Erb wec roundtable final

MANAGING FOR BUSINESS AND SOCIETAL IMPACTS: An Outcome-Based Approach to Corporate Strategy and Goal-Setting

Erb Institute & World Environment Center Roundtable

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CONTENTS GOAL-SETTING AND METRICS.............................. 4 SYSTEMIC CHALLENGES ...................................... 6 PARTNERSHIPS..................................................... 8 BUSINESS MODELS............................................... 9

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The University of Michigan’s Erb Institute for Sustainability in Business (Erb) and the World Environment Center (WEC) brought together 40 senior-level thought leaders and executives from business, academia, government and nonprofits, as well as selected Erb Institute students, for a roundtable discussion. Held November 30 to December 1, 2017, in Washington, D.C., with support from the Dow Chemical Company, the roundtable was a highly interactive, peer-to-peer conversation, operating under Chatham House rules to foster honest and open dialogue.

With the second in a series of jointly convened roundtables, Erb and WEC recognize that advancing corporate sustainability will require a more sustainability-focused approach to innovation and entrepreneurship, as well as both business and market transformations.

The roundtable set out to explore these issues, focusing on three major themes: 1. Goal-setting for corporate sustainability: developing a clear connection between impacts and metrics to improve decision-making; 2. Identifying and confronting systemic challenges: forging new partnerships, facilitating learning, and more tightly integrating sustainability impacts with business decision-making; and 3. Developing new business models: identifying approaches to business that balance social, environmental and economic objectives.

Participants discussed their ideas about and experiences with moving from a tactical, short-term approach to corporate sustainability to one that is longer-term, larger-scale and more robust, and tightly integrated with overall business strategy. Organizations will need to iteratively reevaluate and refine their strategies, and learning from their peers will help inform these processes.

About the roundtable, Dr. Joseph Árvai, faculty director of the Erb Institute, said, “There’s no shortage of stories about how companies are on the path toward sustainability, or how sustainability is in their DNA. What there is a real shortage of, though, are concrete examples of what companies have done—or are doing—to integrate social, economic and environmental objectives into core business practice.” He explained, “To make corporate sustainability as widespread as possible, we must collectively pivot from high-sounding and inspirational narratives to tools, shared metrics, and structures for data-sharing and learning. That’s what we came together to discuss at this meeting.”

This roundtable is part of a series of business engagements, research projects and student projects under the Erb Institute’s impact initiative. Writ large, we’re asking ourselves the same question that CEOs, boards, employees and activists are posing to companies across industries and around the globe—namely, “What do you have to show for your CSR departments and sustainability reports 10, 20 or even 30 years later?” Or, through our research lens, “How do you define, measure and communicate businesses’ contribution to true social and environmental sustainability?”

The Erb Institute is diving into this critical question over the next couple of years, and we extend the invitation to our partner companies and nonprofits to join us!

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GOAL-SETTING AND METRICS The roundtable included a deep discussion of how best to define, measure and communicate progress toward sustainability. Collectively, participants agreed this is a significant challenge—beginning with strategy development and moving into metrics and reporting structures, many companies are struggling to develop approaches that help them characterize their progress in a way that is both informative and meaningful.

STRATEGY DEVELOPMENT AND GOAL-SETTING Several participants noted that their company’s approach to developing sustainability strategy has evolved over time.

One large company, for example, began by looking inward at what it could do to reduce its footprint. Over the last decade, its efforts expanded to embrace a more ambitious agenda that engages customers and positions the company as not only an industry leader but also a leader among enterprises of all scales.

Participants discussed the concept of using a road map as a strategy for identifying goals, but they said the process of developing a comprehensive and cohesive sustainability strategy is more complicated than that; it’s not just a map with a destination, but a map with multiple routes, variables and interim milestones along the way. One participant noted that it’s difficult to come up with an overall road map because uncertainty complicates goal-setting. “There is a tendency to make near-term decisions because long-term are impossible, given climate change,” he said. “We don’t always know the outcome we want to achieve.” Because of this uncertainty, a company’s strategy and the goals it sets should be reevaluated and adjusted at many points along the way.

Further, businesses often struggle to set meaningful goals.

The participants said that setting goals is important—and setting ambitious ones might achieve the transformative change they seek—but they shouldn’t be afraid of failing

to meet ambitious goals. True innovation often involves failure. At the same time, while attendees agreed that setting ambitious goals hasn’t hurt them, they pointed out the importance of being able to demonstrate that they did everything possible to reach those goals.

