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Transcript: Three Things Your Chief Sustainability Officer Won't Tell You

Deloitte Insights Podcast

Welcome to another edition of Deloitte Insights, a production of Deloitte LLP. Deloitte Insights is an audio news podcast that looks at important business issues. Today’s program — Three things your chief sustainability officer won’t tell you.

Environmental and social sustainability is a hot topic in the media and in the business community. What does sustainability really mean in practical business terms, what challenges do companies face in addressing it, and what is the business case for sustainability? To explore these and other issues, Deloitte interviewed sustainability leaders at 48 large U.S.-based companies. Speaking with me today about some of the takeaways from that survey are Chris Park and Katie Pavlovsky. Chris is a principal with Deloitte Consulting LLP and Katie is a principal with Deloitte Financial Advisory Services LLP. They are co-leaders of Deloitte’s Enterprise Sustainability Initiative. Welcome to the program.

Katie: Thank you.

Chris: Thanks. Glad to be here.

Host: Katie, let’s start with you. According to the survey, sustainability executives seem to be telling us what we think of as sustainability may not be what you think it is. Why is that?

Katie: It’s interesting. Many of our respondents through the survey that we recently undertook through the sustainability leadership cited the definition used in the 1987 Brundtland Commission is the basis for their definition of sustainability, with the scope including not only environmental, but also social and economic performance. In practice and perhaps this is a reflection of the maturity of environmental regulation, we observe an overwhelming focus on improving environmental performance. This could be as well because environmental performance objectives tend to be tangible and measurable in terms of impact reduction and also return on investment, and then certainly the regulatory history has resulted in a consensus with respect to metrics and performance objectives. So, what we see is that companies in practice are very focused on sustainability in very different ways, pursuing inward looking or isolated initiatives that are aligned with risk management or cost savings or may be company-specific objectives. Long-term success requires really taking a structured approach to the sustainability scope in the areas of environmental, social, and economic and addressing not only the strategic, operational, and government’s requirements within their four walls, but really thinking about the value chain impacts and the collaboration required to meet sustainability objectives.

Chris: I think Katie hit the key points really from a business issue standpoint. The definition of sustainability continues to evolve, so whether we are referring to climate change or alternative and renewable energy, clean water, ecosystem services, the issue of improving environmental and social performance continues to evolve. The other thing that came through fairly clearly in terms of the survey responses was that the definition of sustainability tends to be very sector specific. What means sustainability in the oil & gas sector is fundamentally different than what means sustainability in other sectors, and I expect we will see the evolution of sustainability as defined by businesses in their respective sectors. We will see companies taking on more environmental and social responsible initiatives inside the company. As Katie mentioned, we will see more companies of value weight environmental and social impact up and down the value chain, really thinking about what they purchase from suppliers and what they produce to the customers, whether they are end-use customers or business-to-business customers.

Host: Let’s dive into that point a little more. Our survey respondents said our products are only as sustainable as our suppliers and customers allow them to be. Chris, can you explain?

Chris: Certainly. I think one of the key things that came across in the survey responses and Katie referred to this a moment ago is the perception out in the marketplace and may be in some instances a misperception, that customers are not willing to pay a premium for products or services that are considered to be environmentally friendly. What the research suggests is that more and more customers are beginning to opt in to make decisions about products that are environmentally friendly and clearly want to have the option of considering those qualities and attributes in the context of their purchase decision. So, for example, we see a lot of research, for example, in the retail space, the retail sector, that would suggest providing some degree of environmental labeling, understanding embedded energy or carbon or understanding the environmental attributes of a particular product is a part of the purchase decision, and customers are, in many instances, wrestling with the definition of what constitutes a sustainable product; is it locally grown or not, is it organic or not, and there are no clear sciences involved yet on “good versus bad products.” So, the research would suggest that customers are hungry for better information about the environmental and social attributes of the products they are purchasing, and at least in some instances, may be willing to pay a little bit of a premium. When we overlay that trend with the idea that environmental and social production can actually be a cost reducer or cost saver reducing energy put, for example, through the production of a product, what we see is the opportunity for enhanced margins and combined with the cost savings, the brand reputation, the brand equity associated with a more environmentally friendly product portfolio really starts to drive buying behaviors. So that’s really the idea that says our products and services are really only as sustainable as our customers allow. And the sense is as customers get more educated, both business-to-consumer customers, as well as business-to-business customers, as those customers get more educated about sustainability, they will opt-in the products that they are more aware of the environmental attributes.

