2012 had many interesting sustainability stories, summarized ably by Andrew Winston, Gil Friend, Marc Gunther, and others.

In this report, the focus is on key themes that corporate sustainability champions can leverage to make sustainability more central to business.  As such, they are sustainable business strategies that gained traction in 2012 and are likely to grow in prominence this year.

The themes are culled from more detailed monthly reports I produced in 2012 for executives at 80+ Global 500 firms, based on research by reputable research and consulting organizations.

I’ve organized the themes by five key areas of business strategy: core capabilities, markets, organization & governance, stakeholder management, and resource management.

Core Capabilities:

  • Business Value of Sustainability: The best work on the business value of sustainability to gain prominence in 2012 was by Prof. Robert Eccles of the Harvard Business School and his colleagues.  They show that sustainable businesses significantly outperform unsustainable businesses in both market value and book value (e.g., ROA, ROE) over the long-term.

Using a matched sample of 180 firms, they show for example that investing $1 in 1993 in a value-weighted portfolio of sustainable firms will grow to $22.6 in market prices in 2010, when compared to just $15.4 for other firms.

The same study found that investing $1 of assets in the beginning of 1993 in a value-weighted portfolio of sustainable firms would have grown to $7.1 by the end of 2010, versus $4.4 for other firms. The comparable results for equity investments were $31.7 and $25.7 respectively.

  • Sustainable Innovation: While sustainability-driven innovation is always an attention-getter for senior management, 2012 saw further refinements that make it even more compelling to them.

Business model innovations that are driven by sustainability got attention: dematerialization, open loops, low-carbon energy, and restorative innovations.

The industrial internet (previously, and simply, called the internet of things) got more in the spotlight, with its many sustainability implications.  It combines intelligent machines, advanced analytics and connecting people wherever they work and could affect half the world’s economy by 2025.

This theme will only grow in importance.  An annual assessment of sustainability practices among the world’s biggest corporations showed that sustainable innovation was the common thread among the most successful sustainability programs.

Markets:

  • Consumers and Public:  The environment continues to rate low in national importance for consumers globally.  Economic problems dominated the developed countries, while political and governance problems dominated the BRICs.  Indian, Chinese and Brazilian consumers had the most sustainable consumption habits, while Americans and Canadians were the worst.

The silver lining for sustainability champions is that Americans are increasingly linking climate change and extreme weather: 74% of Americans now feel that global warming is impacting US weather.  More subtle, but equally devastating, is the impact of drought on 60% of the US.  The rest of the world continues to lead the US in seeing signs of climate change: 90% feel that there has been a major change in the climate in the last 20 years.

All these trends suggest that people worldwide are finally seeing the signs of climate change, but they have not yet connected it to economics and governance.  It may take until 2015 to do so, but when it does, it will be a perfect storm of public pressure that will hit corporate shores quickly.  Corporations that prepare for this coming storm will respond better than those who don’t – something that corporate sustainability champions need to sound repeatedly.

  • Emerging Markets: As businesses in emerging markets grow rapidly, they are beginning to get more concerned about sustainability.  Whether this will translate to action that offsets the price of economic growth is the big question.

In one survey, two-thirds of business executives say that sustainability is critical to business, versus a third in Japan and a quarter in Western Europe.  The same survey says that it is more expensive to be sustainable and margins are lower, but customers are willing to pay more — the average premiums are 19% — and companies can’t keep up with increasing demand for sustainable offerings.

The interest in sustainable emerging markets is spreading to investors too.  One study shows that nearly 80% of investors say that poor disclosure of ESG issues by companies is the biggest challenge to making investments in emerging markets.  The three main concerns are corporate governance, compliance with global norms, and environmental issues.

Nevertheless, it will be hard to pass up markets where real GDP grew by 100% during 2000-12, compared to just 20% in developed economies, and where emerging markets will be 60% of worldwide GDP by 2020.

Organization and Governance:

  • Organization & Megatrends:  The corporate sustainability function is facing increasing pressure to justify projects and staff through business unit sponsorship.  As corporate staff members follow projects into business units, sustainability becomes increasingly part of the business unit dashboard. Timberland’s experience is part of a broader wave of sustainability becoming more decentralized in its organization.

