Greenwashing Won't Wash — the New Sustainability Imperative

Greenwashing won’t wash — the new sustainability imperative

January 2021 Authors Dr. Oliver Eitelwein, EY-Parthenon, Partner, EY-Parthenon GmbH Sean Paquet, EY-Parthenon, Manager, Ernst & Young LLP We would like to thank Jannik Nolden and Patrick Albrecht for their strong support and contributions during the creation of this publication. Greenwashing won’t wash — the new sustainability imperative

Executive summary

Our increasingly connected world has endured much in recent years — rapidly rising global temperatures leading to extreme weather events, rising income inequality, deepening geopolitical tensions and now a global crisis with a subsequent deep recession in the form of the COVID-19 pandemic. These events are linked in their systemic disruption of the status quo; they affect our health, environment, society and economies. They also are the catalysts for innovation — reconsidering what we thought to be fact and reshaping how we interact with our environments.

For business leaders around the world, corporate action. Times have changed. a crucial lesson is emerging from Sustainability, in an environmental, these events: how to lead sustainably. social and financial sense, is now a How can an organization be led management imperative, shifting through today’s volatility and not only corporate focus toward achieving survive, but thrive? The answer lies in tangible long-term viability alongside reimagining the relationship between organizational ROI. Today’s corporate an organization and its purpose, consensus has shifted away from relative to the environment in which negatively associated justifications it operates. These events increasingly of resource use1 to acknowledgment remind us that business ecosystems of the opportunities presented by are connected in complex ways that sustainable management. We see this are not adequately addressed by as the new sustainability imperative. current management paradigms in the In this paper, we explore how investors, long run. consumers, organizations and Business leaders have long been governments are driving the shift skeptical of incorporating sustainability toward sustainability, describe the into their core strategy. Sustainability five pillars that comprise an effective measurements have become sustainability strategy and how the mainstream, tucked away in annual Long Term Value Framework can guide reports over the last two decades, the path to defining such winning but in most cases they are not sustainability strategy. consistently translating into tangible

1 Report of the World Commission on Environment and Development: Our Common Future, Brundtland Commission, Oxford University, 1987.

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This global movement is driven by a unique coalition of a corporation’s major stakeholders. Investors, consumers, industry peers and governments each are casting their own demands to cement sustainability as a non-negotiable strategic necessity for organizations to operate successfully in the future.

Global Institutional Investor Survey 1. Investors 2018 posts that 97% of investors Capital markets are elevating the formally or informally evaluate ESG When we emerge issues.5 The degree to which executives influence of performance against “from this [COVID-19] environmental, social and governance historically underestimate the (ESG) metrics or shared value importance of sustainability in investor crisis, and investors creation2 in investment decisions, decisions is highlighted by a survey rebalance portfolios, we driven by a growing mountain of from Bank of America Merrill Lynch evidence that performance against that revealed corporate managers have an opportunity to these measures is indicative of an estimated that 5% of their shares were accelerate into a more organization’s creation of a long-term owned by investment firms following competitive and financial performance “sustainable investment strategies,” sustainable world. when approximately 25% of their advantage. Larry Fink shares are owned by such companies.6 Business leaders have long been Chairman, BlackRock skeptical of incorporating sustainability In his now-famous letter to clients, issues into their core strategy because BlackRock chief Larry Fink indicated the perception, until recently, has that his firm, the world’s largest been that these initiatives would investor, would place sustainability at be incongruent with short-term the center of its investment approach profitability and thus would be punished and actively exit investments that by shareholders in generating “financial indicate a high sustainability risk, value.” The evidence suggests that the such as coal-sourced energy.7 This opposite is now true. According to a is important to understand because recent EY survey, 90% of institutional the move clearly highlights a more investors would revise investments if unavoidable driver of investors seeking companies do not at least reconsider sustainable investments: systemic risk. the ESG criteria within their business A large portion of the world’s invested model.3 capital is traded by large institutional investors, which must balance the FTSE Russell’s 2018 survey estimates factors affecting an individual firm’s that over 50% of global asset managers performance with the broader factors have incorporated ESG issues into their impacting their entire portfolio, such as investment strategies,4 while the EY climate change and transparency.

