[ Publication date : July 4, 2023 ]
Dialogue: Sustainability management in Europe: What is it really like, and what can Japanese companies learn from it?
Companies are becoming more conscious of integrating sustainability into their management and are stepping up communications about their efforts accordingly, yet genuine transformation is still on the horizon.
For management, the main challenge that lies ahead is likely to be how fast they can work on that transformation to achieve medium- to long-term growth.
Tomo Hirai of in3 spoke with four consultants and advisors who are driving sustainability transformation in Europe, to learn about the continent’s world-leading sustainability management and discover what clues it may have for the transformation of Japanese companies.
ーJapanese Version is HERE / 日本語版はこちら
- Anne Frisch：AquaFin’s founder. She was a former CFO/COO and board director with an extensive career in publicly listed companies from a broad range of industries, including energy, manufacturing and technology. She is working as professor at HEC in Paris and she has been an important contributor to the development of Celemi Sustainability™.
- Helene Regnell： Founding Partner of Lead Sustainability and Contributor to Celemi Sustainability™. She supports companies on their transformation to sustainable business models. Based in Denmark. Previous employments: General Electric, Maersk, Salling Group (formerly Dansk Supermarked).
- Michael Björne：Senior Consultant at Celemi . Expert in modelling complex business environments and creating engaging learning experiences. Lead developer of Celemi Sustainability™, a business simulation about sustainability transformation. Mechanical engineer with a passionate dedication to nature and sustainability.
- Tore Byström： Sales Director Celemi International AB , responsible for building up and developing the team of sales professionals and facilitators within Celemi. He started off his career at Celemi as Area Manager East and Central Europe and later promoted to Global Key Account Manager for several large accounts, including UNOPS, Siemens, Fujitsu, Airbus, Sberbank, and Volkswagen.
Interviewer: Tomohiro Hirai, CEO in3 Inc.
1. The increasing pressure on management
ー From your expert perspectives, what is sustainability transformation in Europe currently like, and what kind of trends are there?
Helene : I think most companies have been working on sustainability more-or-less
voluntarily., And with ambitious efforts towards sustainability being made in Europe, there is
more intense pressure than ever on those companies that have a large impact on climate
change or some other area of sustainability.
The way it is now is that all stakeholders including investors, financial agencies, and even legislators are pushing companies to go into sustainability management, driven by Europe’s ambitious regulations and rules.
The pressure is so powerful that you could say it’s becoming mandatory, and information reported about progress is also being checked extremely carefully. So what used to be nice to do voluntarily is now becoming mandatory to do “or else.”
Of course this doesn’t just have to do with Europe. It affects every company that does business in the region.
Anne : One other trend is that the finance and sustainability teams within companies are now working very closely together.
There are an increasing number of investors who want to apply ESG factors to their investments.
To raise money for a company, be it debt or equity, if you show a sustainable or green component, you can go for green bonds, green bond framework or sustainability-linked bonds.
So now in most large companies, the sustainability team and finance team — both in reporting and treasury — are working very close together. And this has also expanded to small and medium-sized enterprises.
ー What kind of perception do executives and business managers in Europe have of this?
Anne : I’m currently a professor at HEC Paris, and many of these business managers are in my programs. To push sustainability further, they’re being told directly by their boards to enrol in these programs.
These boards see the risk of continuing business as usual and are strongly aware of the need for change.
2. How to gauge a company’s commitment to sustainability transformation
The two types of readiness
Anne : There’s a sort of “litmus test” to objectively gauge how much a company is really steering towards sustainability management. And that is the readiness of the company to implement transformation.
Many companies talk about transformation, but it doesn’t truly happen because they are in a state of business as usual.
So there are two things that serve as a litmus test of whether they are ready.
The first is long-term incentive plans and variable compensation.
What share of the variable compensation of managers and top management is linked to sustainability? If it’s less than 15%, then you know that this company doesn’t have sustainability very high on the agenda.
