Firms around the globe are shifting their focus on sustainability from talk to action. They are developing sustainable products and services and supply chain practices to increase revenue, satisfy investors and regulators, and improve their reputation. Additionally, these practices help them reduce their environmental footprint while saving costs associated with waste and resource and energy consumption.
Many corporate leaders find sustainability also helps deepen their organization’s sense of purpose to engage and retain a new generation of employees. This shift has been fueled by increasing energy insecurity, rapidly changing regulatory and reporting standards, and investor appetite for environmental, social and governance (ESG) performance.
The COP27 United Nations Climate Change Conference in Egypt and the UN Biodiversity Conference COP15 in Montreal stressed the need for business to create action plans to mitigate human influence on the climate and on nature. The Russian attack on Ukraine and subsequent surge of refugees, growing inflation, and lingering concerns about the COVID-19 pandemic also raise doubts about governments’ ability to ensure an inclusive society. In addition, ESG investors and rating agencies are holding firms accountable for their sustainability records. Expectations are growing for business to play a proactive role in driving efforts to secure a sustainable and inclusive future for the next generation.
For 2023, IMD experts have identified a series of sustainability trends that will drive further business transformation to create value, manage risks, and reconfigure industries and entire systems to ensure we respect our planetary boundaries and create a more inclusive and resilient economy.
From net zero to climate-positive supply chains
Carlos Cordon, Professor of Strategy and Supply Chain Management
Many companies are working hard to meet net-zero sustainability targets by 2050 or other target dates. These include Scope 3 emissions, those which do not come from their own operations but from their larger value chain. That is the hardest part, as usually 90-99% of a company’s greenhouse gas emissions are Scope 3. In that journey, many are also realizing that it is impossible to achieve net zero without looking outside of their traditional business. For example, quite a few food companies can’t achieve net zero without having their suppliers (farmers) planting crops that are of no use for the company supply chain, but which capture CO2. Along that path, they are now asking themselves if they could push even more and transform their supply chains to become CO2 negative, going “beyond net zero”. Not only are they asking those questions, but they are also planning how to pay back the CO2 “debt” that the company has created since its creation.
Organizational readiness for sustainable transformation
Vanina Farber, elea Professor of Social Innovation
Patrick Reichert, Term Research Professor and Research Fellow
There is an urgent need for private capital to enter frontier markets to help solve systemic grand challenges. However, organizational transformation and readiness is needed to push the boundaries of the problems that private capital can address and solve. For example, the humanitarian sector is currently experiencing a $32.3bn shortfall between funding and what the UN says is needed. Can development organizations, governments, firms and private financial institutions work together with the humanitarian sector to fill the gap? Collaborative systemic solutions require new approaches to fragility and call for alternative sources of capital to complement traditional grant funding. However, meeting these objectives will require actors to undergo organizational transformation: NGOs will need to be receptive to more market-based approaches, governments will need to provide stable policies and backstop the riskiest initiatives, development finance institutions will need to identify opportunities to provide additionality (i.e., focus on interventions that would have not occurred without their participation), and corporates will need to be willing to collaborate with traditional non-market actors. We tend to think about collaboration as an “external challenge” but the key to success lies in redesigning organizations that can align incentives around impact and mobilize complementary resources to achieve it.
The next generation in family business will power data-driven sustainability
Peter Vogel, Professor of Family Business and Entrepreneurship
Ivan Miroshnychenko, Research Fellow and Term Research Professor
Family businesses will adopt new digital capabilities to manage sustainability data that guide sustainable business practices. Whether it is reducing waste, optimizing the supply chain, or eliminating emissions, insights from sustainability data can help to reach net-zero emissions. A total of 60% of family businesses with strong digital capabilities, surveyed by PwC in 2021, placed sustainability at the core of their daily operations. One main driver for this is the next generation of family owners. The new generation of business owners and leaders care deeply about the environment and are striving towards more sustainable and equitable business practices. Being tech-savvy, the digital natives are willing to take a more data-driven approach in order to lead the way towards a net-zero future.
