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The annual World Economic Forum (WEF) in Davos ended yesterday. The closing speech made big promises on sustainability: the US will put $50 million into a fund to support private sector engagement to promote socially responsible practices, business operations and supply chains. 50 countries this week linked a coalition of trade ministers on climate issues to advance cooperation on the global response to climate change. Further, the WEF talks about significant increases in efforts on climate action and reports on the establishment of a Forum for Chief Sustainability Leaders, which already includes 60 CSOs. In the area of supply chain, indigenous peoples are leading discussions to achieve better working conditions, trade outcomes and sustainability for their peers. And then, more than 80 companies want to add 7 billion trees by 2030 to the “1 Trillion Trees initiative”.
Grand words that are viewed with just as much scepticism. Climate activist Greta Thunberg, who has also come to speak on a panel, had also expressed rather disbelief on the subject.
Nevertheless, there are strong changes in the field of sustainability. Companies around the globe are shifting their focus to sustainability and are becoming active in this area. This is because political and social forces have put sustainability at the top of the agenda. Investors and financial markets are increasingly demanding a convincing environmental, social and governance (ESG) plan and a path to net-zero emissions.
Companies are therefore increasingly developing sustainable products and services as well as supply chain practices to satisfy investors and regulators and improve their reputation. And, not least, to increase their sales. By now, it is clear that these practices help them reduce their environmental footprint while saving costs related to waste, resource and energy consumption.
In addition, many corporate leaders believe that sustainability also helps to deepen the meaning of the organisation and the work itself. This could also ensure a new generation of employees. This shift is fuelled by increasing energy uncertainty, rapidly changing regulatory and reporting standards, and growing investor enthusiasm for environmental, social and governance (ESG) performance.
The pillars of sustainability
Let's talk for a moment about the concept of sustainability. Often the term is associated with only one view, but in fact it is about several dimensions or even pillars. Two commonly used three-pillar models of sustainability are ESG and "Triple Bottom Line". The latter includes the following pillars:
Environmental sustainability: This pillar focuses on protecting the natural environment and preserving resources for future generations. This includes practices such as reducing pollution, conserving energy and water, and protecting biodiversity.
Social sustainability: This area is about the social and economic well-being of individuals and communities. It includes issues such as fair labour practices, access to education and healthcare, and building inclusive and resilient communities.
Economic sustainability: This pillar focuses on ensuring economic growth and stability while protecting the environment and promoting social well-being. So issues like creating jobs, reducing poverty and promoting sustainable business practices.
ESG, on the other hand, is a framework that also comprises three main components: Environmental, Social and Governance. It is increasingly used by companies, investors and other stakeholders to assess the sustainability and long-term performance of organisations. This is because ESG criteria help identify companies that are well positioned to take advantage of opportunities related to environmental, social and governance issues.
Consequently, in the modern corporate world, companies themselves are also recognising the increasing importance of ESG factors and are taking steps to improve their performance in these areas. These include sustainable business practices such as reducing carbon emissions, improving labour standards and increasing transparency and accountability.
For investors, ESG factors can also be used as a means of assessing the long-term risk and return of investments. Meanwhile, many investors use ESG factors as a basis for their investment decisions, and some even specifically look for companies with strong ESG performance.
As a result, companies are also increasingly reporting on their ESG performance through sustainability reports and other means, which allows stakeholders to evaluate their ESG performance and compare it with the competition. This increased transparency enables investors, customers and other stakeholders to hold companies accountable for their environmental and social impacts and make better decisions.
Sustainability Trends
2023 will be a momentous year for sustainability. Many trends are emerging that could have a significant impact on the environment and society. The pressure of environmental regulations such as the EU Green Deal is also felt by the European corporate world. As a result, they are increasingly looking for ways to reduce their carbon footprint. Here are some of the biggest sustainability trends for 2023 in the corporate world:
Sustainable supply chain management
Supply chain management is currently quite a big topic. First there was Covid and now there is the crisis in Ukraine, which exposes the fragility of the supply chain. Sustainable supply chain management is about strategies to reduce waste and optimise resource allocation for better product quality. Companies are therefore focusing on creating efficient distribution networks to move goods faster and more effectively while minimising environmental impacts. Other practices such as ethical sourcing, responsible production, transparent reporting and waste reduction are also becoming increasingly important to create a more sustainable system.
Organisations now also encourage their employees to report incidents of unethical or irresponsible practices to ensure they can be addressed accordingly.
To this end, the Daimler Truck company adopted a policy statement on social responsibility and human rights a few weeks ago. This strongly assures their commitment to respecting and supporting human rights and they expect the same from their business partners along the entire value and supply chain.
Renewable energies
Renewable energy sources such as solar and wind power are becoming increasingly important for companies that want to reduce their environmental footprint. This includes investing in renewable energy systems for offices and production facilities. Alongside this, organisations are looking for ways to feed surplus electricity into the grid to increase the efficiency of the electricity used. In addition, companies are pushing for policies that incentivise investment in renewable energy by providing grants or subsidies for it, where appropriate.
Furthermore, many companies are converting their vehicle fleets to electric models, which cause fewer emissions than conventional petrol engines. Also exciting in this area is the development of hydrogen, not only for passenger cars, but also for trucks or trains. In cooperation with Volvo, Daimler Truck is developing a hydrogen truck that will be able to travel 1000 kilometres in the future. The production of hydrogen from water (as a practically infinite raw material) by electrolysis is currently a focus of research. However, there are two challenges: To produce "green" hydrogen, the electricity used must come from CO2-neutral sources. And a large amount of electricity is needed for electrolysis.