At the same time, sustainability mega forces are growing in strength, which makes it a corporate strategy challenge and opportunity.  One of the best reports on these megatrends describes a world in 2030 that is radically different from today: greater individual empowerment, shift in power to a multipolar world, much greater urbanization and migrations, a demand-supply gap for food, water and energy that creates a dangerous nexus.  2012 also saw some excellent analysis of how industries are being exposed to these forces differentially.  The year saw the popularization of John Elkington’s “zero-impact growth” concept and its application to companies, with Unilever, PUMA, Nestle, Nike, Natura and Ricoh leading the pack.

The top five factors that drove corporate sustainability initiatives in 2012 were energy cost cutting, changes in customer demand, brand risks, higher shareholder expectations, and competitive threats.  Another interesting fact: 40% of shareholder resolutions that became proxy ballots were sustainability-related.

  • Reporting: Sustainability reporting also gained momentum in 2012, with 6000 companies reporting worldwide, and 60% of CFOs of global companies saying sustainability challenges will alter financial reporting and auditing.  In particular, the 2012 reporting developments with most impact in the future have been the move to disclose natural capital externalities, the rise of integrated reporting, and the emerging voluntary accounting standards on sustainability.

The impacts of business on nature began to get quantified financially through outstanding work by the TEEB for Business Coalition, PUMA’s pioneering Environment P&L Coalition, Dow’s natural capital evaluation pilots, and other initiatives.  Social impacts, while more difficult, will not be far behind.

A framework for integrated reporting began to be put together through the International Integrated Reporting Council (IIRC).  This was a follow-up to a terrific position paper on integrated reporting published the previous year.

The effort to create accounting standards for sustainability reporting got started through the Sustainability Accounting Standards Board (SASB).  These voluntary standards will provide the broader context in which reporting and other activities can take place.

  • Risk Management: 2012 was also the year in which risk management strategies to cope with the sustainability mega forces got more incorporated into enterprise-level strategic planning, especially among Global 500 firms.

Corporate planners saw the writing on the wall this year. 83% of the S&P 500 is incorporating climate change into its business processes for managing enterprise-level risk.  This concern with business resilience to climate change increased considerably in 2012, when 81% of companies identified physical risks from climate change, compared to 71% in 2011.

After all, extreme weather events had accounted for 90% of all natural disasters last year, while total losses from natural disasters were estimated at $380 billion globally.  Only a third of these losses were insured.  2012 is likely to break this record, with just one disaster, Hurricane Sandy, already clocking in at $50 billion in the US alone.

This growing evidence has resulted in more sophisticated analysis of business risks by industry sector.  One of the best publicly available analysis summarizes the short and long-term physical and economic impacts of climate change on business sectors such as agriculture, food and beverage, apparel, electric power, mining, insurance, oil and gas, and tourism.

Stakeholder Management:

  • Suppliers: Given that supply chains are becoming increasingly complex and extended, disruptions have become more devastating and difficult to fix.  2012 saw a more proactive shift to dealing with supply chain disruptions due to climate change, ecosystems damage, or social issues.

In the face of these risks, resilient supply chains are becoming critical to business strategy, whether through new models for dealing with transportation and supply risk, a more comprehensive view, better supplier self-assessment, or a more aggressive, risk-focused stance given the world is at risk of 6°C warming.

Supply chains are also being re-examined in their specific aspects.  Rising fuel costs are leading to a rethinking of existing transportation practices.  Shippers are moving to more intermodal ground transportation, postponing final assembly of products closer to the end user, relying more on ocean shipping rather than airfreight, and many other changes.

2012 also saw a rethinking of current approaches to sustainable packaging, by embedding this thinking throughout the value chain from demand/supply planning to delivery and recovery.  The market for sustainable packaging could grow to $150 Billion+ in 2015.

  • Business Management:  For corporate sustainability champions, business unit managers are probably the most important stakeholders to enable a sustainable business.  Change management approaches, an underemphasized area, began to draw attention in 2012 and will only increase in importance.