To this point, while the UN Sustainable Development Goals (SDGs) are useful for setting goals at a high level, many agreed they should serve only as guideposts. The SDGs may serve as fundamental objectives that guide progress, but require further analysis to identify appropriate attributes of success—and associated performance metrics—for realworld application in a corporate sustainability setting.

LOCAL AND GLOBAL PERSPECTIVES When companies align their goals with national or global indicators (such as the SDGs), it reinforces their credibility.

However, despite the global nature of most sustainability challenges, most stakeholders—including consumers, employees and voters—still have a localized mindset, one participant said. They don’t think about global issues—they think about their own communities.

Adopting local goals that respond to the community’s needs and values is necessary for stakeholder support, a participant noted. People want to know how a company’s actions to move toward these goals will affect them and their communities,

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businesses and livelihoods. Another participant noted that incremental goals can help a company gain traction locally and bring along stakeholders that wouldn’t otherwise be engaged.

TAILORED METRICS Once its strategy and goals are set, a company must decide how to measure progress toward those goals. In choosing metrics, companies should consider the issues most relevant to their sector, geographic area and stakeholders.

Tailored metrics engender stakeholder and community support, and local-level sustainability indicators demonstrate that people’s concerns are being heard.

Metrics should be based on science—including the biophysical, social and behavioral sciences—and tailored to align with the company’s mission, participants said. In particular, some remarked that measures based on the natural sciences can help communicate the necessary urgency.

The scale of a company’s metrics also matters. More than one participant remarked that, because public companies face quarterly pressures from investors, they need to adopt metrics that demonstrate progress toward long-term goals. At the same time, other participants talked about the importance of taking the long view and setting targets accordingly.

REPORTING Roundtable participants had mixed feelings on the value of current sustainability reporting practices. Several participants felt that reporting standards or mechanisms, such as the Global Reporting Initiative, drive activity, but not necessarily impact. “Reporting does not drive change. It takes resources,” one participant said. However, another participant expressed the belief that reporting can serve as a starting point for approaching sustainability and can serve as a valuable accountability mechanism.

OUTCOMES Some participants stressed that companies should focus on the desired outcomes of their goals, rather than metrics, as many stakeholders identify not with outputs or numbers but with end results. “People don’t just care about quantities, they care about quality of life, social relationships and the routes by which they are carried out,” one participant noted.

Some participants pushed back on this notion, suggesting that while outcomes are indeed important, there remains a need to measure progress. The example of the Dow Jones Industrial Average was brought up to make this point: While the desired outcome is a healthy economy, it takes more than words and feelings to know what it means and just how healthy the economy is. No one would argue that the Dow is perfect, but many participants agreed that it provides both a much-needed reality check and some clear information about the direction the economy is heading.

Participants also discussed the idea that metrics, when established, can be approached from either a “policing” perspective or a “stewardship” perspective. One example is palm oil production and resulting deforestation: Rather than thinking about how much sustainable palm oil your company is buying, one participant suggested, you should think about the forest health of the countries where you source palm oil.

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SYSTEMIC CHALLENGES As consumers’ expectations shift and commerce is increasingly globalized, companies find themselves in the position of needing to think systematically about how they approach their sustainability goals. The roundtable participants acknowledged that addressing global sustainability challenges will require a systems-level approach that engages companies, governments and non-government partners alike. Further, for progress to be realized, sustainability efforts must be scaled appropriately. As one participant noted, meaningful progress will require action at the sector level.

These realities place industry leaders in an unfamiliar decision-making space and forces them to think broadly and creatively about how they can achieve their sustainability goals.

GOVERNMENT The changing relationship between governments and the private sector came up repeatedly. As the roles of government and the private sector evolve, companies are confronted with a new challenge: how to work alongside government to improve the human and environmental condition. In some situations, partnering with government is imperative.

Globalization requires companies to deal with governments everywhere, but governments’ capacity and political will to deal with global problems vary widely—companies need to consider this when setting goals.

For example, when governments fail to enforce existing deforestation laws, business often gets blamed, one participant said. “The roles of business and society are shifting,” she said. “It used to be that companies were

expected to do some philanthropy, and maybe try to improve their supply chain. Now we are looking at how to drive transformational system change.”

How can businesses do that? One participant suggested that coalitions of companies could come together and refuse to do business in countries that don’t develop and enforce minimum sustainability standards. Furthermore, these same companies could step in when asked to do so and help governments implement standards.

