Thebusiness of sustainability: McKinsey Global Survey results
More companies are managingsustainability to improve processes, pursue growth, and add value to theircompanies rather than focusing on reputation alone.
October 2011
Source: Sustainability & Resource Productivity Initiative
Many companies areactively integrating sustainabilityprinciples into their businesses, according to a recent McKinsey survey,1 andthey are doing so by pursuing goals that go far beyond earlier concern forreputation management—for example, saving energy, developing green products,and retaining and motivating employees, all of which help companies capturevalue through growth and return on capital. In our sixth survey of executiveson how their companies understand and manage issues related to sustainability,2 thisyear’s results show that, since last year, larger shares of executives saysustainability programs make a positive contribution to their companies’ short-and long-term value.
Thissurvey explored why and how companies are addressing sustainability and to whatextent executives believe it affects their companies’ bottom line, now and overthe next five years. In a related opinion piece, “Putting it into practice,” at the end of this survey, the authorsargue that more businesses will have to take a long-term strategic view of theissue by identifying and pursuing sustainability opportunities that hold thehighest value potential.
On thewhole, respondents report a more well-rounded understanding of sustainabilityand its expected benefits than in prior surveys. As in the past, they see thepotential for supporting corporate reputation. But they also expect operationaland growth-oriented benefits in the areas of cutting costs and pursuingopportunities in new markets and products. Furthermore, respondents in certainindustries—energy, the extractive industries,3 and transportation—reportthat their companies are taking a more active approach than those in othersectors, probably as a result of those industries’ potential regulatory andnatural-resource constraints.
Notes
1 The online survey was in the field from July 12 to July 22,2011, and received responses from 3,203 executives representing the full rangeof regions, industries, tenures, company sizes, and functional specialties.
2 Defined as a combination of environmental, social, andgovernance issues also known as corporate social responsibility (CSR) orcorporate responsibility.
3 In these survey results, this group includes respondents fromthe coal, metal, oil and gas extraction, petroleum and natural gasdistribution, petroleum refining, and other mining subindustries.
A more active agenda
Thereare some noteworthy changes since our 2010 survey4 in the actions executivesreport their companies are taking on sustainability, their reasons for doingso, and the extent to which they have integrated sustainability into theirbusiness. For instance, the share of respondents saying their companies’ topreasons for addressing sustainability include improving operational efficiencyand lowering costs jumped 14 percentage points since last year, to 33 percent.This concern for costs replaces corporate reputation as the most frequentlychosen reason; at 32 percent, reputation5isthe second most cited reason, followed by alignment with the company’s businessgoals, mission, or values6 (31percent) and new growth opportunities (27 percent), which climbed 10 percentagepoints since last year.
Therefore,it’s not surprising that the areas where most executives say their companiesare taking action are reducing energy usage and reducing waste in operations,ahead of reputation management (Exhibit 1). Fewer respondents report that theircompanies are leveraging the sustainability of existing products to find newgrowth or committing R&D resources to bring sustainable products to market.Yet both of these are important ways sustainability can drive growth:organizations that act in these areas are the likeliest to say they’re moreeffective than their competitors at managing any other sustainabilityinitiatives. These results suggest that companies may be better able to find acompetitive advantage when pursuing growth activities than operationalactivities.
Companiesare also integrating sustainability across many processes, according torespondents: 57 percent say their companies have integrated sustainability intostrategic planning (Exhibit 2). The most integrated area is mission and values,followed by external communications, while the least integrated areas aresupply chain management and budgeting. That said, sustainability has stayed atabout the same place on CEOs’ agendas, and about the same share of respondentssay they have formal programs to address it (Exhibit 3). The share of respondentssaying their companies effectively manage sustainability has even shrunksomewhat. Starting last year, we used these three characteristics to define agroup of “sustainability leaders,”7 companies that are moreadept at capturing value through sustainability along various measures that thesurvey asked about.
Notes
4 The online survey was in the field in February 2010 andreceived responses from 1,946 executives representing a wide range ofindustries and regions.
5 In 2011, the answer choice was, “building, maintaining, orimproving our corporate reputation”; in 2010, the answer choice was,“maintaining or improving corporate reputation.”
6 In 2010, the answer choice was, “alignment with company’sbusiness goals.”
7 Respondents in this group say sustainability is either themost important or a top-three priority on their CEOs’ agenda, that it isembedded in their companies’ business practices, that their companies have aformal program to address related issues, and that their companies managesustainability very or extremely effectively. This year’s analysis is not fullycomparable to the 2010 sustainability survey, because “leaders” in the mostrecent survey include energy industry respondents, whereas the 2010 surveyexcluded them from the leaders group.
