Ioannis Ioannou, an assistant professor of strategy and entrepreneurship at the London Business School, has conducted studies of what he terms the “winning sustainable organizations of the future.” We connected with him to discuss the relationship between sustainable practices and long-term business success.
Access: Your research indicates that, over an 18-year period, companies that made sustainability a key business practice had better market returns and accounting performance than their nonsustainable counterparts. What do you attribute that to?
IOANNIS IOANNOU: If you truly integrate sustainability into your strategy and business model, you are essentially becoming a structurally different organization — one in which shareholder value maximization is part of the story, but definitely not the entire story. It’s about astute multistakeholder management and innovative thinking — and about generating financial, as well as environmental and social value, in a synergistic way. Some characteristics of such an organization would be its distinct corporate governance structure, stakeholder engagement processes and procedures, transparency and accountability. Another would be a longer time horizon for decision-making, rather than a short-term, exclusive and isolated focus on financial value and quarterly earnings.
Some of my work (with my co-authors) also shows that companies that perform better on sustainability and corporate social responsibility (CSR) metrics gain better access to finance. Why? They tend to disclose more and higher-quality (and thus credible) financial and nonfinancial information, and therefore they’re more transparent. At the same time, their sustainability and CSR engagement also helps them establish more long-term, trusting relationships with multiple stakeholders, such as the members of their supply chains. By doing so, they can minimize transaction costs, agency costs and the costs associated with contracting. In essence, they contract more efficiently.
The broader literature on sustainability has also uncovered other mechanisms. For instance, companies that integrate environmental and social issues tend to have more engaged and productive employees.
Access: Can you offer examples of companies from your studies that have used sustainability to boost performance?
I.I.: The data used for the study on sustainable organizations are from the U.S. but they are also confidential, so I cannot provide specific company names that were part of that study. But the examples out there on the forefront of sustainability — companies such as Unilever, Coca-Cola Enterprises, Novo Nordisk, Desso, and Intel, among others — could certainly be some good examples.
Access: The idea of the circular economy has been described as a “new industrial model” by the Ellen MacArthur Foundation and others. Is a true circular economy — one that reclaims and reuses practically all of its used materials — attainable?
I.I.: Yes. In the public domain and in the eyes of society, firms are becoming just as accountable in terms of their environmental and social performance as they are for their financial performance. That’s where the circular economy comes in. With it, integration of key environmental and social issues becomes core to the business model, but that integration is accomplished in a profitable manner. In many cases it has unleashed a wave of innovation in directions that I believe we haven’t seen before.
Access: Can you offer an example?
I.I.: I have written a case study about Desso, a carpet manufacturer in the Netherlands. Back in 2007, it adopted and implemented the circular economy’s Cradle-to-Cradle principles [which call for the elimination of toxic materials and processes so products can be safely recycled and reused or composted]. A couple of years later, and after successful implementation of the circular philosophy, it came up with more innovative products — carpets that clean the air and reflect natural light. By doing so, it has been able to attract talented young designers and engineers it was previously unable to attract. The change has also transformed the company’s identity into one that not only produces sustainable, high-quality carpets, but a company that cares about its customers’ health and welfare.
Access: What will be needed for companies to buy into the idea of the circular economy? What are the barriers to acceptance?
I.I.: There are many, as with any radical or transformational change that spans across multiple levels. For instance, if we talk about issues at the level of the consumer or the individual, the circular economy is a radical departure. We are used to buying a product, using it, and then getting rid of it. With the circular economy principle, we should start thinking of the product as if we’re actually buying a service. Doing so will, for instance, require companies to develop capabilities for reverse logistics. In other words, at the end of the product’s life, we’ll need to convince the consumer to return the product to the company, while the companies themselves would have to redesign products to facilitate disassembly and recovery of input material for reuse in the production cycle.