An interesting study on how to sell sustainability from the inside looks at the experiences of CSOs of Fortune 100 firms.  Their key success skill is their interpersonal relationships, rather than subject matter knowledge.  The successful CSOs spoke in the language of their business partners, rather than use sustainability terms.  These partners, rather than top management or other stakeholders, were the biggest drivers of CSO success.

Another study shows that becoming a sustainable company involves leadership commitment, stakeholder and employee engagement, and disciplined mechanisms for execution.  Organizational identity is a key lever for such change.  It can be done, but it needs multiple and persistent change management efforts on a variety of fronts.

  • Investors: Sustainable and responsible investing (SRI) accounted for one out of every nine dollars under professional management in the US, according to a recent, comprehensive study.   In 2012, $3.74 trillion in US-domiciled assets were engaged in sustainable and responsible investing practices.  $3.31 trillion of the investment managed by institutional investors, money managers and community investment institutions had ESG criteria applied to them, a healthy 30% growth over 2010. ESG-related shareholder resolutions comprised $1.5 trillion in assets, a paltry 2% growth over 2010.  While the ESG criteria were demand-driven, the share at 11% is still too small to be a key factor in driving corporate behavior.

More specifically, 60% private equity investors say that corporate cost savings from sustainability and rising expectations of limited partners are the biggest reasons for their increased focus on ESG issues.  A key challenge is the lack of well-defined, consistent metrics for monitoring and measuring ESG issues.  Another study shows that while US-based investors mainly focus on eco-efficiency initiatives, EU-based investors consider a wider range of ESG issues in making investment decisions.  Measuring the indirect value of ESG efforts, e.g., on customer loyalty and brand value, is a major challenge.

While assets linked to ESG-related shareholder resolutions grew only by 2%, the number of shareholder resolutions in 2012 grew in number in 2012.  In 2012, there were 110 resolutions related to sustainability, of which 44% resulted in corporate commitments.   ESG-related resolutions comprised 45% of all shareholder resolutions.

Resource Management:

  • Food and Water: Food and water, along with energy, comprise a nexus that will impact sustainable business strategies in all industries, given their centrality to the whole economy.  They are both certain to face increasing stresses in the future due to the sustainability mega forces, especially of climate change, deforestation and ecosystems degradation, and population growth.

Feeding the future world will be a daunting challenge.  Food production will need to increase by 70% by 2050 in order to feed the projected global population of 9 billion.  Extreme weather will exacerbate the production of food and increase food prices, disproportionately affecting developing countries where 70% of the budget goes to food (the US figure is 13%).  Rising food prices have pushed 44 million people into poverty globally just in the past two years.  Smallholder farmers comprise 50% of the malnourished, even as they grow food themselves. Unfortunately, the prices of staple foods could double by 2030.

The food value chain is highly wasteful: 30%-50%, or 1.3 billion tonnes, is wasted from reaping to consumption worldwide.  While 1 billion are malnourished, 2 billion overeat worldwide (the US alone spends $150 billion each year on obesity-related medical costs).  In the US alone, for example, 40% of the food (worth roughly $165 billion) currently gets wasted, roughly 20 lbs./person/month.  There is associated waste in water, energy and land, since 80% of freshwater, 10% of energy, and 50% of land goes to food in the US.

By 2030, the worldwide demand for water is expected to exceed supply by 40%.  45% of the expected worldwide GDP of $63 trillion in 2050 will be at risk because of business-as-usual practices for water management.  Since water impacts are local, sustainable business strategies need to emphasize local solutions and working with stakeholders at the watershed level, even while creating global policies.

Corporate disclosures on water risks are growing rapidly.  For example, 27% of US companies now report exposure to water risks in their supply chains, compared to 10% in 2009.  But enterprise-level action on water is still missing.  Corporate disclosure of water footprint is still relatively rare.  Of the world’s 250 largest companies, only three provided information about their water footprint in any portion of their supply chain.  60% still do not show a long-term strategy for water in their corporate responsibility reports.  Boardroom attention to water is missing in many cases, even as risks are increasing.

