Change for the better

It’s hard to name a more compelling example of corporate transformation than General Electric’s (GE) exit from the lighting business. Lightbulbs launched Thomas Edison’s company in the late 1800s. For much of the 20th century, the GE brand was synonymous with quality consumer appliances and electronics. As dynamics shifted in the 1980s, famed CEO Jack Welch divested its market-leading GE/RCA television business and made a regrettable pivot to financial services. That was dealt a mortal blow by the 2008 Global Financial Crisis. Today, GE’s only link to the innovative lightbulb is its cursive logo, and the conglomerate is splitting into three separate corporations in the aviation, health care and power sectors.

Change is essential to business, but an organization doesn’t need to reimagine itself to move in a positive direction. Adaptation is often the wiser choice. This is the challenge facing management and boards today when it comes to the issue of corporate sustainability. Will they meet the desires of customers, governments, investors and other stakeholders increasingly demanding businesses operate responsibly with greater transparency captured in the ever-expanding environmental, social and governance (ESG) movement? If companies realize the threats a lax attitude can have toward changing consumer preferences and regulations, they should view them as a real long-term business risk.

Once properly vetted, a key action is to establish a governance system to manage relevant and material ESG risks. Some companies form committees, but an increasingly popular practice has been to establish a sustainability team. These have proliferated in recent years, usually headed by a chief sustainability officer who has a seat at the proverbial table and determines strategy with the rest of the senior leadership.

But corporate evolution is not complete until real money is spent. Enter the finance department. It’s here that the costs of implementation are quantified, and they can be formidable. A plan to reduce a company’s carbon footprint can lead an organization to anything from retrofitting facilities to revamping production. Upgrading data security and addressing environmental impact can carry upfront expenses. Capital must be allocated effectively to create the sort of intellectual property that can fuel growth in our knowledge-based economy.

In an effort to finance their transition to greener pastures, many businesses are issuing a new type of bond linked to their long-term sustainability targets. According to the Institute of International Finance (IIF), issuance of sustainability-linked bonds is on track to exceed $1 trillion this year. By turning to green financing sources, companies are making an agreement with their investors that meeting specific ESG key performance indicators, such as decarbonization targets, will lead to a lower cost of capital. 

Once the board and senior management come to the realization that sound ESG practices and solutions have a material impact on revenues and risk, the mindset shifts from “ESG is a fad” to “ESG is our future.” It comes down to having the fortitude to establish a forward-looking vision. Companies committed to a transition have to make uncomfortable and sometimes unpopular strategic decisions to establish a sustainable business model. Nonetheless, judging by its growing acceptance, sustainability may soon become a core business function.