What is a sustainable business?

Updated: Sep 25, 2021

What does a sustainable company do? Look after its staff? Appoint women to its board, try to decarbonise its activities or use more recycled materials? In fact, sustainability is not only about environmental and social performance.

According to the Cambridge dictionary, sustainability is “the quality of being able to continue over a period of time”. Thus, it is safe to say that a sustainable company is the one that is resilient to challenges and manages to stay in business in the long run. An environmentally and socially responsible company is not sustainable if it does not create value for its customers and shareholders. Likewise, a profitable company with a solid customer base can't be sustainable with unhappy and demotivated staff, or negative reputation due to massive air pollution from its plants. To grow and thrive, a business has to be alert and responsive to the needs of its ecosystem, with sustainability ingrained in its purpose and strategy.

Companies’ longevity has been declining rapidly over the past few decades. A research conducted by Credit Suisse revealed that the average duration of companies on the S&P 500 index fell from almost 60 years in the 1950s to less than 20 years in 2017. Advancing digitalisation, evolving global trade and investment dynamics, and profound environmental and societal developments present ongoing and intensifying challenges to companies.

In the face of these mega-trends, a company needs a strategy - sustainability strategy - that addresses existing and potential risks and opportunities of the changing world. Strategy delineates how the company will use its resources to achieve its long-term objectives. The long-term goals of the business are driven by its purpose – why the company exists and what is its impact on society and the environment.

The purpose of the company should be the common denominator of the main economic, environmental and social interests of its various stakeholders. It should be a high-level objective, yet direct enough for different stakeholders – employees, management, customers, investors and others - to be able to relate to. Vague or overarching purpose statements will create confusion and result in lack of pivot, therefore they must be avoided by all means. For example, the purpose of a car manufacturer could be: “Providing affordable mobility to families with a focus on car safety and low-emission driving”.

Corporate purpose and stakeholders’ interests

Source: KEN Associates

Having the company’s purpose statement ready opens the stage for developing its strategy, operational targets and action plans.

Long-term goals of the business are driven by its purpose

Source: KEN Associates

When drafting a company’s long-term strategic objectives, its leadership should be flexible to balance the priorities of different stakeholder groups, and ensure that these priorities are fully aligned with the corporate purpose. That requires assessment of relative importance of various economic, environmental and social factors that are material to the company’s activities.

Materiality analysis is a critical element of environmental, social and governance (ESG) analysis. It aims to assess the effect of different ESG factors on the company’s performance, and also the impact of the company’s activities on the environment and society. For example, for an IT company providing internet communications services, customers’ data privacy, labour quality and corporate governance are likely to be the most material ESG factors affecting its performance (inward or financial materiality). However, there are other factors related to the company’s operations that affect the environment and society (outward materiality or impact), such as mental health of the users of the company’s platform.

For a comprehensive materiality analysis, the company and its consultants need to engage with all relevant stakeholders to learn their perspectives of the issues that are most material to them. Importantly, materiality analysis should be conducted periodically to reflect the evolving importance of various sustainability factors. The results of materiality analysis should be compared to the company’s strategic and operating goals, and lead to updating of these goals if needed.

About KEN Associates

KEN Associates ltd is a UK-based consulting firm. We help companies, investors, governments and development institutions across the world to meet their sustainability goals with cutting-edge consulting and research solutions.

To learn more about our work and get advice on your company's sustainability strategy, please send an email to adallakyan@kenassociates.co.uk or visit our website at www.kenassociates.co.uk

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