Value-focused Management of the Sustainability Transition

by Philip Sugai We know what needs to be done 98% of CEO’s globally understand that sustainability is a top priority for their businessesⁱ. While environmental, social, and economic challenges have been viewed as key risks for businesses and economies globally for more than a decade, unfortunately our current measurement and management capabilities are confusing, conflicting, ambiguous, difficult, opaque, and focused mostly on reporting and compliance rather than on impacts and forward-looking strategy. Because of this, even with the proliferation of sustainability reports, scores and awards, 85% of the SDGs remain unsolvedⁱⁱ. Why standards and frameworks aren’t enough As of today, there are hundreds of competing standards, frameworks and systems for sustainability reportingⁱⁱⁱ and measurement^iv, each with its own unique approach that rarely aligns with the others. While the EU taxonomy, anti-greenwashing rules and the integration and collaboration between various frameworks through organizations such as the International Sustainability Standards Board (ISSB), the Global Sustainability Standards Board (GSSB) may give us hope that the system underlying our sustainability transition will become self-correcting, it only takes a few short minutes of carefully reading through even just a small subset of the sustainability reporting requirements documentation from these groups to see that this is not the case. Worse yet, you will also quickly find that these problems may be features of the system rather than bugs in its design. The complexity of terms used, conflicting measurement requirements and overall lack of consistency across these has created a booming market for management consultants, investment analysts and sustainability transition experts focused on reporting and disclosure rather than the actual achievement of our shared sustainability goals. In an effort to clarify these goals and outline a possible path to achieve them, over the last five years my research team and I have analyzed more than 1,200 of these reporting requirements from more than 40 of the world’s top sustainability standards and frameworks, and organized these into a 7-stakeholder, 27-theme, 81-goal based Value Model^v. Through this, we’ve learned that the development of a system for a true sustainability transition first requires a definition of what “value” means in the context of business activities. With such a definition in place, this system must be built to include:

• Shared end goals: If we imagine each of the SDGs or any other sustainability standard as an object within Newton’s 2^nd law of motion, and the collective actions of all businesses as exerting force on this object through their various sustainability efforts, currently the energy from each of their collective efforts are misaligned, therefore yielding sub-optimal results. For example, if Company A is focused on reduction of plastic waste and Company B on biodiversity regeneration, if we only see each company’s efforts individually, these will of course look positive. But if we take a step back to see both of their actions in aggregate, it’s possible that Company A’s lack of focus on biodiversity could lead to negative impacts that detract from Company B’s overall results and vice versa related to plastic waste. In a worst-case scenario, their combined efforts could actually lead to negative net impacts even though each individually appears to be doing something positive. Leveraging the key lesson from Newton’s net force calculation, the development of clear, shared end goals is required to align our collective global sustainability efforts towards successful outcomes.
• Measuring net impacts: Currently, there is no agreement or synergy between the 300+ sustainability frameworks, creating fundamental issues around how business impacts should even be measured. For example, the ISSB standard asks businesses to report material impacts on their businesses, a so-called “single materiality” approach, while the European Financial Reporting Advisory Group (EFRAG) in the EU additionally asks businesses to report material impacts that they have on their stakeholders, a so-called “double materiality” approach. Understanding that value can be created together with stakeholders, and that these relationships have measurable net impacts across both parties will help us to see total value between and across all important stakeholder relationships.
• Removing Opportunities for Value Washing: Our research has shown that few sustainability standards align even on what the E, S or G in ESG mean and how in turn they should be measured. If anything a company says can be considered “good” for sustainability, without a clear system in place to account for and assure its performance, then we will continue to experience sustainability paradoxes similar to what happened in 2023. Last year we witnessed a 40% increase of Forbes2000 index companies who gave pledges to achieve net zero^vi, while at the exact same time, many companies making such claims didn’t have any clear plans to achieve these, or worse were found to be backtracking on them^vii. Value washing^viii, or the separation of the discussion of impacts from impacts themselves must be removed from any future sustainability system.
• Inclusion of businesses of all sizes: The World Bank estimates that 90% of the world’s businesses are micro, small, or medium enterprises, that employ over 50% of the world’s workers^ix. But most all sustainability standards, frameworks and awards are focused on their much larger, multinational counterparts. The Value Model works as a nested doll system and makes sustainability transition and value creation easy to understand and manage for even the smallest business. It has been built to scale in its detail as businesses work to understand first what stakeholders, then which themes, to achieve which goals and with what KPIs, matched to which sustainability reporting framework can be used to measure and manage value creation within their own business or ecosystem.