Leading the way with astrategic approach
Ingeneral, respondents from companies in the leaders’ group say their companiesdo more on every aspect of sustainability; this is especially true in the areasof growth and risk management that, along with return on capital, are threeways in which sustainability can create value based on McKinsey research8 (Exhibit4). For example, 94 percent say their companies have integrated sustainabilityinto strategic planning, versus 53 percent of all other respondents. Comparedwith the integration of sustainability into other processes, however, theleaders’ supply chains and budgets are less integrated; respondents at othercompanies report this pattern as well. In addition, respondents in the leaders’group are more likely than other respondents to report that their companies arepursuing each of the 13 actions related to sustainability listed in the survey,and they rate themselves more effective at taking action, relative tocompetitors, more often than the rest of respondents do.
Executives in the leaders’ group are also more likely to saytheir companies are taking higher-level, more strategic actions: much highershares of leaders are managing their business portfolios to capture trends insustainability and committing R&D resources to sustainable products.Furthermore, just 9 percent of respondents at these companies say they havesustainability programs in place to respond to regulatory requirements,compared with 25 percent of all other respondents. Those in the leaders’ groupare more likely to say instead that sustainability is aligned with their goals,mission, and values (59 percent versus 28 percent of all others) and that itstrengthens their competitive position (43 percent versus 24 percent).
It’s likely related that executives in the leaders’ group aremore than twice as likely as all others to say their companies capture valuefrom sustainability opportunities. Indeed, 30 percent say they are capturingall the value they can, versus 9 percent of all others. And while allrespondents struggle with the pressure of short-term earnings performance as abarrier to value creation, the leaders struggle less with leadership, systems,and processes that enable organizations to drive value through sustainability (Exhibit5).
Executives whose companies fall into the leaders’ group alsoreport that employees at all levels are far more knowledgeable about theircompanies’ sustainability activities—and that sustainability is more importantfor attracting and retaining employees—than respondents at other companies.9 This finding suggests that the integration ofsustainability extends far beyond business practices at these companies.
It’s important to note thatthe mix of industries represented in the leaders’ group differs from the fullgroup of respondents to the survey. A handful of industries—arguably those witha higher impact on environmental issues such as resource use and emissions,whose need to be more proactive on sustainability to effectively manage theirfuture business is more urgent—are overrepresented: energy, extractiveindustries, manufacturing, and transportation. Relatively few respondents fromfinance, retail, and business, legal, and professional services are in theleaders group.
Notes
8 McKinsey’sresearch on sustainability and value creation has allowed us to develop aframework that shows how sustainability creates value for companies with threelevers. To find out more about how companies can apply these levers, see therelated opinion piece, “Puttingit into practice.”
9 Within the leaders’ group, 23 percent ofrespondents say their companies’ performance on sustainability issues is one ofthe most important factors for attracting and retaining employees, while 5percent of all other respondents say the same.
Value creation and industry
The fact that some industriesare overrepresented in the leaders’ group highlights differences in emphasis onand effective management of sustainability across industries. This carries overto value creation. Overall, the relationship between sustainability andquantifiable value is still somewhat unclear, executives indicate: aboutone-third of respondents say they don’t know how much sustainabilityinitiatives add to shareholder value at their companies. In addition, the sharethat rate sustainability’s contribution to short-term value as positive hasonly inched up since last year’s survey, to 48 percent.
However, respondents do citeseveral different levers for value creation over the next five years. Among thetop are managing corporate reputation, capturing sustainability trends in thebusiness portfolio, and committing R&D resources to sustainable products;across industries, the relative importance of each effort varies (Exhibit 6).
Respondents at consumer andB2B companies diverge on the levers that could drive longer-term valuecreation. Respondents in both groups expect reputation to add a similar levelof significant value, or more than 11 percent of shareholder value—indeed, it’sthe most frequently selected action by respondents at consumer companies. AmongB2B respondents, however, the highest share (23 percent) say managing theirbusiness portfolios to capture sustainability trends adds significant value tocompanies in their industries, compared with 15 percent of consumerrespondents. Achieving higher prices or greater market share throughsustainable products, committing R&D resources, and responding toregulations has more value potential for B2B companies, executives say, whilethose at consumer companies see more potential in managing sustainabilitythrough the value chain, water use, and waste.
Across industries, executivesalso differ in how they view barriers to value creation. Those at extractivefirms point to a lack of capabilities (25 percent versus 15 percent of allrespondents) and lack of incentives tied to sustainability performance (42percent versus 32 percent) as being bigger barriers than they are forrespondents in other industries. Higher shares of transportation respondentsthan the average also cite lack of incentives (45 percent), while fewerexecutives at energy firms select most of the barriers presented, perhapssuggesting that they’ve been thinking about sustainability and value longerthan others. Some in the energy sector do still cite key performance indicators(KPIs) and integrating sustainability into their performance management systemsas concerns. Executives at retail firms are more likely to reportbarriers—except for organizational structure and a disconnected sustainabilitydepartment—than the average.
