Understanding the sustainability risks and opportunities across the product portfolio is vital to creating tangible business value. However, assessing every product in-depth, in every market, can appear daunting. This article outlines how sustainable portfolio steering can provide a simple and comprehensive approach to delivering strong sustainability performance across the organization.
Today’s businesses are faced with the formidable challenge of translating government and consumer aspirations around improved environmental and social performance into attractive products and services. To rise to this challenge, companies must steer their portfolios towards products and services with strong sustainability performance. Such strategic portfolio shifts make economic sense because portfolios of sustainable products and services often demonstrate substantially higher growth rates and superior returns on investment. Inspired by the successes achieved by peers and leading companies in other sectors, business leaders have come to realize that proactive portfolio steering, based on solid understanding of sustainability performance, is therefore key to future business competitiveness. This article sets out how businesses in multiple sectors can use sustainable portfolio steering to create products and services with strong sustainability performance.
Creating tangible value from sustainability
Recent landmark sustainability agreements, such as the G7’s commitment to decarbonizing the global economy and the United Nations’ Sustainable Development Goals, confirm that sustainable development is top of the agenda for governments around the world. Likewise, growing numbers of consumers prefer products and services with superior sustainability performances. In the United States, for example, 20 percent of consumers choose products that are manufactured sustainably, compared to 7 percent who do not1 . Sustainable-purchasing preferences are found to be even stronger in some emerging markets, including Brazil, India and Turkey3 . This trend is not confined to consumers and corporate purchasers: leading business publications report that employees, investors and companies are all found to prefer working with organizations that perform well on sustainability-related indicators. BlackRock, the world’s largest investment management firm, observes “an increasing positive correlation between effective management of environmental, social and governance (ESG) indicators and the longer-term value creation by a company.”
For businesses, this new form of consumer- and regulationdriven disruption creates new opportunities and challenges. Some have found novel ways to create sustainable products and services that generate business value and appeal to a new generation of consumers. For example, food start-ups, such as Beyond Meat and Impossible Foods, are working to create meat substitutes from pea protein to satisfy consumer cravings for meat, while using fewer resources and demonstrating ethical credentials. Industry-leading players are also taking note. General Electric reports that its green products sold four times faster than its regular products and made up 30 percent of its overall revenue during 2015 . Unilever also reports that its Sustainable Living brands grew more than 50 percent faster than the rest of its portfolio during 2016 .
Executives in these leading organizations are acutely aware that failing to understand how solutions contribute to the sustainability objectives of key stakeholders in a timely manner means potentially leaving attractive business opportunities uncaptured, or unwittingly exposing the business to risk.
The long-term competitiveness of a product portfolio hinges on the extent to which it supports stakeholders in achieving their sustainability-related objectives. Or, as Eric W. Bischof, VP Corporate Sustainability of Covestro, puts it, “Taking sustainability aspects into account when managing your product or innovation portfolio just makes good business sense – doing so consistently, transparently and exhaustively may well be the competitive edge you are looking for.”
For other businesses to emulate these successes and generate tangible business value, it is paramount to develop new sustainable value propositions (or improve existing ones). These must:
- Address tangible sustainability goals in society or in the value chain, rather than following regulatory incentives. While regulation triggers temporary demand for more sustainable products, there are many examples of companies or whole industries collapsing when incentives are removed. The demise of the German biodiesel industry in the early 2000s is one such example. Successful product introductions cater to key unmet needs. P&G’s and Ecover’s recent introductions of shampoo bottles partly produced from plastic waste that was collected by volunteers on European beaches show how companies can successfully position their products in response to societal concerns.
- Be cost competitive compared to conventional alternatives. While some consumer segments, such as millennials in western countries, will pay a small premium for sustainable products, the vast majority expect this as part of what a company offers. Companies report that willingness to pay for more sustainable alternatives is typically limited to single-digit percentage increases.
- Have material sustainability benefits, backed up by credible evidence. Increasingly, self-educated and mistrustful consumers reward companies that clearly communicate environmental and social benefits backed by credible external evidence. For example, in 2014, H&M touted its No. 1 ranking in Textile Exchange’s Organic Cotton Market Report until consumers discovered the minimal effort required to acquire the organic certification and the limited share of organic cotton H&M actually used.