As one participant put it, there’s a mismatch between global problems and national governments, and some businesses could serve as a trusted connector between the two.

DECISION-MAKING A company’s response to systemic challenges requires sound decision-making. One participant remarked that businesses frequently treat decision-making in the name of corporate sustainability as the answer to a question, or as a solution to a problem. But in fact, many decisions companies make

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are really questions masquerading as answers or solutions.

According to this and other participants, there’s a need to take the perspective that, when it comes to corporate sustainability, there is inherent uncertainty regarding what will and what won’t work. Given this, sustainability leaders need to create structures for learning and information sharing—within and among firms—to catalyze progress. To this end, one participant pointed to the concept of adaptive management, which embraces purposeful experimentation and encourages science-based mid-course corrections when needed.

Other tools and approaches from the social and behavioral sciences can also help integrate concerns about social wellbeing and quality of life into business decision-making. But most behavioral insights—such as halo effects and status quo bias—aren’t being factored into decision-making today.

The participants explored ways they might leverage decision sciences research from academia in business.

On a similar note, one participant remarked that companies that need to make decisions often see these decisions as problems, but they could re-frame them as opportunities instead. Embedded within these decisions and opportunities are reflections of the company’s values.

CORE VALUES Building on this concept, businesses are increasingly finding ways to align their sustainability strategies with their core values.

The idea of moving from “doing less bad” to “doing more good” has caught on in the corporate sector.

One participant noted that sustainability efforts now give employees a sense of purpose. “People are looking for a meaningful work environment,” he said, a point that resonated with many in the room. The roundtable agreed that many employees feel they have to park their beliefs, values and lifestyles at their employer’s door. Although some organizations are working to change this, more work is needed to make employer and personal values mutually compatible.

Finally, to be resilient in the face of major disruption, one participant noted, a company must assess its key assumptions about change and align its business with its core values.

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PARTNERSHIPS By collaborating, different parties can build the collective voice and critical mass needed to address systems-level challenges. Partnerships are about leveraging capacities and gaining scale, and shared goals should be explicit, one participant said.

One example cited was Coca-Cola’s work with the World Wildlife Fund (WWF) on critical watersheds. Together, the company and WWF engage local governments and businesses in efforts to improve water stewardship and protect waterways, such as a project to restore water

quality and protect endangered species habitat in the Yangtze River. Collectively, Coca-Cola and WWF are able to bring more parties to the table and make more progress on issues that matter to local communities than they would on their own.

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BUSINESS MODELS The roundtable participants spent significant time discussing how sustainability figures into current business models. Many agreed that sustainability needs to be incorporated into business strategy—meaning that a company’s sustainability agenda should be framed so that it supports financial and other critical strategic goals—while others argued that this approach oversimplifies the challenges. There’s growing awareness of how sustainability efforts can affect profits and shareholder value—both positively and negatively. This recognition calls for a shift in how businesses develop their business model, to an approach that considers sustainability trade-offs and leverages more diverse capacities and perspectives.

TRANSFORMING THE BUSINESS MODEL Several participants pointed to one well-known company’s framework as an example of a significant transformation of a company’s business model to integrate sustainability into all aspects of the enterprise. It involves three phases: the footprint, handprint and blueprint. Beyond the company’s footprint, or operational impact, the “handprint” includes the products and solutions that the company creates to promote or improve sustainability. The “blueprint” involves collaborating with business and governments to rethink the roles of business and society in solving problems, and to develop a societal blueprint that integrates science and technology, public policy solutions and value chain innovation to move toward a more sustainable future. This framework helps balance company-specific issues with broader issues of global change.

Roundtable participants also discussed three categories of business models: market disrupters, intelligent incumbents and system collaborators.

The first—disrupters like e-commerce giant Alibaba—are rapidly transforming industries. Intelligent incumbents include large companies that may innovate in their existing products or value chains to respond to disruption and to become more sustainable. The third category is system collaborators—such as big data and smart cities—which scale existing models to make industries more efficient and more sustainable.

Companies in all three categories can achieve more sustainable outcomes even though their routes to them differ.

TRADE-OFFS The roundtable included a rich discussion of the role that trade-offs should (or shouldn’t) play. Several participants said that sustainability goals shouldn’t require trade-offs with other business goals, and framing them as such creates unnecessary conflict. “I see it as a false choice,” one participant said, explaining that a sustainability agenda should meld seamlessly with the business agenda.