Looking ahead
· Companies are not doing as much to integrate sustainabilityinto internal communications or employee engagement as they are into otherareas of business, such as strategic planning. With 53 percent of respondentssaying company performance on sustainability is at least somewhat important toattracting and retaining employees, companies that take action are more likelyto gain an advantage in employee retention. The leaders are better at engagingemployees on this issue (and at keeping employees at all levels more informed),suggesting that it’s possible to make the most of this opportunity insustainability.
· Our experience in working with companies in differentindustries on sustainability aligns with the survey findings that differentindustries use different levers (growth, return on capital, and riskmanagement) to create significant value. There’s no single way to create valuefrom sustainability, so knowing where the biggest opportunities for valuecreation are in an industry—and where the risks and barriers lie—can serve as aguide for developing sustainability strategies.
· Coupled with the shift in reasons for pursuingsustainability, from reputation management to operational improvements and newgrowth opportunities, the overall high degree of integration seems to indicatethat companies have become more businesslike about their sustainability agenda.Most companies, however, are still struggling to factor sustainability into the“hard” areas of their business, such as supply chain and the budget, so thereis still a lot of potential to drive further integration and increased valuecreation. Where leaders and all others diverge most is around KPIs,organizational structure, and leadership engagement; these may be high-potentialareas for companies striving to become sustainability leaders.
Continue on to the next page for a related opinion piece, “Puttingit into practice,” about why companies shouldact now on the sustainability opportunities that are crucial to their business.
Putting it into practice
Companies should integrate environmental, social, andgovernance issues into their business model—and act on them.
Sheila Bonini and Stephan Görner
Sustainability has long beenon the agenda at many companies, but for decades their environmental, social,and governance activities have been disconnected from core strategy. Most stilltake a fragmented, reactive approach—launching ad hoc initiatives to enhancetheir “green” credentials, to comply with regulations, or to deal withemergencies—rather than treating sustainability as an issue with a directimpact on business results.1
That’s no longer enough. Material risks not only to acompany’s reputation but also to the bottom line come from many, oftenunpredictable directions in an era of constrained resources and tighterregulatory requirements, as well as growing demand for sustainable products andservices, good corporate governance, and social responsibility. Where suchchallenges arise, opportunities also lie: McKinsey estimates that theclean-tech product market, for example, will reach $1.6 trillion by 2020, upfrom $670 billion in 2010. The World Resources Institute estimates that peopleat the bottom of the income pyramid, who earn less than $3,000 a year, embody aglobal market of more than $5 trillion.2
Our research finds that ahandful of companies are capturing significant value by systematically pursuingthe opportunities sustainability offers. We believe the trend is clear: morebusinesses will have to take a long-term strategic view of sustainability andbuild it into the key value creation levers that drive returns on capital,growth, and risk management (Exhibit 1), as well as the key organizationalelements that support the levers. Each company’s path to capturing value fromsustainability will be unique, but these underlying elements can serve as auniversal point from which to get started.
Approaching sustainability
Our survey produced insightsinto the specific practices of a small group of companies that treatsustainability holistically. At all of them, it is a top-tier item on the CEO’sagenda, a formal program is in place to address it, and executives embed it inbusiness practices and manage it actively. Much higher shares of respondents atthese leading companies report that they are pursuing each kind ofvalue-creating activity related to sustainability and integrating theorganizational elements—mission and values, systems and processes, internal andexternal leadership, and organizational design—that support such initiatives.
The leading companies fromour survey can thus serve as a model for others. Make no mistake, however:capturing sustainability’s full value potential is complicated. In essence, acompany must first determine its baseline performance on sustainability issuesand then decide on a portfolio of initiatives to create value in those areas.But while many companies understand the impact of their own operations onissues from carbon emissions to human rights, they often have little or nounderstanding of the impact of the entire value chain.3 Moreover,most companies do not actively seek opportunities to invest in any area ofsustainability4 andtherefore miss potential growth opportunities.
Opportunities to create orpreserve the most value vary greatly among industries (Exhibit 2). Anextractive-services company,5 forexample, could significantly reduce its costs through better management ofenergy and water. A retail company could reduce its resource intensity andcosts by revamping its supply chain, since the biggest environmental impactwithin that sector can often be traced to raw materials, such as theagricultural products used in food or apparel. An energy company may have moreopportunities than companies in other industries to create value through newproducts—for example, by commercializing investments in smart grids.
Creating value
Integrating sustainabilityinto strategic initiatives is especially important because these issues play outover the long term. It’s easier for companies where they are core concerns tounderstand trends and make strategic bets in advance of consumer preferences,stakeholder pressure, or regulation. GE, for example, placed early bets onclimate change: in 2004, before Al Gore and Hurricane Katrina made this atop-of-mind issue, the company resolved to double its research investments andsales in clean technology. It also promised to “green” its own operations. As aresult, GE’s Ecomagination division has been a tremendous growth engine, withproduct sales reaching $18 billion in 2009. Other companies too have foundinstructive ways to build sustainability into drivers of value.