War and energy shortages accelerate adoption of energy efficiency and renewable energy
Russia’s invasion of Ukraine disrupted energy supplies across Europe, creating energy insecurity, soaring costs, and a strong incentive for investment in renewable energy sources. In the short term, businesses of all industries and sizes will look at energy-saving measures to reduce both costs and carbon emissions. To save on energy bills, firms will renovate buildings to prevent heating loss and implement digital solutions for temperature controls, shut off lighting and equipment when not in use, and replace less efficient outdated equipment. In the longer term, this will likely lead to increased adoption of new types of energy and fuels. Policy incentives will also continue to emerge to stimulate innovation, help tackle climate change and fund the shift to clean energy. Many companies will see an opportunity to accelerate the green energy transition, and the plans that were put in place before the war in Ukraine, as renewables become more cost competitive.
Accounting for nature and biodiversity in climate targets
Amanda Williams, Term Research Professor and Research Fellow
More than 40,000 species are at risk of extinction in the coming decades, according to the UN progress report on the Sustainable Development Goals released in July 2022. The biodiversity challenge is closely intertwined with the climate crisis – the consequences of climate change have negative consequences for the survival of vulnerable species and preserving biodiversity can help mitigate climate change. This interconnected challenge presents a timely opportunity for companies that are getting serious about ambitious climate targets to account for nature and biodiversity protection in their climate targets as a means to net zero. At COP15, the 2022 UN conference on biodiversity, leaders decided on our collective goals for the post-2020 global biodiversity framework and businesses advocated for mandatory biodiversity assessments and disclosures by 2030. Firms are advised to get ahead of the game and start accounting for biodiversity.
Sharing emotions for healthy, sustainable high performance
Susan Goldsworthy, Affiliate Professor of Leadership, Communications and Organizational Change
Research with more than 3,000 executives since April 2020 shows that between half and two-thirds of leaders say they are operating from a place of ‘dis-ease’ rather than a position of well-being. Many report feeling overwhelmed, experiencing increasing anxiety, frustration and irritability, as organizations face a multitude of challenges in a world dealing with ecological collapse, biodiversity loss, social division and economic decline. Executive teams will increasingly have to address these emotional challenges. One simple exercise can be powerful in creating a more inclusive, productive environment. Taking a stack of post-it notes, team members write down all the things that are concerning them from their personal and professional perspectives. They place them all on the wall, acknowledging and accepting them. They then write down all the things they can influence and achieve in the upcoming meeting, placing those post-it notes on the opposite wall. Through this process, leaders co-create the conditions where people can flourish amidst adversity.
Luxury developing sustainable supply chains
Stéphane J.G. Girod, Professor of Strategy and Organizational Innovation
The luxury industries have continued in 2022 to accelerate innovation towards greater sustainability. Automobile and fashion have had by far the heaviest adverse impacts on the environment and society, so actors operating in these two sectors have been ahead of the pack in reversing this trend. For years now, car makers like Porsche have been working on their shift to electrical power traction, while Kering started its journey towards decarbonization in 2012, introducing along the way the first Environmental Profit & Loss account in luxury fashion and sharing its methodology so that other companies can learn from it and use it as a model. In watches and jewellery, transformation started later, perhaps due to the longer life cycle of these products and their smaller volumes. Luxury actors, traditionally fearless competitors, have come to realize that they need to collaborate to shift to positive impact. In 2022, Cartier and Kering formed the Watch & Jewellery Initiative 2030 which, like the Fashion Pact, aims to drive progress on sustainability in its sector. In 2023, luxury players need to accelerate their decarbonization efforts by working on their Scope 3 emissions, and shift from a mindset of managing ESG risk to creating opportunities for strategic renewal and greater brand desirability through new purposeful and positive-impact business models. All this will require considerably more investments and capability building.