Printable version here

The IADS recently attended a webinar hosted by Bain & Company covering the topic of ‘Monetizing sustainability – Navigating ESG pricing’ where the relationship between profit and sustainability was discussed. As we have covered in our previous IADS Exclusive on how retailers can turn sustainability regulations into opportunities, sustainability directives are here to stay and will only become stricter, but this should not stop retailers from finding ways to make such changes a win-win situation. In the same vein, the IADS also recently studied the key takeaways from Adam Werbach’s book ‘Strategy for Sustainability’ which explores how businesses can integrate sustainability principles into their strategies to create long-term value. Building on the principles and ideas discussed by Bain & Company and in the book by Werbach, we explore some of these ways to build a positive and profitable groundwork for retail businesses while keeping sustainability topics at the heart of the company, which in these days, is key to survival.

Bain & Company: How investments in sustainable initiatives can convert into financial value

To give an overview of the current landscape, Bain & Company shared in their ‘Navigating ESG’ webinar that it is clear many industries and geographies are moving at different paces in terms of Environmental, Social, and Governance (ESG) initiatives. Nevertheless, these topics have become central to boardroom discussions, with 90% of S&P 500 companies publishing sustainability reports. The projected annual expenditure on Green Capex for this decade is estimated at USD 6 trillion, with approximately 50% of new product launches embracing sustainability goals. This trend is further amplified by increasing media coverage and heightened consumer awareness. At this point, companies have not yet fully linked their sustainability efforts to a return on investment, as they are primarily driven by regulatory and corporate objectives. Today, there is quite a debate on whether ESG is truly being addressed fully to encompass the “E” (Environment), “S” (Social), and “G” (Governance), thus blending the 3 concepts is distracting and not always productive. Nevertheless, the next step, and major challenge, is to translate these sustainability initiatives into commercial success, which will require a lot of dedication and effort.

The benefits and risks of tackling ESG pricing 

If retailers can master ESG pricing and take advantage of green business models, although it is a complex exercise, they will be able to unlock significant benefits. The landscape offers promising prospects, such as the ability to command price premiums from a sourcing perspective and enhance margins through the emergence of new profit pools. Additionally, adapting to the evolving demands across the value chain presents vast opportunities for market share expansion and value capture. Launching new markets and products that are in line with ESG initiatives also provides a platform for brands to distinguish themselves and secure a competitive edge.

Conversely, the stakes of mismanaging ESG products and services are high. Overlooking emerging value trends could forfeit potential market gains while misjudging the market entry timing could close the opportunity window. Furthermore, exploiting these trends with too keen an eye on opportunism could tarnish a brand's reputation and compromise its success, underlining the delicate balance between seizing opportunities and navigating the risks associated with ESG initiatives.

Navigating ESG market opportunities effectively requires a multifaceted approach 

Bain & Company broke down the navigation of ESG pricing into 4 key guidelines.

Firstly, it is essential to have a clear understanding of the value at stake to guide prioritization, resourcing, focus and ensure that the overall sustainability strategy is in line with delivery and monetization. This includes being intentional when setting up new ventures especially in terms of the number of resources allocated, what they will focus on, and understanding the levers to be pulled whether that involves tapping into a new market or holding out for more premium offers or customers. In terms of customers, it is essential to understand the factors that push their willingness to pay and the problems the initiative helps the customer address. Supply and demand dynamics play a large role in success as well and it is important to understand if there will be enough green supply (resources) to carry out the initiative. Finally, it is important to understand the minimum margin requirement, meaning the target ROI and effective floor price, and the relationship this demand has on current products, wallet share, or loyalty.

Secondly, it is important to recognize that ESG triggers span across the value chain, with the intersection of costs incurred and value generated not always aligning. This means businesses not only need to understand their customers’ needs, but also their customers’ customers, and eventually the end consumer. This means that ESG pressures can come from a variety of places either from consumers changing opinions and driving pressures upstream, it can also come from regulations that bring more stringent practices, or it can come from a revolutionary technology change. Some examples of companies acting on these pressures are Coca-Cola announcing plans to use more recycled materials due a response to consumer demand, BMW sourcing aluminium from manufacturers exclusively using electricity obtained from solar power to meet their internal sustainability goals, or Rio Tinto investing in renewable energy and low carbon technologies to decarbonize their mining operations due to goals to meet both regulatory compliance and their internal sustainability objectives. Such internal sustainability objectives are important to get just right because efforts to go above and beyond, as seen with Walmart's Project Gigaton, will in turn have an impact on customer perception of the brand. The key to being successful in this stage is to ensure that the business is agile enough to act on these pressures quickly to clearly address the market demands, no matter which area the pressure is stemming from.

