Sustainability for the future: Capturing business opportunities and minimizing risk

By Martijn Eikelenboom, Marijn Vervoorn, Phil Webster, Chandler Hatton and Jonathan Lambert, Arthur D. Little

Recent landmark sustainability agreements, such as the G7’s commitment to decarbonize the global economy and the United Nations’ Sustainable Development Goals, confirm that sustainable development is top of the agenda for governments around the world. Likewise, growing numbers of consumers prefer products and services with superior sustainability performances. This trend is not confined to consumers and corporate purchasers: leading business publications report that employees, investors and companies prefer working with organizations that perform well on sustainability-related indicators.

For businesses, this new form of consumer- and regulation-driven disruption creates new opportunities and challenges. Some have found novel ways to create sustainable products and services that generate business value and appeal to a new generation of consumers. For example, food start-ups, such as Beyond Meat and Impossible Foods, are working to create meat substitutes from pea protein to satisfy consumer cravings for meat, while using fewer resources and demonstrating ethical credentials. Industry-leading players are also taking note.

Executives in these leading organizations are acutely aware that failing to understand how solutions contribute to the sustainability objectives of key stakeholders in a timely manner means potentially leaving attractive business opportunities uncaptured, or unwittingly exposing the business to risk. The long-term competitiveness of a product portfolio hinges on the extent to which it supports stakeholders in achieving their sustainability-related objectives.

For other businesses to emulate these successes and generate tangible business value, it is paramount to develop new sustainable value propositions (or improve existing ones). These must address tangible sustainability goals in society or the value chain, rather than following regulatory incentives. They also need to be cost competitive compared to conventional alternatives, as well as have material sustainability benefits backed up by credible evidence.

No common language or standard

Objective evaluation of the implications of the sustainability trend for individual products or services is far from straightforward because there is no universally accepted definition of what a “good” sustainability performance looks like. There is no common language or standard within companies on how to describe or evaluate sustainability performance. This leads to widespread miscommunication, both internally and externally.

In response to this challenge, a flurry of industry standards, labels, certification schemes and regulations have emerged to aid businesses and consumers in making informed decisions. These standards often vary by geography and sector. The result is a complex and constantly shifting tangle of definitions based on a mix of fact and emotion. In this context, executives need to understand how key stakeholders view their solutions, and how these views are likely to affect regulatory and buying behavior.

Companies have traditionally relied on academic and highly granular tools such as life-cycle assessments (LCAs) to gain insight into the environmental (and sometimes social) impact of products or services. These powerful tools typically assess the impact of products in applications, yet are not designed to assess how the products’ performances stack up against the expectations of the market or society in general. The limitations of these traditional sustainability tools are painfully clear when watching companies vehemently defend products using detailed LCA reports, even as consumers move to competing products in accordance with changing preferences.

Another shortcoming of traditional sustainability tools is that they typically focus on existing regulations and requirements. Companies have a clear need for predictive tools that provide early warnings regarding potential risks or acts of legislation that may emerge. All too often, traditional tools confront decision-makers with obstacles after the fact.

The most relevant input gleaned for decision-making

The perceived complexity of gathering and interpreting information for high-quality sustainability performance assessments can seem daunting. People new to the domain often feel overwhelmed when facing the immense breadth of information. For instance, relevant impact may include environmental, social and economic, and such impact needs to be considered across the full lifecycle (such as purchased materials, manufacturing, processing, use, end of life/recycling). Or the performance of a product in one application or region may be very different from that of the same product in another application or region. For example, when is there really a sustainability risk to a product? How do you measure this objectively? Which weak signals are relevant to capture?

Companies need robust, fact-based methodologies supported by proper tools and processes to ensure that resources are focused on efficiently converting the most relevant insight into input for decision-making. Such an approach necessitates input from various departments and will only deliver maximum value when embedded in all day-to-day decision-making processes. Top management support is therefore critical to the methodology’s successful implementation and use.

A clear view of overall sustainability

Businesses across industries are putting tools in place to help steer product portfolio development, considering consumer preferences and regulations on sustainability. A sustainable portfolio steering approach provides a clear view of a portfolio’s overall sustainability based on an objective review of the portfolio’s constituent products. It provides strategic input for decision-making processes, including strategy development, mergers and acquisitions, capital investments, and innovation management.

The approach considers the product portfolio in terms of its products and their applications, and geographies that those products serve. Product-application-region combinations are assessed individually, using a fact-based model that is both simple and comprehensive. The result is a granular assessment of the sustainability-related risks and opportunities of each combination, tailored to the individual company. When aggregated, insight can be obtained for entire portfolios or parts thereof: for example, what percentage of the total turnover and margin comes from highly sustainable products that are likely to experience high growth, and what share is derived from products that are at risk?

Conclusion

The impact of consumer- and regulation-driven disruption means companies must develop objective and defendable approaches for managing sustainability risk within their product portfolios. Sustainable portfolio steering is a simple and comprehensive approach that helps large organizations create tangible business value by embedding fact-based sustainability intelligence into the daily decision-making conducted by employees across departments and geographies.

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