As water becomes more constrained, the value of water to US industries is seeing a major shift.  Industries most dependent on water are oil and gas, chemicals, mining, electric power generation, food and beverages, and semiconductor manufacturing.  Sustainable water strategies are focusing on community partnerships to improve water efficiency of water use and share water equitably.  Zero liquid release policies are getting more popular.

  • Energy: Sustainable business strategies around energy need to recognize three key themes that emerged in 2012: the resurgence of natural gas in the mix of fossil-fuel energies, the mixed picture with regard to clean energy technologies, and the slowing down of energy efficiency gains.

Natural gas production was the story, at least in the US.  As a result, the EIA’s 2012 projections are that despite continued growth in demand for energy over the next 25 years, US reliance on imported oil will reduce as domestic production of natural gas and domestic crude oil (from tight oil and shale resources) exceeds consumption.  Coal-fired plants are being retired at an increasing rate: 2012 put this retirement at 31 GW from a total US coal-fired fleet of 300 GW.  Natural gas and renewables will each grow by 5% (from 24% and 10% respectively) in the energy-mix and bring down coal’s share of power generation from 48% in 2008 to 38% in 2035.  As a result, energy-related carbon emissions will grow slowly but remain under 2005 peak levels (2% between now and 2035 levels of 5.8 billion tonnes).  The big challenge is that emissions need to reduce for global warming to be contained at 2°C.

The global outlook for clean energy was both good and bad news in 2012.  The good news is that mature clean energy sources such as hydro, biomass, solar PV and onshore wind made good progress, with countries such as China and India and many corporations making significant investments.  The bad news is that the less mature clean energy sources, such as carbon sequestration and capture (CCS), offshore wind, and concentrated solar power, are not growing enough to contain global warming to 2°C.  The lack of progress on CCS is a real problem.

The other big problem is that the demand for fossil fuels is continuing to grow, locking in a high-carbon infrastructure that’s closing the window for containing warming to 2°C.  On the whole, despite some good news, progress in clean energy in 2012 was far too slow and much too alarming.

Despite corporate attention to energy efficiency, the worldwide lack of progress on it has been equally alarming.  Energy efficiency needs to help reduce energy intensity, i.e., energy input per unit of GDP, by two-thirds in 2050 for 2°C containment.  This means that the 1.2% improvements we have seen annually in efficiency need to double to 2.4% by 2050.  This is not happening because of a lack of incentives and other barriers.  But energy efficiency continues to be a real opportunity, despite the lack of progress.  In the US alone, potential savings of $1.2 trillion by 2020 are projected, with millions of new jobs opening up in this sector, if energy efficiency is tackled aggressively through national policies.

  • Natural resources: 2012 was the year in which natural capital (also called biodiversity and ecosystems services) began to get on business’ radar.  Business began to recognize the vast scale of its impacts and dependencies on nature.  Nature provides $72 trillion worth of free services to the global economy every year.  Yet, we’ve now significantly degraded 60% of the earth’s ecosystems and lose about $6.6 trillion in natural assets every year due to water contamination, soil erosion, drought, deforestation, overfishing, and other impacts.  This could jump to $28 trillion a year by 2050.

Well-publicized corporate actions included PUMA’s Environment P&L Coalition (which focuses heavily on natural capital), Dow’s partnership with The Nature Conservancy to launch pilots on evaluating natural capital, Unilever’s supply chain initiatives around protecting biodiversity, and hundreds of other companies that initiated ecosystems services-related projects.  The year also saw the establishment of the TEEB for Business Coalition to drive corporate action on natural capital.

Many organizations drove the natural capital agenda globally.  WBCSD’s report on accelerating public policy initiatives around ecosystems services got attention.  WRI came out with some good reports on integrating ecosystems services into business operations.  BSR produced a report describing how corporate expectations around ecosystems services are evolving.

The Corporate Eco Forum (CEF) produced perhaps the best strategic report on how companies are deploying natural capital for reducing risks, cutting costs, enhancing the brand, and driving growth.

As corporate experience in this area expands, what is needed is a framework for corporate change that accelerates the adoption of natural capital in companies (Disclosure: I am leading a project in this area for TEEB for Business Coalition).