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 by saving costs related to waste, resource and energy consumption.
Many corporate leaders find that sustainability helps deepen their organization’s sense of purpose to engage and retain a new generation of employees. This shift has been driven by increased energy uncertainty, 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 COP15 UN Biodiversity Conference in Montreal highlighted the need for business to create action plans to mitigate human impact on climate and nature. The Russian attack on Ukraine and the subsequent surge in refugees, rising inflation and ongoing concerns about the COVID-19 pandemic also raise doubts about the ability of governments 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 ensure a sustainable and inclusive future for the next generation.
For 2023, IMD experts have identified a number of sustainability trends that will drive further business transformation to create value, manage risks and reconfigure entire industries and systems to ensure we respect our boundaries planets and create a more inclusive and resilient economy.
From net zero to climate positive supply chains
Carlos Cordon, Professor of Supply Chain Strategy and Management
Many companies are working hard to meet net zero sustainability goals by 2050 or other target dates. These include scope 3 emissions, those that do not come from their operations but from their larger value chain. This is the hardest part, as typically 90-99% of a company’s greenhouse gas emissions are Scope 3. On that journey, many are also realizing that it is impossible to achieve net zero without looking outside their traditional business. For example, many food companies cannot achieve net zero without having their suppliers (farmers) plant crops that are not beneficial to the company’s supply chain, but that sequester CO2. Along the way, they are now asking themselves if they can push even further and transform their supply chains to become CO2 negative, going “beyond net zero”. Not only are they asking these questions, but they are also planning how to pay off the CO2 “debt” the company has built up since its inception.
Organizational readiness for sustainable transformation
Vanina Farber, Professor of Social Innovation
Patrick Reichert, Terminal Research Professor and Research Associate
There is an urgent need for private capital to enter frontier markets to help solve major systemic challenges. However, organizational transformation and a willingness to push the boundaries of the problems that private capital can address and solve are needed. For example, the humanitarian sector is currently experiencing a $32.3 billion shortfall between funding and what the UN says is needed. Can development organizations, governments, private firms and financial institutions work together with the humanitarian sector to fill the gap? Collaborative systemic solutions require new approaches to fragility and seek alternative sources of capital to supplement traditional grant funding. However, meeting these objectives will require actors to undergo organizational transformation: NGOs will need to be open to more market-based approaches, governments will need to provide sustainable policies and stop initiatives riskier, development finance institutions will need to identify opportunities to provide additional (ie, focusing on interventions that would not have occurred without their participation), and corporations will need to be willing to cooperate with traditional non-market actors. We tend to think of 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 Associate and Terminal Research Professor
Family businesses will adopt new digital capabilities to manage sustainability data that guide sustainable business practices. Whether it’s reducing waste, optimizing your supply chain or eliminating emissions, insights from sustainability data can help you achieve net zero emissions. A total of 60% of family businesses with strong digital capabilities surveyed by PwC in 2021 put sustainability at the heart of their day-to-day operations. A key driver for this is the next generation of family owners. The new generation of business owners and managers care deeply about the environment and are striving towards more sustainable and equitable business practices. Being tech-savvy, digital natives are ready to take a more data-driven approach in order to lead the way to a net zero future.
War and energy shortages accelerate the adoption of energy efficiency and renewable energy
Natalia Olynec, Head of Sustainability
Russia’s invasion of Ukraine disrupted energy supplies across Europe, creating energy uncertainty, rising costs and a strong incentive to invest in renewable energy sources. In the short term, businesses of all industries and sizes will look to energy saving measures to reduce costs and carbon emissions. To save on energy bills, firms will renovate buildings to prevent heat loss and implement digital temperature control solutions, turn off lighting and equipment when not in use, and replace less obsolete equipment effective. In the long term, this is likely to 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 finance the transition to clean energy. Many companies will see an opportunity to accelerate the green energy transition and 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, Terminology Research Professor and Research Associate
More than 40,000 species are at risk of extinction in the coming decades, according to the UN’s progress report on the Sustainable Development Goals published in July 2022. The biodiversity challenge is closely intertwined with the climate crisis – the consequences of climate change climate have negative consequences for the survival of vulnerable species, and biodiversity conservation can help mitigate climate change. This interconnected challenge presents a timely opportunity for companies that are serious about ambitious climate targets to count the protection of nature and biodiversity into their climate targets as a means of achieving net zero. At COP15, the 2022 UN biodiversity conference, leaders set out 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 and sustainable high performance
Susan Goldsworthy, Professor of Leadership, Communication and Organizational Change
Research of more than 3,000 executives as of April 2020 shows that half to two-thirds of executives say they are operating from a place of ‘sickness’ rather than a position of well-being. Many report feeling overwhelmed, experiencing increasing anxiety, frustration and irritability as organizations face a host of challenges in a world of ecological collapse, biodiversity loss, social fragmentation and economic decline. Executive teams will increasingly need to address these emotional challenges. A simple exercise can be powerful in creating a more inclusive and productive environment. Taking a stack of post-it notes, team members write down all the things that concern them from their personal and professional perspectives. They put it all on the wall, accepting and accepting. They then write down all the things that can affect and get to the next meeting, putting those post-it notes on the opposite wall. Through this process, leaders co-create the conditions where people can thrive in the midst of adversity.
Luxury development of sustainable supply chains
Stéphane JG Girod, Professor of Organizational Strategy and Innovation
Luxury industries have continued in 2022 to accelerate innovation towards greater sustainability. Automotive and fashion have had the most severe negative 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, carmakers like Porsche have been working on their transition to electric power, while Kering began its journey towards decarbonisation in 2012, introducing the first Environmental Profit & Humbs account in luxury fashion along the way and share its methodology so that other companies can learn from it and use it as a model. In watches and jewelry, the transformation started later, probably because of the longer life cycle of these products and their smaller volumes. Luxury players, traditionally fearless competitors, have realized that they must collaborate to make a positive impact. In 2022, Cartier and Kering formed the Watch & Jewelery 2030 Initiative, which, like the Pact of Fashion, aims to drive progress in sustainability in its sector. In 2023, luxury players must accelerate their decarbonisation efforts by working on their Scope 3 emissions and shift from an ESG risk management mindset to creating opportunities for strategic renewal and greater brand desirability through new business models with purpose and positive impact. All this will require much more investment and capacity building.