Thirdly, is it necessary to comprehend the currencies of value to accurately identify target segments and relevant propositions. Customer segments will vary in their willingness to pay across value attributes. When articulating the value proposition of an ESG initiative, it is important to understand the contributions that will resonate with customers. This can be addressed by asking questions such as: how can we help our customers drive value from ESG? and how can we help our customers deliver on their sustainability agenda? These questions cover tangible attributes such as helping customers drive growth or generate premiums from an improved ESG value proposition and improving their risk profile by helping them avoid greenwashing. The questions also address intangible values like helping customers attract and retain motivated talent due to stronger commitments to ESG or helping customers strengthen their ESG claims around their brand and helping them improve their market positioning. Such questions can also address sustainability value by helping customers deliver on their ESG and time-critical targets as well as offering more cost-effective pathways to achieve goals.

Finally, it is about playing the long game and ensuring pricing is established within the strategic context of sustainable offerings, carefully navigating supply and demand curves to achieve optimal outcomes. When defining the value proposition, it is important to focus on differentiation and going beyond regulatory requirements to drive bold change and address the industry’s main challenges to set the company to be an outlier versus the competition. The business needs to decide which areas it wants to be considered ‘compliant’, ‘proactive’, or ‘leading the market’ compared to the competition which helps protect the business from downside risks. These initiatives are more about laying a foundational ESG groundwork and might bring less tangible added value out of the ESG offering, but such changes will lead to longer success in terms of brand recognition.

Monetization might be the goal, but it can’t be achieved without a long-term strategy 

Bain & Company’s presentation broke down the ways that ESG initiatives can help a company find the right opportunities and monetize their sustainability strategies, but it is not enough to stop there. ESG needs to be ingrained into every fibre of a business to make a long-term and lasting effect. This is why the strategies and principles of Adam Werbach’s “Strategy for Sustainability” book are also important to consider when building out a corporate ESG playbook.

Strategy for Sustainability: Building out a solid long-term corporate sustainability strategy

In his book “Strategy for Sustainability”, Werbach explores how businesses can integrate sustainability principles into their strategies to create long-term value. He emphasizes the importance of aligning business goals with environmental and social objectives, arguing that sustainability is not just about minimizing negative impacts but also about seizing opportunities for innovation and growth. Werbach emphasizes that sustainability is not just a moral imperative but also a smart business strategy.

By integrating sustainability principles into their operations, businesses can unlock a myriad of benefits. Firstly, they can achieve cost reduction through the implementation of energy efficiency measures, waste reduction strategies, and sustainable sourcing practices, ultimately leading to long-term savings. Secondly, by addressing environmental and social risks such as supply chain disruptions and reputational damage from environmental controversies, companies can effectively mitigate risks and safeguard their bottom line. Thirdly, as consumers increasingly prefer environmentally and socially responsible brands, demonstrating a commitment to sustainability can significantly enhance brand reputation and foster customer loyalty. Lastly, sustainability challenges can spur innovation, prompting companies to develop new products, services, and business models that are not only more resource-efficient but also environmentally friendly, driving continuous advancement within the industry.

Werbach encourages companies to consider going beyond compliance and being transformational organizations by embracing sustainability as a core value and fundamentally transforming their business models to create positive social and environmental impacts.  With this philosophy, sustainability should be integrated into all aspects of a business, rather than treated as a separate, siloed function. This integration involves embedding sustainability into the company's mission, vision, and values to ensure alignment with business goals, incorporating sustainability considerations into decision-making processes across departments, from product design and procurement to marketing and human resources, and engaging employees at all levels to foster a culture of sustainability and empower them to contribute to the company's sustainability efforts. The key idea is to ensure that all decisions are driven by long-term sustainability goals rather than simply trying to meet quarterly exercise expectations.