Creating a trade-off that involves making less money will not work, another participant said. Instead, businesses need to find “win-wins” that do not pit sustainability against profitability. One participant countered by suggesting it was

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naïve to think that trade-offs wouldn’t be part and parcel of decisions that seek to balance social, economic and environmental objectives. In these cases, trade-offs are inevitable, and the notion of a win-win-win course of action, though appealing, is little more than a theoretical ambition.

PROJECTS AT EVERY LEVEL

Another participant seemed to agree, noting that every decision requires a cost-benefit scenario, and now, climate change, health and other sustainability-related factors are being considered in decision-making processes, as they affect profitability.

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mission-critical—needed to keep the lights on (such as cybersecurity)

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discretionary—initiatives competing for limited resources (including maintenance, training, sustainability)

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“suspend-the-rules”—needed to embrace a radically new technology or different line of business (such as electric vehicles in the automotive industry)

One participant suggested that companies, especially consumer-facing ones, need to engineer sustainability benefits directly into their products, so that customers don’t have to make value trade-offs between sustainability and other objectives (such as cost savings). Indeed, this idea builds on the idea of asymmetric interventions, often referred to as nudges. In these cases, corporations can work with consumers to understand their sustainability objectives and then tailor their products accordingly. This approach minimizes the need for fancy labeling or other decisionmaking strategies; whatever consumers end up choosing should help to meet their—and the company’s— sustainability objectives.

One participant suggested that companies’ projects can be divided into three general categories, and sustainability must find its place in each, whether they are framed as trade-offs or not:

The more sustainability can factor into mission-critical projects, the better, one participant suggested. When a sustainability project falls into the discretionary category, it must show a positive effect on net present value and make the company look good. In the “suspend the rules” category, although costs and profits are unknown, these projects present tremendous opportunities. A company’s rules might be suspended if a CEO has an epiphany, for example.

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CHAMPIONS

AVOIDING TUNNEL VISION

To this end, although sustainability initiatives need CEOlevel support, one can’t always wait for the CEO to have an epiphany. Before taking the initiative to the CEO, you should find champions in other functional units and form internal coalitions, one participant suggested.

Without thoughtful and comprehensive deliberation, wellintentioned efforts to advance sustainability can cause negative impacts elsewhere. For example, one company’s well-intentioned goal to provide shoes in developing countries had the detrimental effect of putting shoemakers in those same countries out of business.

Another noted that the company’s sustainability group shouldn’t be responsible for driving sustainability projects.

You have to find an appropriate channel within the value chain, or it will never scale—the project should be seeded from within.

DIVERSITY Businesses also must consider whose perspectives are represented in conversations about sustainability. One participant noted that if company boards do not include diversity in gender, race/ethnicity and age, companies are limiting themselves. To this point, others observed that if the UN’s SDG on gender equality were used as a benchmark, business leadership would come up short. In setting the sustainability agenda, more diverse perspectives can open up new objectives, new metrics and new opportunities.

A life-cycle approach can help avoid these kinds of problems, and partnerships with nonprofits can help identify and reduce unintended consequences.

COMMUNICATIONS Finally, one roundtable participant challenged his peers to reconsider how they communicate about sustainability. He argued that both the conceptualization of our relationship with the planet and the language used to describe it need to be revamped. Today, the language and concepts in place are specialized and mostly transactional, one participant added.

Companies should be more creative and aim to appeal more to people’s values and morals—which would help companies garner support from various stakeholders.

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LOOKING AHEAD Across economic, environmental and societal disruptions, the need for meaningful commitments to sustainability is becoming more urgent. Risks and needs loom larger than efforts to address them so far. Globalization, governments’ declining capacities and a lack of public confidence have exacerbated some of these risks.

Businesses are in a position where they have the power to change their operations and influence consumer behavior and broader societal culture in ways that will improve social and environmental sustainability. The decisions before them are weighty. The roundtable served as an opportunity for senior-level business sustainability leaders to hear what their peers are struggling with on these fronts, and to learn

from each other. All agreed that this type of learning—across organizations and sectors, and from both successes and failures—is essential.

The Erb Institute is committed to helping private-sector leaders understand how they can move the needle on sustainability in a deliberate way that improves a company’s triple bottom line. Erb aims to support these efforts through facilitated conversations and workshops that enable cross-organizational and cross-industry learning.

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