data for sustainability and ESG reporting.

Takeaways for MBAs

1. Sustainability is an integral part of a successful business strategy on par with (and often tied to) profitability. The risks of neglecting sustainability are real; they are often quantifiable, and they can affect individual organizations or entire industries. 2. Social and environmental sustainability is rewarded by customers, investors, employees, and other stakeholders. It can often lead to long-term cost savings, access to new markets, access to new capital, and tangible advantages. 3. Sustainability matters across industries, geography, and functions, and is likely to become even more central as the world attempts to address pressing crises around climate change and social inequality. Therefore, every MBA graduating today can add lasting value by anticipating how these issues may impact his/her organization and working proactively to address them.