Introducing new analysis strategies to ensure sustainability is a foundational consideration 

In rethinking traditional analysis methods, Werbach advocates for a shift towards more dynamic strategies and away from slower frameworks such as SWOT (Strengths, Weaknesses, Opportunities, and Threats) and PESTLE (Political, Economic, Sociological, Technological, Legal and Environmental). Werbach focuses on two methodologies: STaR Mapping and TEN Cycle.

STaR Mapping focuses on Social, Technological, and Resource changes, and moves away from competitive analysis towards simple incremental steps, termed North Star Goals, that can be implemented across the organization. STaR Mapping aligns short-term objectives with long-term strategies, anticipates energy and commodity costs, addresses demographic shifts toward aging populations, and prepares for future changes.

The TEN Cycle method takes into account Transparency, Engagement, and Networking in a cyclical process aimed at revitalizing conditions for long-term prosperity and the achievement of North Star Goals. The TEN Cycle helps strategists for sustainability celebrate transparency, build from the inside out, demonstrate that people are the most important company asset, provide deep induction processes and long-term equity incentives for employees, stay highly networked to outside organizations and companies, and employ cyclical and constant actions.

Xerox: a use case using Star Mapping, North Star Goals, and TEN Cycle 

Werbach illustrates the practical application of STaR Mapping, North Star Goals, and the TEN Cycle through real-world examples. Once again, these strategies focus on internal changes rather than on competitive analysis, which has been illustrated with a couple of examples from Xerox, where leadership teams leveraged these strategies to innovate and build sustainable and profitable businesses with significant industry impacts:

In 1993, Xerox hired chemist Patty Calkins to drive change as the company sought to integrate eco-conscious design principles into its products and services. Against the backdrop of heightened environmental awareness, Calkins helped the company set an ambitious North Star Goal: to produce waste-free products in waste-free facilities, fostering waste-free offices for customers through offering remanufactured products and parts. This simple foundational change led to big impacts, activating a TEN Cycle: the development of the ISO 24700 standard ensuring the quality of office equipment with reused parts, the reduction of overall costs due to better quality parts that would last longer and could be interchanged between products and offering better products to consumers. It is estimated that Xerox saved several hundreds of millions of dollars through the copier remanufacturing program.  Such a change also made Xerox reputable as being a sustainability innovator and the company became active in associations working towards regulation and spent time educating customers on why sustainable businesses do not always need to be considered more expensive as they make products that are made to last, thus saving customers money in the long-term.

In 2021, Xerox faced substantial challenges, with a staggering USD 17 billion debt, operating losses of USD 237 million, and a substantial loss in stock market value. Under the leadership of CEO Anne Mulcahy, the company embraced its tradition of innovation and community service to chart a new course, grounded in the North Star concept. Mulcahy's strategic vision allowed Xerox to move away from only selling copiers to expanding their product offering- which significantly propelled the company, resulting in a USD 978 million gain by 2005. This foundational change also set the company up to develop the first plain paper copying machine and to establish the renowned Xerox Palo Alto Research Center (PARC), which played a pivotal role in the evolution of personal computing and laser printing, giving Xerox recognition as an innovator.

Conclusion – A winning ESG playbook is all about the Domino Effect

The playing field of how businesses operate more sustainably and responsibly, especially in terms of ESG initiatives, might not ever have a set of official rules and guidelines to follow. Thanks to experts at Bain & Company and the advice taken in the examples shared in Werbach’s book, retail businesses do not have to act as guinea pigs and can follow the examples of many companies that have tried to innovate in the sustainability space.

What can be learned from these examples? There is a critical intersection between simplified long-term sustainability strategies that bring business value and profit in today’s business landscape while amplifying a company's culture and leading to strong relationships with employees and customers. There is also an advantage to being a first and influential actor, as seen with Xerox, that sets the stage for what a sustainable company looks like. By integrating sustainability principles into their strategies, businesses can achieve various benefits, including cost reduction, risk mitigation, enhanced brand reputation, and innovation. Overall, by embracing sustainability as a core value and integrating it into all aspects of their operations, companies can not only mitigate risks and comply with regulations, but also drive innovation, enhance competitiveness, and create long-term value for shareholders, stakeholders, and society as a whole.

IADS Note: To access the full Bain & Company webinar on ‘Monetizing sustainability – Navigating ESG pricing’, follow this link. You will need to input the passcode: !0J?Lp3D

Credits: IADS (Mary Jane Shea)