Increasing focus on non-financial reporting
Companies are increasingly being held accountable for their environmental impacts, so they are becoming more aware of the need to report not only on their financial performance, but also on their environmental performance. Most recently, the Corporate Sustainability Reporting Directive was adopted by the EU Parliament on 10 November 2022. Under the Corporate Sustainability Reporting Directive (CSRD), large companies are required to report on how they deal with social and environmental challenges.
For this reason, organisations are increasingly relying on standardised sustainability reporting frameworks such as the Global Reporting Initiative (GRI). This is an emerging market in which other providers are also active, such as Clarity.ai and others.
Compliance with government regulations
To ensure that companies meet their emission reduction commitments, more and more countries are introducing regulations. These regulations require sustainable investments, disclosure and reporting of environmental practices and performance. Companies must comply with these new regulations or risk significant fines or other sanctions. This topic is naturally tailor-made for consultancies like Mckinsey, KPMG and others, who are coming up with their new sustainability divisions.
Sustainability becomes a strategic priority
Speaking of ESG, companies are beginning to realise that sustainability is not only important from a compliance perspective, but can also help them gain a competitive advantage by offering products and services to consumers who prefer sustainable options. As a result, many companies have started to include sustainability in their long-term strategic plans and goals. In the past, sustainability was always associated with additional costs, but now organisations are also saving costs in this way.
Greater trust in circular economy models (Circular Economy)
Circular economy business models involve reusing resources instead of throwing them away after use – reducing waste and conserving natural resources. More and more companies are starting to adopt circular economy models to reduce their environmental impact and still remain profitable.
Examples include: Product leasing, product re-use/re-marketing programmes, product life extension programmes, pooling (e.g. sharing parts for multiple products), refurbishment/repair services, take-back programmes (e.g. recycling of electronic waste), and last but not least, collaborative models that promote resource sharing within supply chains or across sectors or industries.
The Economist also sees the circular economy as a significant trend in 2023:
The World Ahead 2023: five stories to watch out for
Data transparency and traceability are becoming more important
Companies need reliable data to accurately assess their environmental impacts and track progress towards their sustainability goals. Many organisations have implemented systems that allow them to collect data on their resource use, energy consumption, water use, waste management and carbon footprint in order to create more transparency about their activities and make informed decisions about how best to reduce their environmental impact. This transparency is thus entirely in line with the ESG model.
More investments in sustainability
Governments around the world have started providing economic incentives for companies that undertake sustainability initiatives or invest in green projects such as renewable energy or energy efficiency. This makes sustainable investment much more attractive for companies seeking a greener future. Those who invest in companies with a good environmental record or those that actively seek to reduce emissions and conserve natural resources can benefit from economic returns while contributing to the protection of our planet.
Rising demand for sustainable products and services
Transparency is also needed on the part of consumers - because they want to know where the products come from and how they were produced. They also want to know that the products they buy have been produced sustainably, without causing harm directly or indirectly through the production process or supply chain activities. According to a study by Deloitte, 55% of consumers surveyed have recently purchased a sustainable product or service – and that was in 2021.
Increasingly, companies are being held responsible for this transparency throughout their value chain. This starts with the source materials and goes all the way to the supply processes. This is to ensure that they meet the standards set by international bodies, such as the European Union's REACH regulation, which governs the regulation of chemicals in Europe.
What can your company do to become more sustainable?
There are a variety of sustainable practices, both small and large, that can be used to ensure that organisations reduce their environmental impact and act in a socially responsible way. Finally, we would like to share with you some examples, some of which you are certainly already practising:
Ecological transport: Encouraging your employees to use public transport, carpool, cycle (and offer a company bike to do so) or walk to work will both reduce the carbon footprint and encourage healthy habits. Remote work for employees also contributes to reducing transport emissions.
Sustainable procurement: Choosing to buy products and services from suppliers that use sustainable practices can help promote sustainable practices throughout the supply chain. This includes supporting fair labour practices and ethical sourcing of materials.
Use of renewable energy: Adopting energy-efficient practices and using renewable energy sources reduce the carbon footprint and are essential for achieving environmental sustainability. Switching to electric models in the vehicle fleet is one way to contribute. Or sourcing electricity from renewable energy sources such as solar, hydro and wind power is another.
Communal engagement: Supporting local communities and non-profit organisations can help promote social and environmental sustainability. This includes volunteering and donating to charities.
Sustainable finance: Considering environmental, social and governance (ESG) factors in investment decisions and financial products can help align financial goals with sustainable development goals.
Continuous improvement: Integrating sustainable goals into the overall corporate strategy and regularly measuring progress can help the company achieve its sustainability goals and adapt to new developments in technology and policy.
Conclusion
Sustainability will become an increasingly important issue for companies in the future, and it is not only in Germany that sustainability goals are now legally anchored. That is why organisations need to incorporate decisions about their value and supply chain as well as actions and investments of environmental, social and governance (ESG) factors into their overall strategy. And at the same time, they need to improve their practices in the areas of green transport, sustainable procurement, use of renewable energy sources and social engagement. The key to successful sustainability is continuous improvement, and therefore profitability – because that's how companies can stay ahead of the curve and ensure they are doing their part to preserve the planet. By making changes today, we can ensure a better future for all. Let's walk the path to greater sustainability together.
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