Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship at London Business School, on the disruptive power of environmental, social and governance (ESG), and how sustainability, far from stifling innovation, can drive it.
Why has sustainability reached an inflection point?
Look at what’s happening at Harvard,1 with students demanding that Harvard Endowment divests from fossil fuels, or look at the membership of Extinction Rebellion, or Greta Thunberg’s Fridays for Future. People are realising that the term ‘climate crisis’ is not an exaggeration.
This reflects on businesses. We talk about corporate cultures that need to have a purpose. Ideally, that purpose will have something to do with a positive social impact. And companies are facing increased reputational risk because consumers and society at large are holding them accountable.
That’s a major shift. But is it an opportunity or a challenge?
Sustainability is the mother of all disruption. We tend to think of disruption in the context of technologies like AI and big data, but we need to understand that environmental and social issues are areas in which businesses have traditionally not engaged as much as they should have; they lack the experience, knowledge and skills to deal with these issues, which are going to come at them very quickly. So there’s considerable scope for disruption there.
But we’ve seen companies gaining competitive advantage by looking at ESG as an opportunity. They can build a strong position and make it difficult for their competitors to imitate them.
What about the companies that don’t take sustainability seriously?
As with all disruption, I wouldn’t be surprised if we see a number of companies unable to make the transition. After all, the corporate graveyard is packed with brands that were once legendary. ;
It’s up to companies to realise that there’s a long-term, tectonic shift happening and to start making the right investments; they’re the ones that will be better positioned in the long run.
What do companies need to be prepared for as this shift takes place? And how can they prioritise sustainability?
It’s important to change the mindset from sustainability as a cost, to sustainability as an investment. So if the environment is the stakeholder at the centre of your business model, then the funds you use on that stakeholder are not costs – they’re investments. You as a business understand how that stakeholder is at the centre of your business model and how you’re creating value for the business and for that stakeholder.
The other thing to note is that we’re moving towards mandatory measures for sustainability. At the EU level, we have very good discussions about what is materiality in the context of ESG, how different issues are impacting across industries, and how to move conversations forward even faster.
I wouldn’t be surprised if, at some point in the near future, we live in a world where ESG disclosures are mandated and audited. Certainly, that is the direction we are headed in.
Is there a conflict between creating sustainable products and creating excellent products?
We shouldn’t look at sustainability in isolation. Take Tesla, for instance. People don’t buy Teslas just because they are electric cars. They buy them because they're fundamentally better cars.
The best companies – Tesla included – make the most of sustainability requirements. Instead of seeing them as roadblocks, they use them as opportunities to innovate at the same time as strengthening customer experience. In other words, these are products that are functional, higher quality and, on top of that, sustainable. That’s how you get the best products.
So sustainability and innovation are complementary – not conflicting?
It’s wrong to compartmentalise innovation strategy and sustainability strategy. If you do it right, they’re two sides of the same strategic coin.
The companies that survive disruption do so because they see it as an adaptation challenge, rather than a temporary issue. If they get the adaptation right, they’ll find that there’s a whole host of customers ready to vote with their wallets.
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