The Burden of Proof for Corporate Sustainability Is Too High

Throughout 2023, tech companies have continually laid off workers. The year started with Amazon and Salesforce cutting 18,000 and 8,000 people, respectively, and sector momentum grew into the spring. An article in the April/May 2023 issue of Fortune magazine asserted that companies were “swapping exuberance for efficiency” and pointed out that they had collectively laid off more than 150,000 people since January. (By August, that number was up to nearly 225,000.)

An article in that same issue of Fortune focused on Salesforce, asking whether there was a conflict between the company’s layoffs and CEO Marc Benioff’s commitment to empathetic leadership and sustainability. That’s a fair question, but the article went further, declaring that Benioff’s dilemma could “serve as a referendum on the whole model of stakeholder capitalism.” If that’s true, then why aren’t the collective woes across the tech industry, which another article declared “a confession of bad management,” a referendum on shareholder capitalism?

There’s a serious inconsistency in how the business world sees sustainability. Whenever a company that prioritizes sustainability gets in trouble, people say the leaders took their eye off the ball. But when companies stumble while pursuing the “normal” strategy of maximizing profits above all — which is, by the way, wrongly implied to be the opposite of sustainability — their troubles are rarely blamed on that single-minded focus.

Sustainability as Scapegoat

The burden of proof on sustainability became crystal clear when, in 2021, activist investors and the board ousted the CEO of Danone, the French multinational food company, in a dramatic move that made headlines across the world. CEO Emmanuel Faber had faced harsh criticism for the company’s financial performance versus that of its competitors, but here’s how some of the press approached it at the time: The Financial Times editorial board’s take: “Danone: A Case Study in the Pitfalls of Purpose.” Forbes: “Sustainability and the Downfall of Danone CEO Faber.” Time: “A Top CEO Was Ousted After Making His Company More Environmentally Conscious. Now He’s Speaking Out.”

Unfortunately, this two-year-old story has legs. I was recently speaking to leaders of a big consumer packaged goods company, and one of the execs expressed skepticism about sustainability, pointing to what had happened at Danone (and at Unilever, which has also taken heat about its sustainability focus).

The finger-pointing at sustainability is, if anything, accelerating in some circles; to use modern parlance, it just triggers some people. Without diving into the morass of the anti-ESG movement, I think it’s clear that some prominent voices will blame sustainability for any corporate trouble. When Silicon Valley Bank went under, for example, some pundits and politicians hit the airwaves to claim, ludicrously, that it was because the company had mentioned its diversity and inclusion efforts in its proxy statement.

Blaming sustainability for financial woes just rings true for most execs. But why?

I believe it’s about a deeply flawed base assumption: Sustainability, even as companies embrace it like never before, is still generally assumed to be a drag on earnings and to always add to costs. But that’s never been remotely true.

The idea that sustainability is a trade-off or is incompatible with financial responsibility is false. Some of the companies most famously focused on sustainability, such as Walmart and Ikea, are relentless cost cutters and have fit their environmental and social efforts into that strategy. These companies know that sustainability not only can cut expenses but also slashes risk, drives innovation and revenues, and builds intangible or brand value. It’s not true that running a business in a sustainable fashion always costs more, although new ways of operating don’t always pay off quickly. And, to be fair, the sustainability community — and that includes me — has sometimes implied as much.

But let’s go back to the burden on sustainability and try a quick mental exercise. If a focus on sustainability causes failures, then are the companies that focus only on shareholder profits always successful? Of course not. The failure rate for companies is high: Roughly 50% of small businesses close within about five years. Even among the Fortune 500 giants, failure is the norm. Of the original list in 1955, only 60 of them survived until the late 2010s. Obsessing over shareholder value didn’t save 88% of the biggest companies.

All companies, at some point, emphasize a strategic focus. Consider a sample list of core strategies — some fads, some lasting additions to the management arsenal — that companies have embraced across a century: mass production, specialization, product differentiation, quality, safety, customer satisfaction, employee happiness, cost cutting, reengineering, agile and lean development, data-driven decision-making. Companies that embraced these things often outcompeted others, but none of those core strategies was ever the only factor in their success.

Companies rise and fall for diverse reasons. The most celebrated success stories, like those profiled in the influential book Built to Last, can also face scrutiny over time. Decline occurs when companies fail to adapt to sectoral transformations (Blockbuster), neglect technological shifts (Kodak), or lose brand relevance when they fail to attract younger consumers as their core audience ages (a fate shared by numerous apparel and consumer packaged goods brands).

So, in that context, what really happened with Danone? Is it possible that sustainability was the problem? Sure. But perhaps it was something more nuanced. In his book Purpose & Profit, Harvard professor George Serafeim analyzed how Danone was doing at the time of the CEO’s ouster and found that the company was underperforming peers not just on financial outcomes but also on sustainability outcomes: The intentions and plans were solid, but the results lagged. Serafeim concluded, “Maybe Danone is underperforming not in spite of its focus on impact but because it’s failing to generate enough impact.” Whether this conclusion is correct is the right debate to be having rather than simply chalking up the company’s problems to sustainability.

Stop the Blame Game

The good news is that sustainability must now be mainstream or attention-seekers wouldn’t find it worth attacking. It’s becoming core to how business is done, with evidence everywhere — signs like increased regulation and transparency demands from stakeholders, sustainability reports issued by nearly every large company, and countless courses added to business school curricula globally.

Given how widespread sustainability efforts are now, perhaps it’s time to do something paradoxical. Could we make sustainability in business more important by lowering the intensity of focus? This does not mean going light on the issues sustainability is grounded in — like climate change and inequality, which are, quite literally, deadly serious — but instead just turning down the heat. Can we normalize sustainability and stop blaming it for anything that goes wrong at companies with a purpose and vision? And can we stop crediting it for being the only factor that drives some companies’ success? I’m willing to stipulate, for example, that sustainability darling Patagonia also succeeds because it has kick-ass products that last a long time and a culture that attracts employees and customers.

It’s time to truly embed sustainability into business and treat it like any other unquestioned part of operations (think HR, R&D, and safety). Sustainability need not be the scapegoat or the hero. It can just be a powerful way to do business and stay relevant in a fast-changing world … and help society and the planet thrive.