What is Sustainable Value Creation?

Senior Fellow at the new Sustainable Value Creation Institute Dirk Visser unpacks this new take on how leaders can get ahead of the curve on business and sustainability.

Over the past 15 years, conversations around climate change have evolved dramatically in the business community.

“In the early days, it was about awareness raising,” says Senior Fellow at the new Sustainable Value Creation Institute Dirk Visser.

“Many executives simply didn’t see climate change or environmental risk as directly relevant to their business.”

Today, most directors recognise sustainability is part of their legal obligations and what is expected of them by stakeholders.

But now, the conversation has shifted and splintered.

On one side is the idea that businesses can profitably address sustainability challenges and if it is not profitable, then it is not their responsibility to do something about it.

On the other hand, is an argument that business should prioritise social and environmental good above maximising shareholder value.

“The idea of Sustainable Value Creation sits between those camps,” Visser says.

“We need businesses to both create shareholder value and to actively contribute to system-level sustainability transitions. Businesses and their shareholders cannot flourish in a destabilised climate or a fragmented society,” Visser says.

Sustainable Value Creation is premised on the idea that sustainability and shareholder value are not two independent, or even conflicting goals for businesses, but mutually reinforcing priorities that must be integrated.

“The purpose of the new Institute is to address this fundamental tension of how businesses can simultaneously pursue shareholder value and contribute to the sustainability of the systems that make those returns, and human flourishing possible.”

Why the conversation has shifted

According to Visser, there are three key reasons business leaders have been engaging more deeply on sustainability, and with the Sustainable Value Creation Institute.

1. Systemic risk is rising

Climate change, biodiversity loss, and social instability do not only create direct financial risks for organisations, but can have economy-wide effects that are difficult to escape.

“It’s very hard to run a successful, profitable business in an economy that is shrinking or destabilised,” Visser says.

2. Trust in markets is fragile but essential

As the negative impacts of unsustainable production and consumption activities become evident, the public’s trust in business is influenced by whether it’s seen as offering solutions to or exacerbating the problems.

A loss of trust in business or markets leads to a loss of social licence or more heavy-handed government interference which is bad news for businesses.

3. Current approaches have yielded limited progress

Despite significant investments over the last few decades in activities meant to increase profits and decrease negative social and environmental impacts, the needle hasn’t really shifted. Not only has the impact on greenhouse gas emissions, biodiversity loss and inequality been limited, but the superior financial performance by companies who have invested in these activities has been lackluster.

Putting sustainable value creation into practice

The Sustainable Value Creation Institute was established with business for business to advance sustainable value creation across corporate Australia.

Visser says that putting the concept into practice requires deliberate focus across three domains.

1. Pursue ‘win-wins’

There are initiatives that are both profitable and beneficial for society or the environment, but many ‘win-wins’ remain untapped due to behavioural inertia, organisational silos, or capability gaps. The Institute will help identify and capture these opportunities.

2. Seek competitive advantage through sustainability

Organisations can offer more sustainable solutions and build competitive advantage, if they are prepared to make an integrated set of choices that are aligned with their unique capabilities.

The Institute will work with organisations to anticipate sustainability transitions and create new profitable opportunities.

3. Support system-wide transition

Many solutions necessary for a sustainable economy are not profitable to pursue or cannot be achieved by organisations acting alone, as they require breakthroughs in technology, changes in regulation or societal shifts.

But that does not mean that business cannot support, or hinder, these systemic changes. This may involve collaboration with competitors, governments, and community-based organisations, an area in which momentum is building.

“The Australian Competition and Consumer Commission (ACCC) has even provided guidance enabling certain sustainability collaborations that might previously have raised competition concerns, particularly around complex issues such as Scope 3 emissions reporting,” Visser says.

The logic for investing in system change is similar to the logic of taking out insurance, or for a country investing in defence capabilities – you don’t do it purely based on a dollars spent and dollars returned calculation.

“Some investments are about ensuring your continued existence when significant, adverse events occur.”

Coalitions are leading to change

Visser says business engaging in cross-sector collaborations has already led to encouraging changes, in areas from modern slavery to more sustainable timber, and this is paving the way for broader changes.

“Voluntary initiatives can get things started. But in many areas, regulatory change is necessary to bring everyone up to a minimum standard.”

He argues that business has a critical role in creating political space for policy reform, not through narrow lobbying, but through evidence-based, non-partisan engagement.

Australia faces significant environmental challenges including high per-capita emissions, fossil fuels and biodiversity loss, however Visser says on economic metrics we perform strongly with deep capital markets, sophisticated financial institutions, a globally admired superannuation system and abundant natural resources.

“With vast renewable energy potential, critical minerals such as lithium and copper, strong human capital and robust financial markets, the country has many of the ingredients required to lead in the global transition,” Visser says.

Where businesses can start

For executives overwhelmed by the scale of the sustainability challenge, Visser’s advice is not to attempt everything at once. Rather than chasing generic ESG scorecards, he says leaders should ask three questions:

• What are the most critical drivers of our long-term financial success?
• What are the most significant expectations from our stakeholders that can change our future operating context?
• Where can we have the most meaningful positive societal impact given our unique capabilities?

The overlap of these three areas reveals where to focus.

Leaders must recognise the deep dependencies that make value creation possible in the first place, such as our functioning legal system, education, environmental stability, and social trust.

Instead of asking whether sustainability undermines profit or whether profit must be sacrificed for purpose, the more productive question is:

How can businesses simultaneously generate shareholder returns and contribute to the resilience of the systems that make those returns possible?

“Business is not separate from society. Leaders are also citizens, parents and members of communities. Strengthening the underlying system that enables value creation is in everyone’s interest.”

The Sustainable Value Creation Institute (SVCI) seeks to fundamentally advance sustainable value creation across corporate Australia. To address these challenges, Melbourne Business School has partnered with four leading ASX 100 companies to ensure the long-term prosperity of the country’s economy as it navigates the sustainability transition. Find out more here.