Helene : At companies really pushing sustainability transformation, the bonuses of the CEO and top management will be 20%, 30% or even more connected to sustainability. And then it will be rolled out to the management below and all employees, to give them incentive.
At the same time they will also try not to have conflicting incentives, to ensure everyone is working in the right direction. That is one way companies do it.
Anne : The second litmus test is that of time investment: How much time do they spend pursuing sustainability?
Do they give their employees time to think about sustainability, find new solutions and work through them? If not, then they’re not ready.
Anne : You should also look at the share of investments that align with sustainability.
Actually one of the required elements in the EU taxonomy is disclosure not only of share of revenue aligned to the taxonomy, but also share of investments — the capital expenditure.
As an example, a major oil company in Europe has changed its logo. Okay, well it uses lots of symbols like the sun and the wind, so it looks very environmental.
Well then, how much capital expenditure is going into traditional oil and gas? The only thing they’ve done is changed their logo.
This is an example of green washing.
To gauge how serious a company is, it’s important to look beyond just communication to the share of investments that go to sustainable activities.
3. Truly working towards transformation
Top-down strategy and message
ー It seems that many companies actually find sustainability transformation difficult in practice. Does transformation happen from the top down? Or does there need to be organization-wide awareness in order to move forward?
Helene : Sustainability transformation is absolutely a transformation agenda, and many companies are not actually engaged in true transformation.
For example, changes at an incremental level — like improving energy consumption by 5% per year — won’t actually achieve the goal of transformation, so nothing will change.
It’s simply doing what they’re doing now, but more efficiently.
And it’s not wrong to be more efficient, but transformation means that you need to rethink your business model.
That’s why I think it needs to be done from the top down.
Company leaders can ask each other: What kind of business are we going to be in 10 or 20 years from now? What products will we be making? Or will we be selling services instead of products? Will we be procuring raw materials? Or will we be collecting old products to refurbish or remanufacture them into new ones?
The circular economy approach takes a very long time to actually implement. You need to think right now about what influence and financial impact it will have on your business.
I would also add that in the new CSRD (Corporate Sustainability Reporting Directive) there is a requirement for what is called double materiality.*
*In contrast to considering the financial impact of ESG issues on companies (single materiality), double materiality tries to focus on environmental and social materiality as well as financial materiality.
Then, company leaders and executives need to think about how they can motivate their employees and middle managers to move in this new direction, and how they can be clear about what they want to achieve.
For example, you can’t have a policy about respecting human rights in the supply chain while at the same time telling managers that they need to buy as cheap as possible.
The nightmare of the middle manager is that they don’t really know which direction to go in.
If the top sends mixed messages, employees are left not knowing what to do.
As management, it’s okay to have a high-level strategy and goals, but you need to think about how they can be incorporated and implemented into your organization’s culture and daily decisions.
Motivators and actions to transform
ー Changes in the external environment, society and politics are all so quick and complex, which makes it hard for management teams to forge a clear direction. And then implementing those strategies is even more difficult…
Anne : Let me tell you about a company that is moving towards transformation. And what’s interesting is that it’s not a European company.
It’s state-owned company in Morocco that produces phosphate fertilizers and exports them around the world.
You need a lot of water and energy to produce fertilizer. To cope with the recent jump in energy prices and make all of their future production green, this company has announced a huge plan for transformation. They want to invest $13 billion in five years.
They’ve also given themselves the objective to be carbon neutral by 2040. Not by 2050, but 2040.
One reason they’re doing this is because they export fertilizer around the world, including to Europe.
There is this potential that Europe will introduce a carbon tax, and they see the risk of being charged carbon tax at the border if they bring in fertilizer made with carbon-based energy. So they’ve planned a huge transformation in terms of business sustainability.
It’s not just the will of the top, but changes in global attitudes and legislation are also motivators for this company.