2 Michael E. Porter, George Serafeim and Mark Kramer, “Where ESG Fails,” Harvard Business School Institutional investor website, 2019. 3 “Global Institutional Investor Survey 2018,” EYGM Limited, 2018. 4 “Smart beta: 2018 global survey findings from asset owners,” FTSE Russell website, 2019. 5 “Global Institutional Investor Survey 2018,” EYGM Limited, 2018. 6 Robert G. Eccles and Svetlana Klimenko, “The Investor Revolution,” Harvard Business Review website, 2019. 7 “A Fundamental Reshaping of Finance,” BlackRock website, 2020.

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Amid the current COVID-19 This trend is especially driven by pandemic, BlackRock is doubling 2. Consumers younger generations, which are more down on the importance of firms’ Especially in the millennial generation connected to the idea that their long-term sustainability strategies. and younger, consumers now futures will be significantly influenced In Fink’s words: “The pandemic we’re demand sustainable products and by the impacts of climate change and experiencing now highlights the are willing to rethink their buying the actions taken today to address fragility of the globalized world and the habits to incorporate environmental them. About 50% of millennial and value of sustainable portfolios. We’ve and social product benefits into Generation Z consumers are willing to seen sustainable portfolios deliver their buying decisions. This means spend an increment of 10% or more stronger performance than traditional markets are changing and opening on sustainable products compared portfolios during this period. When we new opportunities for consumer value with 34% of Generation X and 23% of emerge from this crisis, and investors extraction. baby boomers.13 These generations rebalance portfolios, we have an Research shows revenue from increasingly will challenge companies opportunity to accelerate into a more sustainable products is growing at across industries to incorporate sustainable world.”8 BlackRock and about six times the rate of other sustainability into their products to other major investors are now seeking products9 and that 50% of consumers remain relevant. to double their sustainable exchange- pay a higher price for products that What was previously a choice of traded funds (ETF) offerings and have a positive social and environmental convenience, if all other variables further account for ESG risks in their 10 impact on the supply chain. By align, now increasingly is becoming a portfolios and processes. We applaud 2021 in the US, Nielsen estimates priority in purchasing decisions. This this sentiment; though the short-term consumers will spend $150 billion on trend applies immediately to consumer focus will be on managing through this 11 sustainable products. By 2025, EY products companies and will ripple crisis, remaining investors and firms finds consumers will consistently give through markets, affecting business- will emerge with a new perspective preference to products or services that to-business companies as demand for about risk and managing with the are less damaging to the environment, sustainable products permeates the long-term in mind. human health and society, when entire value chain. compared with other products.12

8 “To our Shareholders,” published shareholder letter of the BlackRock Chairman Larry Fink, BlackRock website, 2020. 9 The Business Case for Corporate Investment in Sustainable Practices, ICCR Institute, 2016. 10 “The Comprehensive Business Case for Sustainability,” Harvard Business Review, 2017. 11 “The Database: The Business of Sustainability,” Nielsen, 2019. 12 Infinite possibilities: procurement in 2025, Ernst & Young LLP, 2015. 13 Greg Petro, “Sustainable Retail: How Gen Z Is Leading the Pack,” Forbes website, 2020.

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social system. Performance must not taken, governments increasingly 3. Corporations be measured not only on the return will bring certain aspects of sustainable Driven by a clearer understanding to shareholders, but also on how it management into hard-coded law. achieves its environmental, social and of the financial potential locked Pressure is mounting from good governance objectives.”14 Albeit away in sustainable opportunities governments around the world to hold with some skeptics, 140 of the largest and the internal employee demand companies accountable for sustainably corporations in the world pledged to collectively pursue “purposeful” operating. While carbon emissions caps support at the event to develop a work, sustainability commitments are long familiar policies around the common framework to standardize from large companies have reached a world and governments set new market reporting of nonfinancial ESG factors.15 critical mass and now are placing peer standards with legal anchors to reduce pressure on any CEOs that have yet to Over half of US businesses have target sector goals, some lawmakers announce their commitment. responded to climate change by are exploring even more drastic The sustainability imperative is increasing their commitments to measures for the future. The German driven, at its core, by one sweeping renewable energy. The United Nations Bundestag, for example, is examining a realization of the global business Global Compact, an initiative seeking principle for sustainable supply chains community: a firm’s purpose beyond to drive responsible corporate to achieve economic sustainability profit and its codependency on other behavior across the United Nations, if the free market itself does not firms, organizations and individuals has garnered commitments from more prioritize transformation. The proposed in the ecosystems in which it operates than 9,500 companies, including 28 legislation would force companies to represent significant forces in companies with combined market cap investigate every sequence of their maintaining long-term profitability. of $1.3 trillion announcing to step supply chain and likely would penalize up to new level of climate ambition.16 them for unsustainability.17 In addition to the other three drivers, This wave of announcements is cause this realization is also driven from The bottom line is this: the longer the enough for executives to reflect on the the inside out. Now more than ever, free market does not demonstrate long-term purpose and impact of their employees demand that their work has evidence-based control over its own businesses. It also legitimizes the purpose. We have all felt the difference externalities that have negative impacts logic and value proposition behind the a clear purpose can make in our on society and the environment, the movement. motivation and the quality of our work. more severely regulatory bodies will Clearly communicating the impact an 4. Governments try to impose restrictions on business organization is having beyond profit operations. In this movement, there motivates the entire organization. So far, corporate interest in sustainable are simply too many stakeholders, too much capital and, most importantly, the A revamped definition of “stakeholder management is being driven primarily social and environmental risks at play capitalism” was the main theme at by the upside it offers to investors, are too significant for governments not this year’s World Economic Forum consumers and corporations to step in. in Davos. Quoting from the Davos themselves. However, government Manifesto 2020: “A company is more penalties for not complying with than an economic unit generating climate regulations already hurt wealth. It fulfils human and societal companies across industries. Given aspirations as part of the broader what is at stake if further actions are

