Sustainability as strategy: How mid-market businesses can adapt for long-term success

Over the course of the past decade, the importance of sustainability has increased significantly all over the world – not only in terms of how individuals live their lives, but also how governments frame policy as well as how businesses develop operating models and plan for the future.

The ongoing pandemic, meanwhile, has produced a paradoxical challenge for mid-market businesses. And despite Covid-19, the need for action on sustainability has never been more urgent.

Linda Mannerby, Head of Sustainability at Grant Thornton Sweden, explains, “Companies that understand global challenges and risks, adapt their business models, and manage their business impact – both positive and negative – have a greater opportunity to survive long-term.”

Sustainability in the mid-market

It is clear that sustainability has become a strategic focus for blue-chip businesses. In line with the UN’s Sustainable Development Goals, the likes of Shell, Unilever, Microsoft, Apple and American Airlines – to name just a handful – have all recently announced plans to reduce their net carbon dioxide emissions to zero within the next few decades. Grant Thornton’s IBR research has focused on the extent to which mid-market companies are embracing sustainability.

The findings show that a significant proportion of mid-market businesses are attuned to its importance: just under half (48%) believe sustainability will have a net positive financial impact on their business, while a similar number (47%) expect a sustainable approach to lead to improved operational efficiency and lower costs. Meanwhile, 43% say financial success and sustainability are of equal importance.

The mid-market is clearly attuned to the growing importance of sustainable businesses, but the data also suggests that many mid-market firms are unsure of how to put any commitment to sustainability into practice. 48% agree that most companies of their size don’t know where to start when it comes to sustainability measurement.

Another notable finding is that businesses in emerging markets are prioritising sustainability issues to a greater extent than their counterparts in developed economies, and also expect a greater positive financial impact from integrating sustainability.

Why embrace sustainability?

One of the key motivating factors for mid-market businesses to make sustainability a guiding strategic principle is the growth opportunities this kind of approach can create.

One of the number one motivations for integrating sustainability into strategy is to obtain investment, as year on year there more capital in the world is allocated in accordance with sustainability parameters. Many investors and banks also use sustainability as a proxy for a company’s approach to risk management.

Ivri Verbin, Chief Executive Officer of Good Vision, explains, “Another issue is that, if I want to sell to a bigger company, they will want suppliers to fall in line with their own sustainability goals – they are accountable for a responsible supply chain."

And this may be one factor underpinning the fact that businesses in emerging economies are more likely to prioritise sustainability. Verbin observes that the demand from bigger businesses in more developed countries to implement sustainability is also pushing emerging countries to comply with these issues in order to be able to sell to them.

Integrating sustainability into core business strategy also drives innovation and ultimate business growth, explains Katerina Katsouli, ESG & Sustainability Director at Grant Thornton Greece. “Increased innovation results in a boost to sales, contributing strongly to business growth. Sustainable and socially responsible companies can establish a clear point of brand differentiation, helping shield them from lower-cost competitors.

“These businesses also stand to gain great value when it comes to reputation. They are better able to build trust with stakeholders, gain willing recommendations from clients, and protect themselves from scandals, regulatory challenges and other reputation-busters."

The impact of taking a sustainable approach

As the trend towards sustainability gathers pace, says Emma Verheijke, Partner Sustainability & Impact Advisory at Grant Thornton Netherlands, mid-market businesses simply cannot afford to be left behind.

“What we see in the Netherlands and across Europe, is that there are more and more drivers accelerating this transition, from finance and employees to customer sentiment and even public-tender rules. So if you are not going to make this transition and embrace sustainability, is your business going to be future-proof? Are you going to be around in five years?”

Verheijke adds: “I’m not sure this concept has really landed yet – and I think a lot of companies will start to feel the pain of not making this transition quite soon.

“Sustainability is no longer a nice project on the side: it is part of your core strategy. It affects your risks, your opportunities, your long-term planning, how you deal with your people, your resources and your suppliers, as well as consumer demand. Companies that see that and anticipate these issues will be the ones that have the most value in the future.”

Verbin agrees: “The sustainability revolution is in many ways like the digital revolution: companies that refuse to embrace sustainability will be left behind.”

Indeed, the IBR found that almost two-thirds (61%) of mid-market businesses think that global sustainability trends will demand fundamental changes to operating models in their industry.

