Sustainability efforts of DAX companies fall short and thus endanger their future

Dr. Katja Grimme of the Future Circle says that a company that does not address the transformation to a sustainable business model in a timely manner is blocking its own future.

How do we want to live and do business in the future? We were asking ourselves this question even before Coronavirus.It is now quite clear that it cannot be 'business as usual'. Ethically responsible action is becoming increasingly important against the backdrop of pandemics, climate change, species extinction and social inequality.

More and more entrepreneurs also see it as their duty to take responsibility. Today more than ever, companies of all types and sizes are called upon to provide their shareholders, employees and the increasingly vigilant consumers with coherent answers: Answers to the question of what contribution they are making to a 'grandchild-friendly' (in German: 'enkeltauglich') future.
If we look in detail at the sustainability activities of DAX companies today, two significant aspects stand out.

To achieve effective improvement, much more focus must be placed on downstream activities in the value chain.

1. There is currently insufficient consideration of the social and environmental impacts of products or services

Today, companies  only have limited awareness of the impact their products and services have on 'people and planet'.  The impact includes environmental issues such as car emissions, water pollution, and so on,  or waste, including plastic and electronic waste generated at the end of use of the product and the problems this causes.

In the sustainability reports, such impacts have so far rarely been analysed and listed. This is often because measurement/estimation is difficult and also lies outside the company's own sphere of activity.

However, the downstream value chain often accounts for a far greater proportion of emissions than the activities for manufacturing products or services.

Therefore, it is not enough to focus on sustainability measures in the company's own activities: To achieve effective improvement, much more focus must be placed on downstream activities in the value chain.

As a consequence, the product/service portfolio must be critically and objectively reviewed accordingly. Changing or adapting it if necessary means looking at the company's business model and strategy. This leads directly to the second.

Why developing a sustainable corporate strategy is necessary now - and worthwhile!

2. Companies find it difficult to consistently align their long-term corporate strategy and business models with sustainability

The current focus of sustainability initiatives is mainly on marginal/incremental improvements such as reducing greenhouse gas emissions generated in the production process or in administration (CO2 footprint) or non-recyclable waste. However, what has hardly, if at all, been addressed so far is a long-term strategy adjustment, this requires  a transformational rethinking of how to change the business model in order to operate holistically sustainably in the long term.  (A concrete example of such a shift in thinking could be oil companies that are getting out of the oil business and are instead developing and marketing technologies for the production of renewable energies or for removing CO2 from the atmosphere. Further examples can be found in PlanetProofed (2020),  by Nauert/Specht. (in German).  Today, such action is primarily opposed by shareholder value, which until now has still been focused on maximum returns. This means that investors must also adjust their success criteria.

Why developing a sustainable corporate strategy is necessary now - and worthwhile!

When analysing current trends in society and politics, it can be expected that companies will very soon and increasingly be forced in various ways to pay for the negative externalities of their economic activities.  Negative externalities refer to costs that do not affect the producer/polluter but third parties (i.e. society). They arise during the consumption or production of a good and are not included in the market price, environmental damage is a good example. These include taxes (such as on CO2, kerosene, waste), elimination of subsidies (e.g., for fossil fuels), bans on harmful materials (e.g., plastics, pesticides), or even shutting down lines of business (as with nuclear power or lignite). It is also conceivable that negative externalities will have to be internalized, e.g. car manufacturers will have to pay for the costs of pollution caused by their vehicles.

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Therefore, companies should change course today by focusing on products and services that restore the vitality of the planet and equity in society, rather than further restricting it. Corporate products and services that consume the planet's natural resources and promote inequality in society will have increasingly less strategic scope. The best example is the fossil fuel industry: Investors are withdrawing from this industry, its reputation and acceptance by consumers is rapidly declining and many have even decided to stop producing fossil fuels, such as in France or Denmark. The world's largest investment house BlackRock, for example, no longer invests in companies that derive more than 25 per cent of their revenue from coal production.

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For the companies in this industry, this means a narrowing of their strategic scope: budget resources are increasingly reduced, the business model is finite.

It follows: a company that does not address the transformation to a sustainable business model in a timely manner will have an increasingly reduced strategic scope in the future. In other words: The company is blocking its own future. On the other hand, those who face up to the challenge early on and make a strategic change will also benefit early on because their strategic scope will expand again.

The realization of ambitious, sustainable goals requires above all the courage to change as well as a comprehensive realignment of the organization and the management culture. Topics that need to be addressed include purpose, anchoring ethics and sustainability throughout the company (e.g., through sustainability officers on the board/CSO), leadership by leading by example, and empowering the teams. Not an easy task, but a worthwhile one!

Conclusion

Companies should focus their sustainability efforts primarily on strategic considerations of their product/service portfolio and business model. This includes anticipating the likely changes over the next 10-20 years and developing and consistently implementing a long-term valid business model for that future. This is how a company can become future-proof for the long term.

Founded in January 2021, The Future Circle e.V. aims to inspire and empower companies as well as organizations and their decision-makers to establish and actively live sustainably successful business models with a positive impact on our planet and society for the benefit of future generations ("grandchild-friendly"). The Future Circle supports companies in this process by taking on the role of educating, coaching and highlighting positive corporate examples.