14 “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation,” World Economic Forum website, 2020. 15 “Measuring Stakeholder Capitalism: World´s Largest Companies Support Developing Core Set of Universal ESG Disclosures,” World Economic Forum website, 2020. 16 James Ellsmoor, “US Businesses Are Benefiting from Ambitious Environmental Goals,” Forbes website, 2020. 17 “Nur noch schnell die Welt retten,” Handelsblatt website, 2020.

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The five pillars of successful corporate sustainability S u s strategies t a i n

g y

The sustainability imperative is here, and executives can take one of two paths. First, companies can try to immediately capitalize on the movement via branding and other marketing activities, while maintaining existing operations. This is a high-risk, half-baked approach that often leaves the true market opportunities on the table. The second path is to become truly sustainable, transforming from the inside out to integrate sustainability into the core of the business. This path is more difficult, but one that we believe will separate thriving organizations from those that may not last over the long-term. Our perspective is intended for organizations taking the second path.

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The five pillars of successful sustainability strategies

• Optimize product design for sustainability • Define sustainable value chain (raw 1. True positive materials, manufacturing, packaging, Sustainable impact distribution, use and disposal) products and • Use technology as an enabler to drive value chains sustainability methodologies Transforming • Engage in product stewardship the core • Foster an organizational culture around sustainability through metrics, incentives Internal 2. and measures alignment • Change mindsets and behaviors Consistent and joint • Improve employee motivation and capability sustainability purpose building culture and • Communicate transparently about S purpose sustainability efforts u s • Make certain sustainability strategy is t a aligned with core business strategy i n a • Consistent metrics and incentives processes, Deeply b 3. and policies organization and governance Corporate i anchored in l

i Integration in fully aligned with the new strategy

t corporate y Fully

strategy the corporate • Enabling technology installed to steering

s integrated operating continuously track progress

r model a

g y • Test and refine company’s sustainability Recognized activities to gain consumer recognition consumer, 4. • Implement societal positive policies, e.g. human and Positive around ethical issues and business practices societal reputation • Increase perceived human value through impact focused skills building and sustainability- Driving focused engagement external • Inject transparency of sustainable progress value into external reporting Increased 5. • Positively contribute long-term value financial Capital creation value markets • Realize operational and growth-oriented gains related to capital cost efficiencies access • Boost return on capital (emissions, resource use, waste reductions)

Developing a strong sustainability few organizations know what comes sustainability into the corporate strategy is important for today’s next. What actions can be taken to walk strategy. The pillars of sustainability organizations, but what does that the walk, not just talk the talk? This is strategy, conceived to structure the mean for businesses seeking to where to look next. journey toward real sustainability in transform? Many organizations the organization, are: sustainable A principle for future success is that have sought to model their recent products and value chains, sustainability should be ingrained into sustainability strategies around the sustainability culture, integration the corporate strategy, not driven by 17 UN Sustainable Development Goals into the corporate operating model, one-off initiatives or organizational and made commitments to reduce positive reputation, and capital silos. Across markets, we identify five carbon emissions (EY included). But market access. pillars to consider when incorporating

