Imagine Company A in Sector A. In order to shield itself from operational and reputational risk, this fictional company actively engages with its suppliers to promote a sustainability agenda. It does so by integrating a suite of material KPIs in its supplier policy, such as carbon, water, and energy intensity; circularity; employee safety; diversity; and select governance factors.
Company A follows the same approach with its customers, and provides them with enabling products and services, where relevant. It may even sponsor specific sustainability initiatives.
By exporting its advanced business system to members of its value chain, Company A contributes to building resiliency to the benefit of all its stakeholders.
But this is just the first stage of the rocket. Here comes the next one: As much as Company A privileges suppliers with the required sustainability credentials, it is itself favored by its own sustainability-driven clients (without being disfavored by the others). As a result, all the members of Company A's value chain grow their market share versus their respective competitors.
The higher growth profile associated with a lower cost of capital more than compensates for the incremental sustainability-related investments, as anticipated by financial scenarios independently run by each value chain member with a long-term profit maximization objective in mind. After all, sustainability is a form of innovation – one that is directed not only externally to products and services, but also internally to operational management.
The rocket's third stage fires up: Losing market share to Company A and witnessing a rerating of Company A, competitors to Company A, such as Company B, react. Driven by nothing else than the 'invisible hand,' Company B seeks to improve its sustainability credentials and reaches out to Company A's suppliers at the expense of its existing relationships. Company B's traditional suppliers react by upping their sustainability profile to retain their share of wallet with Company B. Company B's customers respond favorably to its repositioning, and its loss of market share is stemmed. Company C, D, and E, all competitors to Companies A and B, follow, driven by competitive dynamics. But Company A and B do not stand still and continue to innovate and perfect their game alongside the value chain to maintain their edge.
Fourth stage: Suppliers to Company A and B, having enjoyed some success in Sector A, engage with their customers in other regions and end-markets to replicate Company A‘s business system and build a lasting competitive edge across their portfolio. The pattern outlined above repeats itself across all sectors and regions. It is like falling dominoes.
Powered by good ol' fashion capitalism, the whole wide world becomes more and more sustainable when considering environmental, social, and governance aspects. The risk of doing business structurally goes down. Valuation levels rise. The world reaches a stable orbit.
A lot can go wrong as each stage of the rocket is fired, including some overshooting and undershooting, which will be rightfully criticized.
With this risk in mind, I am prepared to actively engage with all the members of my value chain to promote and contribute to a more sustainable business system globally.
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