The sustainability transition starts with three crucial mindset shifts.
We are entering a new era for businesses. The rise of ESG – environmental, social and governance factors – is a symptom of the pervasive change that corporations and their leaders need to deal with. Expectations of how businesses should operate are changing dramatically, from new talent demanding to work for purpose-driven companies, to regulators becoming globally bolder, to investors seeing ESG performance as a leading indicator for value creation. You might be confident that you run your operations responsibly – but today, that’s not enough. You’re accountable for your whole value chain, whether you control it or not.
The sustainability transition is a moral and business imperative. But the issues involved are often incredibly complex and dynamic: even detailed action plans quickly become obsolete.
So how do businesses move forward? By addressing mindsets: the core beliefs, hopes and fears that guide decision-making in your teams.
Through the Duke CE ESG Leadership Academy, we have identified the mindset shifts across three major dimensions that are critical for companies to succeed in the transition to socially and environmentally sustainable business models.
1 Act with urgency
The global net zero goal for 2050 does not start in 2049. It should have already started. It’s too risky to fail to address ESG factors head-on. A mining company that provides critical minerals for electric vehicle batteries was recently approached directly by a car manufacturer – a firm a few steps above them in the value chain – with concerns about the treatment of local communities near the company’s mines, and the impact of its activities on scarce water resources. Sales had to be halted, costing the mining company millions of dollars. They are now taking a more pro-active approach to embed ESG considerations in their core business strategy. They have realized where the true risk lies.
An important dimension of this relates to technology. It means moving away from “I’ll decarbonize my business with the technologies of the future”, to “I’ll pioneer the technologies that are waiting to be scaled up”. According to McKinsey, 70% of technologies required for a net zero world are already available – indeed, most already offer positive net present value. Leaders need a pioneer mindset to adopt them at the scale needed to save our planet.
2 Be genuine
The second dimension of the mindset shift required is about making ESG and sustainability goals truly genuine. No lip service, no box ticking. Leaders need to embrace ESG to make the most of it. “The trend is your friend,” as the saying goes.
A good illustration of this mindset shift relates to ESG reporting. We need to go from “ESG is just a reporting burden, we do it for the rating agencies”, to “ESG data is extremely valuable to improve our decision making”. Ask yourself: how can we better leverage all the data that we are gathering to create more business value? A retail company concerned about its greenhouse gas emissions started tracking how much fuel it was burning on its deliveries. Through detailed comparison across routes, it realized that many circuits were poorly designed. Optimizing them saved significant amounts of fuel, simultaneously reducing both the company’s environmental footprint and its dollar spend.
Another example on this dimension involves going from compliance to caring courage. Anglo American’s Los Bronces mine in Chile faced severe water shortages; water was also scarce for the local community. The company decided to shift from a mindset of compliance with local laws on water consumption to one based on bringing solutions to the community while doing their core business. It devised a way to pump water from a desalination plant near the ocean all the way to the mining operation high in the Andes mountains – and used water only after serving the local community, which was also suffering from water scarcity. This is not philanthropy. This is not corporate social responsibility. This is caring for the community, increasing the employee value proposition by improving the livelihood of the nearby village, and doing it by leveraging core business competencies. It starts with genuine, courageous caring.
3 Capture the opportunity of a lifetime
The third shift is about capturing the opportunity of a lifetime: embracing the sustainability transition to create and capture value for all stakeholders. We need leaders to go beyond the narrow mindset of, “We will manage the threats that sustainability trends pose to our value pools”, to “We will develop competitive distance by leveraging sustainability trends into our core business”.
Consider the argument raging over the EU’s planned ban on vehicles using the internal combustion engine (ICE) by 2035. A number of German manufacturers have been lobbying for a U-turn, asking that the ICE remains legal for use with ‘e-fuels’ – a synthetic alternative to oil-based fuels. On the other side of the argument are dozens of other manufacturers, including Ford and Volvo, that are planning to go fully electric by 2030. They want the ban to be enforced fully, as planned, without loopholes. What if they win? Having resisted the shift away from the ICE, the German manufacturers could find themselves dangerously exposed and ill-prepared for the future. After all, this debate has rumbled on at the same time that Tesla has developed a market cap larger than the next top five global carmakers combined. Tesla developed a competitive distance by making the electric vehicle trend their friend, embracing it fully rather than defending the status quo.
On the financing side, business needs to go from “ESG as a distraction that consumes scarce financial resources” to “ESG as an enabler of sustainable finance that lowers our cost of capital”. Brambles, the global supply chain company, has fully embedded circularity into its business model. It recently raised a €500 million green bond, specifically aimed at reinforcing its portfolio of eligible green assets. Its chief sustainability officer Juan José Freijo – also a Duke CE educator for the ESG Leadership Academy – attributes a large part of its success and convenient financing terms to its sustainability goals. “The bond was oversubscribed, with support dominated by ESG-driven funds. We couldn’t have done this with a standard bond”.
ESG is not about woke culture getting into the corporate world. It’s about 21st-century capitalism. The sustainability transition is about embedding ESG concerns into our core business models. It is about contributing to a more sustainable future – for all stakeholders.
Andrés Saint-Jean is global head of Duke CE’s ESG Leadership Academy.