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Transforming the core

1. Sustainable products and value chains Consumers increasingly are willing to pay for sustainably differentiated products, creating new market opportunities for companies across the value chain and a downside for companies that don’t play. Our second pillar expands on this idea. Organizations seeking to capitalize on these markets must consider the entire value chain, both in the sustainability of each step and in the structure of the chain itself.18

There are three discrete product from an existing, unsustainable where the most disruptive potential strategies to address the new portfolio in these new markets, is found and, so far, startups are sustainability markets. They are: the unsustainable gaps must be more effective than incumbents at addressed. bringing new sustainable products 1. Rebrand an existing to market with new business product — Evaluate the existing 3. Create new sustainable products models, sales strategies and portfolio against newly established and solutions — A third strategy powerful branding. and existing sustainability criteria. is to capture value with an entirely It is possible that there are quick new product or product line. This is wins — products that already meet internal and external standards — that can simply be rebranded to address the target market. This is a common strategy, which can easily backfire if the appropriate due diligence is not completed to identify the true external impact a product creates along its value chain. This is “greenwashing,” and it usually comes back to negatively affect the perpetrators19 (more on this later).

2. Adapt an existing product to make it sustainable — The more likely scenario is that at least some of the existing product portfolio is the result of a partially unsustainable supply chain. It is, again, a common temptation to rush this process to capture market share or avoid a heavy investment. But to truthfully capture sustainable value

18 Tensie Whelan and Randi Kronthal-Sacco (2019), “Research: Actually, Consumers Do Buy Sustainable Products,” Harvard Business Review website, 2020. 19 Pascual Berrone, Andrea Fosfuri and Liliana Gelabert, “Does Greenwashing Pay Off? Understanding the Relationship Between Environmental Actions and Environmental Legitimacy,” Springer Nature website, 2020.

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Tesla, Inc. times the value of Volkswagen, the industry in which it operates, bringing largest car producer by number of a sustainable product to market There are many reasons for its cars sold.20 can be more complex than creating success, one of which is the brand a socially and environmentally The Tesla case offers many valuable it maintains around its purposeful responsible product. Consumer- lessons for mature firms. For one, mission statement of “seeking to serving companies will push consumer unique, valuable and untapped accelerate the world’s transition to demand for sustainable products markets for sustainable products exist. sustainable energy.” Tesla correctly through the supply chain, creating Secondly, these markets have the understood the untapped potential opportunities, or threats, for suppliers. potential to disrupt existing markets. of the electric vehicle market, driven This is how all supply chains work, but Thirdly, considerable thought should be by the unsustainable nature of the sustainable products require a new given to how new sustainable products current, emissions-heavy auto industry. level of transparency to facilitate trust are brought to market. The decision to It was able to attract top-notch talent in the marketplace, which requires leverage existing brand infrastructure, motivated by the company’s strong investment from one or many players stand up an independently operating purpose, and it invested heavily in in the value chain. The opportunity is internal startup or buy a promising R&D for years, with a patient stream valuable enough for some companies startup could mean the difference of capital supplied by long-term, to vertically integrate across the value between success or failure. sustainability-focused investors. Tesla chain to create a market for their is now valued at above $300 billion Depending on an organization’s products. in market capitalization — roughly 3.5 position in the value chain and the

Indigo Ag, Inc. Indigo Ag realized it needed to focus The key elements of this scenario, on creating evidence through product which we expect would apply to most data, maintain product differentiation value chains with a sustainability- Indigo Ag, a startup valued at through supply chain transparency demanding consumer at the end, are approximately $3.5b, is seeking to and, ultimately, provide a medium to full transparency across the value disrupt the traditional agriculture connect interested buyers with these chain to more directly connect demand industry with sustainable products products. to a sustainable supply and product- and a unique, vertically integrated level data management capabilities to Indigo Ag, therefore, created an business model. Indigo Ag started as facilitate trust that the end product agricultural data platform and a digital a microbiology company promising truly has sustainable qualities. This farm application suite, an app to better yields and more sustainable case study also highlights vertical match freight carriers with agricultural chemical usage to protect crops.21 integration as one strategy to loads (like Uber for grain transport), Indigo Ag was struggling to sell its facilitate supply chain transparency. and a digital marketplace to connect sustainable products because of the Partnerships and inventory visibility are growers and sellers, among other homogenous, bulk trade commercial less capital-intensive options, though businesses. With this model, food structure of the industry. Corn is they provide less control over the and beverage companies that are corn, soy is soy and when farmers distribution and processing of products. developing sustainable additions to sell, most of it is consolidated before In either scenario, attempts to address their product portfolios now can source processing, meaning any sustainably new sustainable product markets have ingredients with more confidence, thus produced crop is mixed in with crops the potential to shake up a value chain’s providing a more trustworthy product that are produced unsustainably. To structure, which is cause enough for to consumers. create a new market for its products, executives consideration.

