Unlocking Value: Strategies for Integrating Sustainability into Core Business Functions

Welcome to Part II of our series from Pimlico Strategy & Insights, where we delve into the dynamics of sustainability strategies from a business value perspective. In this instalment, we explore the trend toward integrating sustainability within core business functions, highlighting the importance of internal resources and cross-functional collaborations in unlocking the potential of these strategies.

The Evolution of Sustainability in Business

In Part I, we discussed how sustainability efforts have traditionally focused on enhancing brand reputation and marketing, with limited perceived potential to influence direct commercial outcomes such as sales growth, investment flows, supply chain stability, cost management, and climate risk mitigation. However, recent evidence indicates a shift in these dynamics, partly driven by regulatory mandates.

Regulatory Drivers and Business Integration

PwC’s Global CSRD Survey 2024 highlights that companies are increasingly prioritising sustainability in preparation for the EU’s Corporate Sustainability Reporting Directive (CSRD). Approximately three-quarters of surveyed companies, including those outside the EU, are incorporating sustainability more extensively into their decision-making processes in anticipation of the CSRD. Leaders expect this to yield various business benefits, such as improved environmental performance, better stakeholder engagement, and effective risk mitigation.

Nearly one-third of respondents anticipate significant financial benefits from the CSRD, with 28% expecting revenue growth and 26% anticipating cost savings. The expectation of these financial benefits is more pronounced among companies nearing their reporting deadline, with 38% of those set to report in FY 2025 forecasting substantial revenue growth and 34% predicting considerable cost savings.

However, the CSRD presents significant challenges, including data availability, staff capacity, and the need for new technology investments. Its emphasis on detailed disclosures about sustainability performance across domains like climate change, business conduct, and biodiversity necessitates a cross-functional approach under senior leadership sponsorship. Integrating finance, operations, procurement, and technology functions is crucial for success.

The Business Case for Sustainability

A recent survey by Thomson Reuters shows that companies integrating sustainability across their operations are 52% more likely to surpass competitors in profitability and exhibit a 16% higher revenue growth rate. Moreover, 53% of businesses incorporating sustainability practices acknowledge that tangible business benefits justify their investments.

Despite its recognised role in enhancing brand reputation and marketing, sustainability's potential to impact direct commercial outcomes is often overlooked. Yet, it is clear that sustainability initiatives can drive substantial business growth and innovation when integrated into corporate strategies.

Overcoming Integration Challenges

One significant issue in the strategic dynamics of sustainability is that sustainability teams often operate in isolation, primarily tasked with crafting narratives rather than meaningfully integrating sustainability into core business strategies. This perpetuates a 'business as usual' approach, where efforts are confined to specialised teams without real authority or integration into key operations. A shift in governance from shareholder value to broader stakeholder capitalism is essential, requiring systemic changes to embed sustainability deeply within corporate structures.

Investor engagement on sustainability is frequently siloed, separating environmental, social, and governance (ESG) considerations from main financial discussions, which diminishes their perceived importance. Furthermore, the allocation of resources to sustainability teams is often inadequate, relegating these teams to roles focused more on reporting than on driving actual change. Stronger commitments from all stakeholders, particularly investors, are needed to reevaluate and enhance operational, decision-making, and governance structures within companies.

The Role of Senior Leadership

Alison Taylor from the NYU Stern School has argued that the effectiveness of sustainability efforts is often hampered by the lack of a strong relationship between Chief Sustainability Officers (CSOs) and senior leadership teams, including the finance department. For sustainability to be taken seriously, it needs to be embedded in core strategic decisions made at the highest level of the organisation.

This suggests that robust governance, spearheaded by an alliance of the CFO, CIO, and CSO, is critical. This top-level engagement ensures that sustainability is not only about meeting reporting requirements but also about leveraging insights gained from sustainability data to drive strategic business decisions and long-term value creation.

As companies advance in their sustainability journeys, particularly in response to new regulations like the CSRD, there is a clear shift from viewing sustainability as a standalone issue to integrating it as a core element of corporate strategy. This shift is crucial for realising the full potential of sustainability initiatives, not just for compliance but as a driver of substantial business growth and innovation.

By addressing internal politics, fostering cross-functional collaborations, and strengthening senior leadership engagement, businesses can move beyond viewing sustainability as a mere reputational tool. Instead, they can unlock its true potential as a central component of long-term planning and resource allocation, driving both sustainability and commercial success.

At Pimlico Strategy & Insights, we harness our proprietary FASTER™ and TRACK™ frameworks for sustainability to empower clients to gain visibility and navigate an increasingly dynamic market. We help companies drive their sustainability agendas through bespoke insights and consultancy strategies that position companies for success and growth.

Let's make sustainability move FASTER™ together.

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