The importance of getting the front line involved
ー Once company leaders have a clear sustainability transformation strategy, how are they actually transforming their organization? Even if the sustainability team takes a leading role, when it comes to actually shifting business operations in a major company, it turns into a “grand naval exercise.” So I’m wondering how to actually transform an organization.
Helene : I’m an advisor to a bank in Denmark.
This bank holds about one third of the loan market for agricultural businesses in the country, and in the past few years there has been a discussion about carbon tax in Europe and Denmark.
There’s this chance that a carbon tax will be introduced in the future, which would then increase the risk of many farms going bankrupt.
This bank has such a large exposure to agriculture, and it was clear to the management that this puts their revenue in danger. Something needed to be done…
And what they did was form a partnership with an organization that develops software and systems for agriculture, and started providing tools to farmers.
These tools make it possible for farmers to go beyond showing willingness to reduce their CO2 and instead actually simulate and create scenarios for how they can lower their carbon tax.
But this solution wasn’t created by the management team or an ESG team. They couldn’t have come up this idea by themselves.
It’s also clear that if you delegate everything to the ESG or sustainability team, it becomes an uphill battle.
This is because the employees on these teams are not salespeople, not product development people, and not customer-facing people.
ー Indeed, if management can raise agendas and issues, the people at the frontline can work on them as a business.
Complexities and contradictions in the transformation process
Anne : On the other hand, there’s also a case where the management declared sustainability transformation as the company purpose, yet when they succeeded in transforming, they actually ran into an unexpected dilemma.
A world-renowned global food manufacturer had a CEO who was very visionary in terms of sustainability. He successfully steered the company towards transformation, so well in fact that it became a purpose-driven company.
But shortly after that, he was ousted by investors who were not happy about the company’s financial performance.
This is just a single case, but it shows that simply setting sustainability transformation as a goal and achieving it isn’t enough.
Sustainability transformation initiatives can’t be split between normal business and transformation within an organization; it needs to be integrated throughout the whole company.
To make that happen, it can’t just be about changing mindsets from the top. Each person involved in the business needs to change the way they work.
Sustainability doesn’t just exist in overall organization or as a strategy. Each job needs to be transformed, so how are we going to transform the jobs of people working in marketing, in engineering, in production or finance?
These are the kinds of new training initiatives I’m working on now.
4. The Celemi solution
ー Celemi’s training provides support for transformation throughout an entire organization, not for just company leaders. But what does that look like exactly? And how is Celemi’s solution different from normal sustainability training?
Michael : While transformation needs to be led from the top, we have people from every department participate in order to give them a sense of purpose and their connection with other people. We convey the challenges, the solutions and the holistic view of the problem in a way that makes people engaged.
That’s what we’re trying to do with a Celemi simulation.
Helene : With Celemi, you use fictitious companies and set up case stories.
It uses a game where every participant makes decisions and discusses what the best solutions are.
Because people from all different levels participate, at first I was a little bit concerned that the game would be too complex for them.
But then it turned out to be understandable on different levels, and the room was so full of energy.
Michael : The simulation helped them realize that everything in sustainability is a balancing act.
You need to achieve results both short and long term, in terms of people AND planet AND profit. You need to take risks to reach the big potentials, and you need to mitigate risks associated with delaying the transformation. Stakeholders might have contradicting expectations.
The simulation demonstrates how the demand for sustainability can be turned into business opportunities. Often, improved conditions for people and planet mean an improved business, especially long term.
Helene : But sometimes there is a clear contradiction. If you go in one direction your profit suffers, or if you go for profit then you suffer in terms of brand value. The participants discuss how to deal with these dilemmas.
This was a great way of learning for them.
They were having fun and at the same time discussing dilemmas that gave them insight into how their own company makes decisions in this area, or perhaps does not make decisions.
Which is also a part of it, because, as one participant said, when I’m presented with our sustainability strategy, I don’t know what the strategy does not talk about.