20 Source: Yahoo Finance stock information on Tesla (TSLA), August 17, 2020 21 Charlie Mitchell, “How an ag company most people have never heard of could prove itself more disruptive than Netflix or Airbnb,” The Counter website, 2020.

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Transforming the core

2. Consistent sustainability culture and purpose Culture is of the utmost strategic importance. Without consideration for it, affecting any large-scale and sustained change will be very difficult. And this is what a true sustainability strategy entails: anchoring a new purpose and really changing behaviors.

The collective mindsets, behaviors and Having a clearly communicated purpose medium-growth companies. The 80% decisions of an organization ultimately within the company determines the successfully made purpose the center shape the direction of a firm. What direction for what individuals and of their organizations, starting with does a sustainable culture look like? corporations actually do. Therefore, the C-suite and driving a clear priority A culture of sustainability is not only purpose provides a “North Star” that and communicating the future vision of about encouraging employees to reduce guides the actions of individuals across what the sustainable organization will the amount they print or carpool to large organizations. Leadership plays look like. work (though these can be impactful the key role in combining individuals’ Paul Polman, former CEO of initiatives); it is about nurturing a and the corporate purpose through Unilever, was a good example long-term mindset and connecting to transformation. A purpose-led for painting a tangible vision of a a collective purpose beyond profit also transformation should captivate and sustainable future. Leadership created driving long-term consumer, human and inspire employees to ignite long-lasting, a road map that aimed to increase societal value. A sustainability-oriented positive change that fuels sustained the positive impact of sustainability, culture comes in two stages of maturity. improvement and innovation. while strengthening the position in the Kantar’s Purpose 2020 study, market. Many employees at Unilever Stage 1: Leadership acting as a survey of more than 20,000 were motivated by the plan and saw it a role model consumers and 100 leading brand as an occasion to seek out their own Cultural transformation must start interviews, highlighted that brands way of pursuing sustainability-oriented at the highest level. The first course with a high perceived positive impact, innovation. Companies like Siemens of action for executives seeking to or more purposeful companies, and Merck built sustainability-related transform their organization is to clearly experienced growth of 175% over performance criteria into their rating articulate the organization’s purpose 12 years compared with 70% to 86% systems for executives — showing in line with its sustainability goals. The for brands perceived as having low that the ultimate responsibility for EY organization, in our purpose-led or medium purpose.23 Of the high- futureproofing the business lies with transformation framework, defines growth companies in the report, the highest level of management and purpose as an aspirational reason for 80% demonstrated high levels of giving incentives to use sustainable being that is grounded in humanity and “purpose infusion” into the business, business practices.24 inspires action. Purpose is the reason compared with only 32% of low- and for a company’s existence.22

22 Thijs H.J. Geradts and Nancy M.P. Bocken (2019), “Driving Sustainability-Oriented Innovation,” Massachusetts Institute of Technology website, 2020. 23 “Purpose 2020: Inspiring Purpose-Led Growth,” Kantar website, 2020. 24 Heather Clancy, “The State of Green Business: Sustainability becomes an employee perk,” GreenBiz Group website, greenbiz.com/article/state-green-business- sustainability-becomes-employee-perk, accessed May 14, 2020.

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Stage 2: Empowering the the fuel that drives the engine, and facility and manufacturing use in this organization is highly important. When individuals water-stressed area. In Ireland and and corporate purposes are aligned, Rotterdam, Trane Technologies facilities Because change is led organically employees are willing to go above and are 100% zero waste to the landfill by those closest to the problem, a beyond what is required to express because all waste is recycled or reused. successful culture shift ultimately their values.25,26 The Green Teams support Trane will be determined by how deeply Technologies in its goal of becoming a the entire organization buys into a Trane Technologies, for example, zero-waste company, while providing new vision. Empowerment requires a demonstrates the empowerment employees the opportunity to connect thoughtful approach to balancing long- of its people through inclusion in their jobs to a real, impactful purpose. term metrics and short-term targets, its sustainability strategy. Every Giving them space to do so will mature business unit builds a “Green Team” spurring support for this approach the corporate strategy across the whole of employees, who get the chance to through the chain of command to entity and strengthen the company’s create change in their own community. provide space for people to own the development.27 In Waco, Texas, employees installed vision. A connection between individual a rainwater collection system for purpose and corporate purpose is

Mindset and behavior-shifting tactics Attempting to change a culture can feel like an intangible effort at the outset. Here are a few tangible tactics to jump- start change management in developing a culture of sustainability.

