1.4 The Sustainability Challenge: A Priority Check

Sustainability concerns date back to Malthus’ 1798 essay, “The Principle of Population.” Malthus reasoned that abundance enabled population growth but, sooner or later, that growth would lead to disease, famine, and war. This view, known as the Malthusian Trap, made the case that population growth is unsustainable, an idea that continues to shape public policy today.

More recently, best-selling author Daniel Pink turned again to the notion of abundance, but with a much more positive outlook for sustainability. He argued that “the era of abundance” has set the stage for sustainability to become mainstream business practice.

The Era of Abundance

Consider this: From the mid 1980s to the mid 2000s, almost uninterrupted prosperity altered economic perceptions and strategic priorities. Simply put, expanding wealth and abundant profits throughout the 1990s made it easy for consumers and managers to prioritize sustainability. Figure 1.3 shows the Dow Jones Industrial Average from 1970 to 2007. Now, think about the stock market as a surrogate for perceptions of economic wealth. As the stock market boomed in the 1990s, people thought, and acted as if, they were wealthy.

You may be wondering, “What does a sense of wealth have to do with sustainability?” Here’s your answer. German economist Ernst Engel observed that as incomes rise, the proportion of earnings spent on food falls. Higher disposable income means more consumers can realistically consider the “nice-to-have” value propositions. They can afford a sustainable lifestyle. Simply put, the economic prosperity of the 1990s enabled sustainability’s rise as a strategic priority.

Does the evidence support this wealth-sustainability relationship? Figure 1.4 shows that in the 20 years between 1985 and 2005, average world per capita GDP rose from $2,615 to $7,236. The number of countries that reached $10,000 per capita GDP went from 18 to 62. What happened?

1. Freed from work for sustenance, more consumers began to choose a sustainable lifestyle.

2. As poverty declined, governments demanded greater accountability for ecologically sound business practice.

The bottom line: As stakeholders—e.g., consumers and governments—began to embrace sustainability, managers perceived they could leverage sustainability investments to enhance their company’s image and market advantage.

The Era of Transition

Regrettably, by 2009, the Great Recession had pummeled growth and induced economic insecurity, resetting consumers’ sustainability mindset. Remember, sustainability had gained momentum in an era of abundance. Prosperity made it relatively easy to argue that investments in sustainability were the “right thing to do.” The economic downturn, however, led consumers to reprioritize living standards. Sustainability initiatives lost momentum.

Consider another point. The sustainability efforts of the 1990s / 2000s had hitched a ride with companies’ drive for efficiency. The quest to lean-up operations and take waste out of supply chains had delivered documentable sustainability gains, helping boost sustainability’s momentum. By the time the Great Recession hit, the easiest gains had been harvested.

With consumers facing serious economic headwinds and the cost of sustainability initiatives on the rise, the familiar tagline re-emerged. Sustainability is only sustainable if it’s profitable. Figure 1.5 depicts the challenge of building enduring momentum for sustainability. By the early 2020s, classic forces pulled both ways. More money had been dedicated to green subsidies, but rising interest rates and the menace of recession muted sustainability’s return.

It is safe to say that the sustainability story is still being written. The question, “What’s next?” remains unanswered. How the story unfolds depends on how decision makers—i.e., consumers, corporate executives, and politicians—prioritize sustainability. This is where you come in. You, and others like you, each have an opportunity to become an influencer—someone who tells a compelling sustainability story. Just keep this in mind: Your sustainability story has to be grounded in reality, not rhetoric. That’s why you need to build a toolkit capable of delivering sustainability outcomes consumers, companies, and society want to afford.

To help you tell a more persuasive story, one that emphasizes “what’s in it for the other person” (WIIFTOP), let’s look at how key stakeholders prioritize sustainability.

Understanding Stakeholders’ Priorities

Your takeaway from Figure 1.5 depends on your perspective. If you are a consumer on a budget, you understand why people prioritize their basic living standard over sustainability. But as an activist, you wonder why everyone doesn’t grasp the need to take action to save the planet now. Stakeholder capitalism recognizes these competing priorities, and argues that you, as an SC professional, should make decisions to create long-term value for all of your stakeholders, not just maximize profits for your shareholders.

Stakeholders are people who have a vested interest in your company. They affect or are affected by your company’s operations and performance. Simply put, they have a stake in the business and its outcomes. Stakeholder capitalism calls out five key stakeholders.

• Customers buy the products and services you bring to market. Meeting their needs is crucial since no one else consistently puts money into your business. But customers can be diverse.

• Employees make your business work. Front-line employees make the products and deliver the services your company offers to the marketplace. Managers support business operations. Not all employees share the same priorities.

• Suppliers produce and deliver the resources—i.e., raw materials, components, and services—your company uses to create products and services.

• Shareholders provide the capital—i.e., investments—needed to fund operations. They share in the ownership of the company.

• Society, from the local community to the global environment, provides vital resources—i.e., streets and services (e.g., electricity and trash)—and absorbs outputs from your operations, some good (e.g., tax revenues) and some bad (e.g., pollution).

Stakeholder capitalism’s emphasis on long-term value creation is its strongest selling point. Why, you ask? Taking a long-term view enables managers to re-think the interaction among three strategic priorities: Operational excellence, risk mitigation, and sustainability. Since companies have limited resources, they can’t do everything. Managers must make tough calls about these conflicting priorities. So, let’s ask the question: If you had to allocate scarce resources across these three priorities, how would you rank order their strategic importance?

You might guess that balancing priorities is stakeholder capitalism’s biggest challenge. The reality is that stakeholders often pursue conflicting priorities—across and within stakeholder categories. This reality makes it difficult to turn stakeholder capitalism into an actionable corporate strategy. Consider what happened at Volkswagen. Senior leaders touted VW’s state-of-the art diesel engines as green. They didn’t realize that engineers, feeling intense pressure to deliver good news, had installed bypass devices on the engines. These devices falsely reported low emissions. When the devices were discovered, the resulting scandal rocked VW’s reputation.

Ultimately, advocates of stakeholder capitalism argue that the following behaviors show commitment to decision-making that creates long-term value for all your key stakeholders.

• Delivering good customer service

• Engaging in honest marketing practices

• Paying fair wages

• Providing safe working conditions

• Reducing the executive-worker pay ratio

• Investing in local communities

• Preventing environmental damage