Why CFOs Choose Corporate Sustainability
Who is driving corporate sustainability forward? In this interview, David Lubin, co-founder and managing director of Constellation Research and Technology, shared his perspective on CFOs’ role in steering the wheel of these decisions.
Lubin is a serial entrepreneur, having founded and built several companies to scale. He is an expert in business analytics and corporate sustainability. He has served on the faculties of Harvard University and Tufts University.
Corporate sustainability is no longer an unfamiliar concept in the global market. It can be surprising to see the number of sustainability reports available online. The aggressive energy and resource commitments made by some large corporations are ambitious.
Have you ever wondered who is behind all of these changes?
It often takes a dedicated commitment made by a CEO to make a compelling case – and an integrated sustainability plan carried out by the CFO to make it happen.
CEFF: Will the Trump administration harm progress on corporate sustainability?
Lubin: For most companies, I suspect there will not be any significant negative impacts at all. For the most part, companies are proceeding with the same plans at the same speed as they were before.
The very important exceptions are those companies in high-carbon-intensity sectors. For companies in those sectors that have lagged the market and delayed developing strategies to move toward a low-carbon economy, Trump has rewarded inaction.
CEFF: What would be impacted by Trump's administration?
Lubin: Historically, government does not have a great role in sustainability strategy here in the United States, except for establishing some incentives for product innovations like Energy Star or mandating standards in high-impact industries. We can expect these important signals to be diminished.
However, business forces driving sustainability behind the scene – including resource efficiency, product innovation, and changing consumer demands– will remain the same under the new administration or may be accelerated. For example, while the Environmental Protection Agency may relax the 2025 mpg standard, millennials under Trump may react by favoring cleaner vehicles.
That said, the opportunity to incentivize corporations, especially heavy emitters, to take on more aggressive commitments will be missed. And that time makes staying on a 2-degree pathway more difficult in the future.
CEFF: What are the reasons for companies to accelerate their sustainability progress in the coming years?
Lubin: Leading companies are moving to a more sustainable products and operations, including supply chains, because it supports their value proposition to their customers. In effect, customers tell them to do so.
Walmart is a great example. Its core value proposition is ‘everyday low prices.’ When it invests in clean energy solutions or recycling programs – or dematerialized products like super-concentrated laundry detergent – it is integrating sustainability factors into its core business logic. Not only are these actions good for the world, they help support the ‘everyday low price’ commitment – they save money. Suppliers must comply. In many cases, there are gains for them as well. Walmart understands the future of a resource-constrained world and realizes that it needs to invest in strategies and capabilities that will enable it to remain competitive.
This is happening in many sectors. In the real-estate sector, for example, the business model for going green is a very good one. There is a higher occupancy rate in green buildings and a premium in rent rates that is well above the incremental costs of going green.
Consumers are more educated than ever about climate change and sustainability and are making more conscious buying decisions on these factors. This was not the case five years ago. We are now above pre-recession level.
Consumers need to continue doing their part in driving companies to change. Companies see this as a slow but inevitable process.
CEFF: What are the core value drivers for corporate sustainability?
Lubin: Businesses have realized that the direction of change is one way – toward more sustainable solutions. The core business value drivers for sustainability include enhanced revenue growth from greener products, annual cost savings, and reduced sustainability-related risk. For most businesses, their most important sustainability programs are tied to these core value drivers.
CEFF: What are the long-term best practices for achieving corporate sustainability?
Lubin: There is no easy answer to this question. Developing and executing a robust sustainability strategy that has material impacts on a business is a complex process.
But, if I had to pick one aspect, I would say the first and perhaps most important step toward achieving best practices is to conduct an in-depth analysis of how climate and environment might impact the company's business performance, how the company might contribute to climate change, and how the competitive environment in which the company operates could change in important ways over the next decade. [The reason I mentioned] a decade is that for a big company, that’s the general time frame for significant change.
This scenario analysis can present a case for change and allow companies to envision a different future.
When we look at leading companies today, they almost always begin with a compelling case for change. For example, Unilever ‘s Healthy Living Plan, that aimed to double revenue while reducing impacts, was a response to a set of likely future conditions that called for a change in strategic direction toward more sustainable products for customers, more resilient suppliers, and more eco-efficient operations. It was built on years of experience running a broad portfolio of initiatives – but the plan pushed a new business logic.
Sustainability is not an extra wheel for Unilever. It is a fundamental enabler of its core value proposition. This is why the case for change is so strong.
CEFF: Who are the key players in driving sustainability practices in companies? What roles do CFOs play?
Lubin: One thing to remember about big companies is that things only happen when they are in the plan. And, in most cases, the CFO runs the planning process.
I would guess that of all companies whose sustainability strategies I have studied, only 10 to 20 percent are deeply integrated into the firm's business plan. This means that CEOs have built a compelling case for change and CFOs are fully on board with the business logic. CEOs drive integration of sustainability into business logic. And through the planning processes, CFOs allocate capital to sustainability initiatives that deliver against the plan targets.
For the rest of the 80 percent, sustainability is a complementary or supplementary program and is not really integrated into the plans and monthly operating reviews within the businesses. In these companies, CFOs are more likely to say no to good sustainability initiatives because they “aren’t in the plan.”
In my opinion, this is why sustainability reports contain so much anecdotal information and so little systematic reporting that links to business outcomes. This helps explain why mainstream analysts have been slow to appreciate sustainability drivers.
CEFF: What are the challenges when bringing CFOs on board?
Lubin: We can have all the proven transformational concepts ready, but without the CEOs making a case for integrating these changes into the business logic, CFOs are much more likely to reject initiatives. CFOs have a lot of experience with business cases that were a sure thing but didn’t actually produce – so they are risk-averse.
For CEOs to make a compelling case and get over this hurdle, they will need to connect business outcomes with sustainability initiatives. They will need evidence to show sustainability's impact on their businesses in a meaningful way that can be measured and managed. That’s helping the companies to grow, improving their profitability, and materially reducing risks.
Note: David Lubin's job title and professional experience were edited on 4/28/2017.
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