Michael : When you read a lot of sustainability reports, you find that some of them only highlight positive changes.
A general reader cannot relate the initiatives with the totality of the problem. In a way, this is cherry picking at work.
So what we try to do with Celemi simulations is convey the understanding of the totality.
Our work doesn’t provide right or wrong answers; it provides a thought process.
So several times during the experience, participants are asked to go through this thought process that considers: What are the opportunities, what are the risks, what are the impacts if we delay implementation of this project?
And how does that relate to the different activities of the company?
So it’s a method for acquiring a way of thinking rather than knowing the right answer for a participant’s own company.
Helene : It’s both fun and learning at the same time.
The best kind of training is one where the subject matter resonates with participants, and where they can understand why they’re doing it. And I think the way to get them to understand that is by making the training as real as possible.
5. Expectations for Japanese companies and their role
ー What kind of reputation does Japanese business have in terms of sustainability? What’s the perception in Europe about Japanese business as a whole?
Helene : I think there are some large Japanese companies that are definitely maturing. They are doing this because they are international and have subsidiaries all over the world.
Tore : When I went to business school, there were books full of case studies of big Japanese conglomerates like Matsushita that had successfully innovated. What we would call today sustainability innovations.
ー True, that’s an example of Kaizen. Japan does have many good things like that too.
Anne : Because Kaizen avoids waste and overuse, it’s a method that could be used to develop a circular business model and save on natural resources.
So how can that philosophy be applied to design?
For example, we are now focusing heavily on product lifecycle analysis using the whole value chain. I think the Japanese should be excellent at that.
Now is the time to introduce the Japanese Kaizen approach to lifecycle analysis and save on natural resources.
ー Yet I think businesses are not really scaling this up. To create transformation you need the organization to agree, but once you start this “consensus rally” there’s usually no total agreement, so genuine transformation doesn’t happen.
Anne : I agree with you. Transformation and consensus are not necessarily things that you put together, and transformation is a very deep change.
In the 18th century, Europe went through the Enlightenment. And what we’re experiencing now is that kind of major revolution.
But it will not happen just through beautiful consensus. There also needs to be forces and tensions.
ー So this means that the scales of society are changing dramatically.
Then what kind of demands and expectations are there for Japanese companies? What actions or roles should Japanese companies take?
Helene : I would expect Japanese companies to understand their end-to-end value chain globally.
From where they procure resources and raw materials to when products reach customers. And then what happen to products when they are no longer serviceable?
I’d like them to analyse that from a sustainability perspective, primarily on climate change, biodiversity and human rights — those three factors.
From executive leadership I would expect that they involve themselves in understanding the impact of their business, and once they have that picture, to take action based on it.
What are the priorities? Create a plan, take action, and make sure that action actually creates results.
That would be my expectation.
Anne : They need to look at their whole value chain, what is called scope 3,* and many companies are still learning what scope 3 is.
*Other indirect greenhouse gas emissions in the supply chain beyond scopes 1 and 2. Scope 1 covers a company’s own direct emissions created through fuel combustion and production processes at factories, while scope 2 covers indirect emissions created by using electricity, heat, steam and other energy purchased from other companies globally.
I admire Japanese companies that can be innovative and at the same time masters in execution. So I think that, if they understand this, and if they incorporate it into their purpose, they could be a wonderful help.
6. Business and sustainability as a single strategy
Helene : The best companies don’t think of business and sustainability separately; they are a single strategy.
And there’s no difference whether it’s a sustainable business strategy or a normal business strategy. The same things work.
So in the process of implementing that strategy, you need to think about different initiatives that will create more management information, reward the right performance, and give transparency to decision makers. All of these things are very intricately linked together.
Michael : It’s not having the main strategy and then some sustainability stuff on the side.
Everything is connected, and you cannot achieve a sustainability transformation without understanding the foundation of your whole business.
That’s why we provide support for transformation from an integrated perspective.
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