The path forward For all the excited talk about sustainability, and the proliferation of sustainability commitments by companies, we need businesses to integrate these commitments into their governance, control and reporting mechanisms, as outlined in the new ISO3700 family of standards^x. Second, we need investors, business leaders, governments, and individuals globally to value those actions that lead to the achievement of these goals rather than simply giving awards for sustainability data disclosure. The fact that the market for sustainability data has now exceeded $1 billion^xi should give all of us pause to reconsider what the purpose of our sustainability transition truly is. We know from experience that when we understand an end goal clearly, we can collectively align global interests to combat a major sustainability issue. For example, in the 1980s, with a growing understanding of the impact of CFCs and other gases on the growing hole in the ozone layer, we were able to take collective, concerted action to solve this problem. The fact that today’s sustainability issues are more multifaceted, and complex doesn’t mean that we can’t similarly solve them. It means that we need to first agree to step back and see the challenges inherent in the wicked problems in front of us and to create what Mariana Massucato^xii calls “mission-oriented innovation policies” that align public and private sectors around the development of elegant, system-level solutions. Once this happens, markets can then decide how to reward or punish the different strategic approaches that businesses take within such a system in context. How individual businesses (irrespective of their size, industry or location) design and implement their sustainability strategies will then become a new basis for competition. The development of such a system will not only empower us to align our collective forces to solve today’s most daunting environmental, social and economic challenges, but also create the foundation for us to do so for future challenges as well. We can of course instead choose to avoid the development of such a systems-level view, believe all of the gilded sustainability pledges made by today’s businesses and simply wait until an increasing number of externalities become existential challenges to future business and government leaders. But if the definition of sustainability requires us to protect future generations from the negative outcomes from our actions today, then waiting really is no longer an option.

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About the Author Philip Sugai is the Director of the Value Research Center (VRC) and a Professor of Marketing at Doshisha University’s Graduate School of Business in Kyoto, Japan. He is the author of Building Value through Marketing, a Step-by-Step Guide, published by Routledge, and has published a number of academic articles and business case studies focused on value measurement, sustainability and marketing.

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Sasin Collaborative Thought Leadership: Transforming Our Critical Systems Complex multi-actor systems have developed around satisfying critical human needs, such as nutrition, mobility, energy, or housing. These systems, as well as enabling sub-systems such as education, finance, etcetera, represent most of our economic activity, but there is also enormous inefficiency embedded in the complexity and dynamics through which these systems have evolved, making them responsible for most of humanity’s environmental and social impact. Current efforts to reduce our negative impact can hardly be considered successful, because too much focus is still on marginal improvement of our traditional models. Only 18% of the 169 targets set for the 2030 SDGs are on track to be reached (most targets show virtually no progress and 15% are in fact reversing). This is why increasingly, scholars and practitioners are trying to understand the nature of systemic change, the radical reinvention of our critical systems. Cambridge University Press recently published ‘Transforming our Critical Systems – How Can We Achieve the Systemic Change the World Needs’ by Sasin professor GJ van der Zanden and researcher Rozanne Henzen. Sasin has invited thought leaders and practitioners from around the world to share their visions and insights on the reinvention of the systems that they are part of. These pieces provide a rich variety of perspectives from business, policy makers, civil society, academia and think tanks, as well as enablers such as finance, technology and start-ups. In systems change, incorporating perspectives from multiple stakeholders is essential to come to a shared understanding of the system dynamics and challenges, develop a shared vision of the future and explore possible interventions and collaborations.

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