Make it real — Demonstrate how a newly articulated, sustainable vision will impact internal and external stakeholders. Bring in customers and partners to discuss why making a change is important.

Use symbolic behavioral artifacts — Identify the employee behaviors that embody the desired culture — for example, speaking out proactively against non-sustainable activities. Summarize the current behaviors and identify representative examples to symbolize the behavior that should change. Then brainstorm how to shift behaviors to the corresponding desired behaviors.

Create role models — Identify stakeholders with high formal or informal influence in the organization and work with them to exhibit small, purposeful shifts in behavior.

25 Paul Polman, CB Bhattacharya, “Engaging Employees to Create a Sustainable Business,” Stanford University website, 2020. 26 Thijs H.J. Geradts and Nancy M.P. Bocken, “Driving Sustainability-Oriented Innovation,” Massachusetts Institute of Technology website, 2020. 27 “Empowering Employees: the Key to Achieving Environmental Sustainability Goals,” Business Sector Media website, 2020.

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Fully integrate sustainability in corporate steering

3. Integration in the corporate operating model An important factor in delivering on sustainability commitments will be how well managers understand and manage the required changes to run their businesses sustainably.

The third pillar focuses on driving toward and maintaining the It is a foundational strategic element operationalizing the strategy in the new commitment to source sustainable to measure ESG KPIs as digitally and corporate operating model. This raw materials? Existing procurement automatically as possible to reduce the means incorporating sustainability into professionals must be able to evaluate friction a massive manual effort can corporate steering and governance sustainability according to a new, have on an organization’s efficiency processes in the functions and different uniform set of criteria, which may and accuracy and, thus, the adoption levels in the organization. It also require new skills, tools and processes. of new ways of working. If done covers the metrics and technology The person responsible for designing correctly, digitized metric tracking that will enable effective measurement and implementing these changes also provides the level of accuracy against targets. Take, for example, a can serve in one of three roles: 1) an required to transparently report hypothetical business that recently existing role with added responsibilities; progress toward achieving targets, announced a sweeping strategy to 2) a new, dedicated role; or 3) an which is crucial for maintaining internal sustainably source all of its products, external role. and external trust. EY member firms eliminate poor labor practices in its have a robust perspective and offering Managers’ performance will be supply chain and make long-term around identifying and measuring evaluated against new frameworks investments in the communities in the appropriate metrics to enable and metrics. New data assets must be which it operates. Excellent! What a broader sustainability strategy. created and managed. In today’s world, happens next? It is tempting to think Measurement receives a lot of attention new digital solutions will be developed about this problem as another project, when it comes to sustainability, and to enable entire components of the an effort that is started and eventually rightly so, but it is just one piece of operating model. And between it all completed, when this vision represents the broader sustainability strategy are the new processes and governance a new way of doing business. So, the puzzle. Furthermore, EY teams policies that make each component steering infrastructure of the operating are driving the international Value work together effectively. Because model must be altered to effectively Balancing Alliance, founded by corporate sustainability results from deliver on this vision. BASF, which aims to provide greater strategic alignment of the whole transparency and comparability of data Employees will have new company, sustainability performance sources, procedures and indicators for responsibilities, perhaps even new can be measured by the objectives of sustainability reports.28 roles. The “who” is a good place to business units to become integrated in start. Who will be responsible for the company’s core.

28 “Unternehmenswert neu definieren,” Handelsblatt website, 2020.

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Driving external value

4. Drive your positive reputation The fourth pillar, positive reputation, refers to capitalizing on sustainable business practices through brand value growth. The bottom line: extracting brand value from a sustainability strategy should be attempted only after demonstrating the intention and results around true sustainability targets.