Katie: What’s interesting about sustainability is perhaps unlike any other fundamental business change, the recognition that the efforts across the value chain require nontraditional collaboration in infrastructure development for companies to be successful. So, as supply chains have become more global and complex and as fundamental business model changes, innovation has been required to address sustainability, such as breakthrough thinking needed to adapt operational strategies as well as developing these supply chains that will achieve sustainability goals, undertaking those efforts while also optimizing cost and service levels, have been key focus areas for our companies and so thinking about product innovation and design in particular and the need to have a much broader life cycle ranging from the use of alternative input to designing for post consumption is going to be the key, and so as we look at the research and the survey responses, what’s interesting is that only about 10% of the respondents indicated that sustainability had been formally built into the R&D processes, and so what we are finding is the companies who are successfully integrating sustainability have really conferred as Chris mentioned, the level of consumer awareness and education that will need to really be undertaken in a much more significant way with respect to overall product stewardships’ strategy, but also the alliances that are needed with the scientific communities, as well as nontraditional business partners to push technological advances or engaging with the government to ensure adequate infrastructure exist, for example, recycling initiatives. So, certain sectors additionally are really recognizing that in order for products to be sustainable across the value and supply chains, if you will, that they really need to drive consensus with respect to measurement of sustainability objectives and so, as Chris mentioned, we are seeing some sectors take leads with respect to how they are defining sustainability and integrating it within their organizations and across the supply chain, and that the retail sector would be a good example where we are really seeing an effort to drive consensus in terms of how you measure and integrate sustainability, and report on it as business terms and conditions and contracts, if you will.

Chris: I think that’s really the key point. Another thing that came through clearly in the survey responses was the idea that management tools for addressing sustainability are still evolving, particularly those tools with respect to the value chains, sort of outside of the enterprise boundary. So, for example, companies have been exploring life cycle analysis for many, many years and those product life cycle analyses allow a good view of some of the technical considerations associated with environmental qualities related to a product. What we are seeing more and more is the evolution of the standards around the development of life cycle assessment, to consider more strategic and business sorts of implications, really thinking about the impact of embedded energy and carbon and other sorts of environmental attributes from purchase materials and supplies all the way through downstream purchasers and end use. So, I expect we will continue to see, based on the survey results, the evolution of management tools for defining and measuring and considering environmental attributes and then the awareness of those start to manifest themselves in terms of experiments around product labeling, better visibility from a branding perspective, perhaps a signage perspective at the retail level, etc.

Host: You have both mentioned management tools and measuring performance. Another message that came through the survey results is this: Sustainability’s bottom-line results might be better if we forget about ROI. What’s your take on this, Chris?

Chris: Well, we are not sure it’s much about forgetting ROI as much as it is reevaluating how ROI is calculated. No rationale business would or should forget ROI in terms of thinking about the types of investments and initiatives necessary to drive enterprise value. In fact, many sustainability initiatives drive both short-term and long-term value. What’s a little bit different in this case is the maturity of the management tools and the methods for considering and measuring sustainability performance in considering those elements in terms of calculating a business benefit. For example, you think about the decades of evolution in traditional financial reporting and operational reporting. The development of business case is a fairly mature science in terms of thinking about what sorts of investments make sense. The evolution of thinking around sustainability investments is still evolving. The ability to manage and measure enterprise-wide energy impacts, carbon emissions, clean water, and other aspects is still evolving. And as such, the management tools, the methods and processes are evolving along with it. What we are seeing in a lot of instances is that companies that are fairly mature in developing and executing sustainability strategies has thought about ways to incorporate short-term and long-range planning in their decisions about what to investment in. This is especially true in the environmental aspects of sustainability, but is starting to be more evident in some of the social aspects of sustainability as well, philanthropy and community investment and development and all sorts of things. So, we expect to continue to see an evolution in the thinking about development of sustainability strategy, identification of environmental and social impacts, and initiatives and investments that will drive enterprise value, and a clear recognition that not every sustainability investment will drive value short term or long term, but many will, and the real key for companies thinking about it is to identify those initiatives that will drive better business performance, top-line and bottom-line improvement at the same time as improving environmental and social performance. That’s really the sweet spot; it’s about improving the business the performance and economic performance of the company at the same time as having a positive effect on environmental and social performance as well.

Katie: It’s interesting because the survey responses did indicate that companies are still measuring sustainability investments based on traditional ROI metrics related to cost and asset utilization. But as Chris mentioned, those who are really successfully implementing sustainability are framing the value and ROI considerations according to competitive advantage, they are taking the opportunity to not only manage existing sustainability drivers, but to anticipate them to align them to their existing business priorities where they have really balanced both the risk and opportunities to a very structured approach and they have been driven sustainability through their operations and their governance structures. And what I would just add to Chris’ points are that, what’s really key is considering and understanding the interdependencies from a strategy standpoint from a supply chain, functional, and operational standpoint to make sure that companies are managing the unintended consequences that could come from an ROI perspective if they are not thinking about it, well holistically and strategically. And certainly recognizing that some of the investment needed to address the infrastructure, technology, and other types of constraints just based on the maturity of sustainability right now will come with the payoff being long-term business sustainability.

Host: Katie and Chris, great conversation today. Thank you for your time.

Katie: Thank you.

Chris: Great. Thanks for having us on the program.

Host: Visit deloitte.com/us/sustainability to access our survey — Sustainability in Business Today, a Cross-Industry View — and additional insights on today’s discussion. You have been listening to Deloitte LLP’s production of Deloitte Insights, the program that looks at today’s important business issues. We want to hear from you. Visit deloitte.com/us/podcasts to give feedback, ask questions, or discuss the issues with fellow listeners. This has been a production of Deloitte LLP.

Thanks for listening and bye for now.

As used in this presentation, Deloitte means Deloitte Consulting LLP, which provides strategy, operations, technology, systems, outsourcing, and human capital consulting services. Deloitte Advisory Services LLP provides financial advisory services. These entities are separate subsidiaries of Deloitte LLP. Please see deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

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