Valentina Yakhnina, Sustainability Manager at Grant Thornton Israel, adds: “A side effect of becoming more sustainable in terms of your resource management is that you can increase efficiency and reduce costs – for example, if you make the effort to reduce the amount of materials you use, or find new ways to reduce waste.”

The obstacles to becoming more sustainable

For many businesses in the mid-market, the financial outlay required to implement a sustainability programme is a major hurdle to overcome – and one which has become even more of a problem as a result of the financial pressures around Covid-19.

Julia Höglund, Sustainability Advisor at Grant Thornton Sweden, says: “The biggest challenge is short-termism. Even if we don’t want to be, we are still in a system where we are pushed to deliver on quarterly financial targets, and this is still driving the change within companies.

“The question we usually get from clients is, ‘What is the return on this investment?’ This is sometimes difficult to answer in financial terms because it is dependent on so many global and consumer factors. What we can measure however is the return on investment across ESG (environmental, social and governance) activities, which may have an impact on overall financial performance.”

Identifying value

Sue Almond, Global Head of Assurance at Grant Thornton, says that the IBR’s findings, which found many firms draw a strong link between sustainability and financial performance, were particularly encouraging. She explains: “Financial performance of the business underpins its own sustainability. So if there is a clear line of sight from sustainability actions to overall financial performance of the business, then you have that business imperative: this is how you win hearts and minds.”

Markus Hakansson, Head of Sustainability Business Advisory at Grant Thornton Sweden, adds: “Your ability to create value as a company is not dependent only on financial factors. Non-financial factors – social and environmental – are connected to 80% of the company’s ability to create value and in the end, value is money.

“But this value – which can be the knowledge of the employees, or structural capital – can be held in the company for many years before it becomes cash. Understanding this concept of sustainability can be a problem for the board and owners.”

First steps in sustainability

Höglund says that the key to working out what a business’s sustainability goals is opening up a dialogue with stakeholders. “This is all about finding out what stakeholders really demand,” he explains. “These stakeholders range from investors and lenders to customers, employees and the wider public.” According to the IBR, 49% of mid-market businesses expect to face more pressure from existing and future talent to become more sustainable in the year ahead, while 55% expect to face more pressure from their customers.

Verbin adds: “The whole idea of sustainability is understanding stakeholder expectations and trying to respond as a business. Dialogue will provide crucial insights and solve many of your problems. You can’t be an innovative company without listening; and the social networks make it very easy to listen.”

At the same time, says Mannerby, businesses need to assess their current position in terms of the environment and society. “You need to understand where the positive and negative impacts are,” she explains. “One of the simplest ways of doing this is by mapping your value chain: this kind of impact analysis can help you reach out to board members, raising awareness and identifying risks.”

Businesses need to be clear from the outset as to what they are trying to achieve through becoming more sustainable, Verheijke says. “Is it compliance? Communication? Financing? Attracting and retaining talent – or all of the above? Because that is going to dictate the direction you are going to take.”

Once goals and material impact areas have been established, businesses can decide which reporting and assessment frameworks fit best, she adds, rather than starting with a particular framework or methodology and working backwards.

Mark Hucklesby, director of financial reporting at Grant Thornton, says that recent developments in sustainability reporting are likely to lead to the development of a unified set of non-financial reporting standards to replace the large number of competing sustainability standards currently in operation.

“A wide range of sustainability questions are being asked by various stakeholders involved in their supply chains,” he explains. “And failure to be able to articulate a clear response when asked about your sustainability philosophy is going to hamper future opportunities. An integrated and unified set of sustainability standards will provide much needed transparency and comparability.”

Verbin says it is important to get buy-in to sustainability programmes from across the organisation: “I would suggest involving employees in shaping such programmes: employees are connected, and many of them are millennials – they grew up in the sustainability revolution and it is part of their DNA. They are also closer to the practicalities.”

In the same vein, communication is vital to build a dialogue and raise awareness with potential clients, investors and other stakeholders., Yakhnina adds: “This doesn’t have to be a lengthy report – but it should be a very clear and practical explanation of what exactly you have done and what value it brings.”

Placing sustainability at the centre of strategy

Ultimately, Hakansson says, sustainability concerns should be placed at the centre of all decision-making within the company. “It is not just about putting sustainability into the business model: it also needs to feed into the strategy, tactics and operations,” he explains.

“In the perfect situation, every decision on the tactical, operative and strategic level should be made on the triple-bottom-line basis, taking into account its environmental, social and financial impact.”

Connect with our expert Michael Koehler to explore how to integrate sustainability strategy into your business.