Returns on capital
Most companies creating valuethrough sustainability look first to improving returns on capital, which oftenmeans reducing operating costs through improved natural-resource management(such as energy use and waste). Dow Chemical, for example, reported that itinvested less than $2 billion since 1994 to improve its resource efficiency. Todate the company has saved more than $9.8 billion from reduced energyconsumption and water waste in its manufacturing processes, even as itcontinues to develop innovations. In 1996, through a separate initiative, Dowalso created a set of goals for environmental, health, and safety issues, andit has ensured their integration into the company’s processes by trackingprogress with clear metrics. As a result Dow, with a 20 percent reduction inabsolute greenhouse gas emissions, has gone well beyond Kyoto Protocol6 targets.7
Companies are also drivingdown costs by systematically managing their value chains. Wal-Mart, forexample, expects to generate $12 billion in global supply chain savings by 2013through a packaging “scorecard” that could reduce packaging across thecompany’s global supply chain by 5 percent from 2006 levels. Moreover,companies can add value by improving employee retention or motivation throughsustainability activities or by raising prices or achieving higher market sharewith new or existing sustainable products. Whole Foods Market, for instance,raised its sales by 13 percent a year from 2005 to 2009, in an economyexperiencing single-digit growth.
Growth
Companies that rigorouslypursue sustainability also regularly revisit their business portfolios todetermine the potential impact of trends (such as existing or potential climatechange regulations) that could lead to new growth opportunities. WasteManagement, for instance, reinvented itself as a provider of integratedenvironmental offerings by adding waste reduction and waste-to-energy solutionsto its services. Companies also screen rigorously for unmet needs created bysustainability trends in line with their strategies and identify potentialcustomer segments. ArcelorMittal, for example, embedded sustainability in itsorganizational design through a department for scientific analyses of the lifecycles of steel products. The department creates offerings that minimizesteel’s negative environmental impacts—one result of the company’s investmentin innovative solutions. GlaxoSmithKline is looking not only to philanthropybut also to its business model in addressing diseases in less-developed markets.By adopting a range of flexible pricing models for patented medicines andvaccines so that they’re affordable for customers in those countries—yet stillprofitable—the company hopes to garner a significant share of sales inpotential new markets.
Risk management
Better management of risksthat arise from sustainability issues begins with detecting key risks ofoperational disruptions from climate change, resource scarcity, or communityissues (such as boycotts or delays in getting permits for manufacturing). Facedwith potential supply constraints, Nestlé, for example, launched a plan in 2009that coordinates activities to promote sustainable cocoa: producing 12 millionstronger and more productive plants over the next ten years, teaching localfarmers efficient and sustainable methods, purchasing beans from farms that usesustainable practices, and working with organizations to help tackle issueslike child labor and poor access to health care and education. The mining giantBHP Billiton managed its exposure to emerging regulations by systematicallyreducing its emissions.
The choice for companiestoday is not if, but how, theyshould manage their sustainability activities. Companies can choose to see thisagenda as a necessary evil—a matter of compliance or a risk to be managed whilethey get on with the business of business—or they can think of it as a novelway to open up new business opportunities while creating value for society.
About the Authors
Sheila Bonini is aconsultant in McKinsey’s Silicon Valley office; StephanGörner,collaborator with Bonini on “Putting it into practice,” is a director in theSydney office.
Notes
1 According to McKinsey’s 2011 survey onsustainability, just 36 percent of executives say their companies have astrategic approach to it, with a defined set of initiatives.
2 Allen L. Hammond, William J. Kramer, Robert S. Katz, Julia T.Tran, and Courtland Walker, The Next 4 Billion: Market Size and Business Strategy at theBase of the Pyramid, World Resources Institute, March 2007.
3 Seventy-eight percent of respondents at leading companies saythey have mostly or completely integrated sustainability into the management oftheir supply chains; 37 percent of all other respondents say their companieshave done so.
4 According to McKinsey’s 2010 survey on sustainability, 88percent of respondents at leading companies strongly agree that they activelyseek opportunities to invest in sustainability, versus 23 percent of all otherrespondents. For more, see “How companies manage sustainability: McKinsey GlobalSurvey results,” mckinseyquarterly.com, March 2010.
5 This group includes survey respondents from the coal, metal,and other mining industries; oil and gas extraction; petroleum and natural-gasdistribution; and petroleum refining.
6Kyotoprotocol to the United Nations Framework Convention on Climate Change, United Nations, 1998.
7Mid-pointReport: 2015 Sustainability Goals Update, 4Q 2010, Dow Chemical, February 2011.