As previously noted, the Kantar relative to other factors that drive their to highlight the pitfalls in product Consulting Purpose 2020 study, purchase decisions. Nielsen reported sustainability branding, but they a survey of more than 20,000 in 2014 that about half of millennial highlight a broader truth when it comes consumers and 100 leading brand and Gen Z consumers were willing to to sustainability: to extract brand value interviews, highlighted that brands pay more for sustainable products.31 In from sustainability strategies, trust with a perceived high positive impact, 2018, that number had risen to about must be established. and more purposeful companies, 85% for both generations, compared So, true sustainability must first experienced growth of 175% over 12 with about half of consumers in older be demonstrated by cultivating a years compared with 70% to 86% for generations.32 sustainability-driven culture and brands perceived as having a low or What will be counterproductive bringing sustainable products to medium purpose.29 The differentiator in extracting brand value from a market. In the future global economy, is more than marketing sustainability sustainability strategy is greenwashing, only companies that have transformed targets. It is more important to drive which was defined by Greenpeace as to be truly sustainable will be rewarded. consumer, human and societal value by misleading consumers with regard to really changing the corporate culture, An example of how to appropriately a company´s environmental measures products and value chain strategy, extract brand value is Unilever’s or the environmental performance of and operating model. In other words, campaign to source eggs only from individual products or services.33 Amid consumers and investors look beyond cage-free chickens for its mayonnaise the flood of corporate sustainability marketing tactics to real impact. products. It first understood the real announcements are criticisms that sustainability impacts through its raw Sustainably conducted business is most of these announcements are materials supply chain, assessed the correlated with brand value growth. premature attempts to extract brand implications to its supply chain given the A recent study by the University of value without the intention of following broad procurement shifts and made the Cologne across 100 brands from 30 through. Canadian Environmental switch to eggs from cage-free chickens different industries and more than Marketing Agency TerraChoice, for some brands before communicating 700 companies surveyed showed a in its still-relevant “Seven Sins of that to consumers.35, 36 This example significant relationship between the Greenwashing,” describes how most highlights the importance of connecting dimensions of corporate sustainability sustainable product branding at the the functions responsible for the end- and brand value. Sustainably engaged time (2010) succumbed to at least one to-end sustainability effort — product companies have a 50% higher brand of seven issues: hidden trade-offs, no development and operations through value than average companies.30 This proof, vagueness, irrelevance, lesser of to the marketing team — to develop is especially influential for younger two evils, fibbing and worshiping false and execute a cohesive sustainability generations and is gaining momentum labels.34 These principles are intended branding strategy.

29 “Purpose 2020: Inspiring Purpose-Led Growth,” Kantar Consulting website, 2020. 30 Jannik Nolden, “Investigation of the influence of sustainable corporate governance on the brand value,” Cologne University (not yet published), 2019. 31 “Consumer-Goods’ Brands That Demonstrate Commitment To Sustainability Outperform Those That Don’t,” The Nielsen Company, 2015. 32 “Was 2018 The Year Of The Influential Sustainable Consumer?” The Nielsen Company website, 2020. 33 “Greenwashing,” Greenpeace website, 2017. 34 Nicole D´Alessandro, “7 Sins of Greenwashing (And 5 Ways to Keep It Out of Your Life),” EcoWatch website, 2020. 35 Andrew Winston, “Avoiding Greenwash and Its Dangers,” Harvard Business Review website, 2020. 36 “Unilever joins the global cage-free egg crusade,” Bell Publishing website, 2020.

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Driving external value

5. Capital market access Investors are placing value on sustainability and withdrawing capital where unsustainable business practices are identified. Establishing a formal strategy around investor engagement for the topic could maximize the amount of capital access gained and make certain that sustainable transformation efforts do not go unnoticed.

Capital market access is the final investors. One strategy is to establish Another rather direct strategy is to outlining strategy to engage with formal channels for communicating collaborate with investors to learn from investors around sustainability and the long-term purpose to institutional their views about sustainability. Those maintain or boost access to capital. Like investors. The Chief Executives for investing in sustainable businesses capitalizing on brand value, our position Corporate Purpose’s Strategic Investor are, after all, placing more emphasis is that capital can only be secured if the Initiative developed a template for on long-term results and should be first three pillars of the sustainability organizations to articulate their long- incentivized to share insights into strategy are truly addressed long- term plans and established forums for which metrics they believe are the term. The depth of this principle is organizations to share these plans with most indicative of success. It is then demonstrated by recent shareholder investors.37 Executives should also seek possible to leverage the frameworks activism in the tech industry. to incorporate more long-term rhetoric and analytics used by these investors into earnings calls. It is becoming more to inform innovation around the There are approaches beyond the regular for companies to report down sustainability strategy and engage in substantive elements of becoming quarters, but show positive outlooks cautiously open conversations to show sustainable that an organization can to see boosts in the share price. intentions. take to more effectively engage with

37 Robert G. Eccles and Svetlana Klimenko, “The Investor Revolution,” Harvard Business Review website, 2020.

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Leveraging the Long Term Value Framework to define your new sustainability strategy

The step to define sustainability strategies that really shift paradigms by fundamentally transforming the core of the firm toward long-term value for the company’s key stakeholders is where many corporations struggle. To address this, the EY Long Term Value Framework provides a very powerful method to solve the rising complexity of multi-stakeholder strategy development within a coherent and structured approach.

