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The Sustainability <=> Innovation Connection #20 Innovation Newsletter

Like innovation, sustainability—a focus on creating economic, social, and environmental value—is rising on corporate agendas. According to a recent global executive survey, CEOs are now “twice as likely as they were in 2012 to say sustainability is their top priority,” and more other execs now see it as one of the top three items on their CEO’s agenda. Almost half of the executives surveyed say their company is aiming to align sustainability with overall business goals rather than with cost-cutting strategies.¹

It’s natural to think innovation would drive new solutions for sustainability. But the opposite is also true: a focus on sustainability can drive innovation and growth. Hannah Jones, Nike’s Chief Sustainability Officer (CSO) and VP of the Innovation Accelerator, says it in six words in a recent interview: “Sustainability is just innovation spelled differently.”

The similarities and synergies of innovation and sustainability span strategy, growth, process, and culture, as we explore below.


Strategy

Both sustainability and innovation should start at the top and be woven into business strategy. As Hannah Jones puts it, sustainability needs to be integrated “into the very fabric of a company’s business model, its governance, the accountability of executives.” It cascades from there into targets for different business functions, and performance measurements that are reinforced by appropriate incentives.

For Nike, sustainability leadership also includes a “robust corporate responsibility and sustainability committee of the board” that stimulates innovation. Nike’s was set up more than 10 years ago.

Though more and more S&P 500 companies have instituted board-level governance of sustainability, with many even exceeding legal oversight requirements, there are still significant gaps. Few public companies in the U.S. have a stand-alone board-level committee. Oversight of sustainability is frequently assigned to a key committee such as Nominating and Governance, where it becomes just one of many responsibilities and is often not a top priority. Most committee charters don’t clearly define how oversight is exercised, and few set standards for board expertise.

UPS does not have a stand-alone board committee responsible for sustainability, but it was among the first Fortune 100 companies to appoint a chief sustainability officer (CSO) in 2011. The CSO regularly reports to the board, chairs the Sustainability Directors Committee, and is a member of the Sustainability Steering Committee chaired by the COO.

Kurt Kuehn, UPS’s CFO and a founding member of its Sustainability Steering Committee, sees the link with strategy as a matter of “working from your strengths.” For UPS, that means focusing on solving problems where logistics and sustainability meet. When you concentrate on your core capabilities, you merge the value sets of profitability and sustainability. And just as business competencies can expose new possibilities for sustainability, sustainability can inspire improvements and innovations for the overall business.²

Taking governance a step further, outdoor clothing maker Patagonia’s strategic focus on sustainability is now written into their corporate charter. In 2012, they became the first company to incorporate as a “benefit corporation” (B-Corp) in California. The charter of a B-Corp allows its board to consider social or environmental objectives in addition to and even ahead of profits. More than half of U.S. states have passed legislation to establish the B corporation option, and more than 1,100 companies worldwide are known to have registered as B-Corps.


Growth

Sustainability and innovation work in tandem to foster the disruptive ideas that can charge growth. Last year, we reported on research that showed more and more companies changing their business models to meet sustainability challenges.

As they did, they were finding ways to translate those changes into profitable opportunities. In crafting more sustainable supply chains, for example, Kraft Foods also improved reliability in the supply of raw materials and opened new consumer segments, such as coffee. (See “Innovation Pressure Remains High.”)

Nike’s growth strategy, says Jones, “is really predicated around decoupling from constraint resources.” Sustainability is not just about incremental improvement. It is a core element in a business model that “can continue to deliver growth in the face of looming macro-environmental challenges such as resource scarcity, climate change, and demographic shifts.”³ So when Nike was acting to improve working conditions at its suppliers, it sought to tackle the issues systemically. That meant engaging a whole range of local stakeholders including community groups and government, as well as other customers of its suppliers. It also meant targeting not just better controls, but higher-level innovations. Hannah Jones explains: “You can either solve a workers’ rights issue by monitoring every single factory 24 hours a day for whether they’re wearing protective equipment, or you can innovate a new glue that removes all the toxics so that you don’t have to have the personal protective equipment.”

Patagonia’s spotlight on sustainability recently resulted in the development of a new “biorubber” wetsuit. Instead of using petroleum- or limestone-based neoprene, Patagonia partnered with Yulex Corp. to develop a new rubber made from the guayule plant, a desert shrub. It is a renewable resource that can be replaced faster than the wetsuit wears out, involves low-impact agriculture, and uses little energy and few chemicals for extraction and processing. The final product not only provides improved elasticity and softness; it’s also biodegradable.

The bottom line for Patagonia: the wetsuit should prove profitable, enhance the company’s reputation, and align with its mission to “build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis.” The biorubber will also spark growth and innovation for other companies, because Patagonia does not have an exclusive on the material. They didn’t want it. Why? “Because when volume goes up, prices go down; and when more people can buy a less harmful material, we all win.”


Processes

Sustainability and innovation utilize similar process elements. Nike, for example, runs its sustainability function the same way it runs its innovation functions. “Everything goes through stage-gating,” Jones says. “We actually try to find a balanced portfolio of investments that will bring returns in the short, mid, and long term.”

For Kuehn at UPS, the process of teaming up with diverse stakeholders to address sustainability challenges helps charge innovation throughout the company. Outside stakeholders are able to view your corporate strengths through “a new lens,” he says—the lens of their own needs, agendas, and experience—without being tied down to assumptions about your business model. Rather than focusing on constraints, the way many managers are apt to do, “external stakeholders imagine possibilities.” With that imagination comes insight into how your strengths can be reframed more broadly.


Culture

Sustainability and innovation both require similar mindsets and cultures. Both involve making leaps of faith and developing the capabilities to judge whether an idea can move from concept to prototype to scale. Furthermore, as Jones says, “All the problems that sustainability practitioners bemoan—‘nobody knows quite what my future value is’—are the same for most innovations.”

The management culture needs to shift; leaders need to embrace new attitudes toward the definition of success and new ways of measuring it besides short-term ROI. UPS’s Kuehn observes that all the numbers are not obtainable when it comes to sustainability, as is often the case with innovation. So other elements need to be baked into the definition of “value” in financial models. Successes reach beyond the purview of the company. And many of the benefits to the company are intangibles like goodwill, brand equity, risk avoidance, and social engagement. When UPS employees work on sustainability projects that engage their own strengths, it also sparks new ideas among the greater employee community. Those ideas seep past the boundaries of a given sustainability project and can pay back to the company directly in unexpected ways.

Ideally, the combination of behaviors + processes + growth targets + strategy that are common to sustainability and innovation add up to a company culture that drives both. As Hannah Jones says of Nike, the company “naturally has a culture of risk-taking, and innovation is in our lifeblood.” That’s the kind of culture that fosters growth in the top line and the bottom line, while making positive contributions to society.


  1. McKinsey & Co. “Sustainability’s Strategic Worth: McKinsey Global Survey Results.”
  2. Kuehn, Kurt with Lynnette McIntire, “Sustainability a CFO Can Love,” Harvard Business Review (April 2014).
  3. Paine, Lynn S. “Sustainability in the Boardroom: Lessons from Nike’s Playbook,” Harvard Business Review, July-August 2014.

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