The EY Long Term Value 1 Framework has been developed to help CEOs define strategies that Context create value in the long term across 5 a broader group of stakeholders, Stakeholder 2 including employees, consumers, Strategy Stakeholder outcomes society and shareholders. The approach centers around five Purpose clearly defined steps:

1. Establish the business Metrics 4 context Determine the best fit purpose and strategy to operate in the long Value Value term context of your business. Key creation protection 3 questions to resolve include: What Strategic capabilities is the current and future context the company operates in? What trends Governance will impact your business model? Why does the company exist? What are implications for stakeholders? What is your long-term plan that will enable the organization to achieve 2. Assess stakeholder Which stakeholders are at the core its purpose? How does this translate outcomes of your value-creation model? What to changes to products and value outcomes are you aiming to deliver Identify business opportunities and chains? How will you direct and control to meet stakeholder expectations? risks from a stakeholder perspective the organization in the future and Are some outcomes more important and adjust your strategy to lift the deeply embed the metrics in your than others? potential. Key questions include: steering model?

16 | EY-Parthenon Greenwashing won’t wash — the new sustainability imperative

3. Identify strategic 4. Develop measurement and 5. Manage execution for capabilities valuation approach success Define, build and strengthen the relevant Measure your performance based on Plan, track and report project strategic capabilities to create and an outcome and impact perspective. development and outcomes. Identify protect financial, consumer, human and What existing metrics can be used and potential risks and additional societal value. Key questions include: Are which additional metrics are required to opportunities and facilitate stakeholder some outcomes more important than create long-term value? communication. others? What resources and capabilities are needed to create long-term value?

EY-Parthenon | 17 Greenwashing won’t wash — the new sustainability imperative

A final note

Those that choose to pursue a value chains, cultures and operations, truly sustainable enterprise with a pressure will rise on those that lag. This well-crafted plan of attack will be will be driven by investors, consumers rewarded in driving their long-term and governments, increasing costs value. Starting with the first three of capital, making alternative buying pillars — sustainable products and decisions and, ultimately, placing value chains, sustainability culture, regulatory constraints on unsustainable and integration into the operating operations. model — will promote the most The sustainability imperative is here effective transformation because these to stay. The chaos inflicted by the pillars will directly determine how current pandemic crisis will eventually sustainable an enterprise is. Only after settle, putting back into focus pressing these pillars are addressed can the sustainability issues and leaving behind value locked in the final two pillars — a world that is even more sensitive to positive reputation and capital market the needs and purpose of sustainability access — be fully realized in the long for human well-being, building even term, driving increased brand equity stronger justifications and upsides and more favorable capital structures. for those organizations that have the As more companies integrate courage to be early movers to achieve sustainability into their products, real long-term value.

18 | EY-Parthenon Greenwashing won’t wash — the new sustainability imperative

Authors

Dr. Oliver Eitelwein EY-Parthenon Partner, EY-Parthenon GmbH T: +49 160 9392 6690 E: [email protected]

Sean Paquet EY-Parthenon Manager, Ernst & Young LLP E: [email protected]

About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com.

About EY-Parthenon EY-Parthenon teams work with clients to navigate complexity by helping them to reimagine their eco-systems, reshape their portfolios and reinvent themselves for a better future. With global connectivity and scale, EY-Parthenon teams focus on Strategy Realized — helping CEOs design and deliver strategies to better manage challenges while maximizing opportunities as they look to transform their businesses. From idea to implementation, EY-Parthenon teams help organizations to build a better working world by fostering long-term value. EY-Parthenon is a brand under which a number of EY member firms across the globe provide strategy consulting services. For more information, please visit ey.com/parthenon.

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

EYG no. 007532-20Gbl EY-000123116.indd (UK) 11/20. Artwork by Creative Services Group London.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please refer to your advisors for specific advice. ey.com