“If you're a long-term investor, you think about what your portfolio's value is going to be over a 15-, 20-year period, not three, five, 10 years,” he said. “And when you consider all the events that will affect your portfolio over that period, you can't ignore the impact that climate change will have on your portfolio's value.” Such pressure from investors is becoming more common, and it's not just about the climate. Pillay stresses that his company has a “stewardship” approach, and “we're here to ensure that future generations benefit from our actions today.”
For example, Solvay, a leading materials science company, employs a special matrix, aptly named the Sustainable Portfolio Management Guide, designed specifically for strategic sustainability assessments. The matrix uses two main axes: one quantitatively assesses the environmental impact of the product during production as “operational vulnerability” and the other qualitatively assesses the social and environmental benefits and challenges of the product from the perspective of customers and other stakeholders as “market alignment”. Adding a dynamic dimension to the grid, sales volume is visually represented by a color gradient. Products on this matrix are classified as “solutions” if they have a low operational environmental footprint and high market alignment, while “challenges” include products that perform poorly on either criteria. Within each business unit, a designated “point of contact”, typically a marketing strategy manager, oversees the assessment of their respective business line on the matrix. It is worth noting that the tool goes beyond simply measuring greenhouse gas emissions to cover a wide range of sustainability elements, from water efficiency to raw material use to potential exposure to toxic substances. The primary purpose of such a tool is not to provide definitive solutions, but to start a thoughtful discussion. Solvay uses this matrix not only to evaluate existing products and business lines, but also as a basis for making decisions regarding product development and potential mergers and acquisitions.
Change in strategy
Two central questions in strategy are “where to play” and “how to win.” Sustainability transformation often requires new answers to both. The companies we study and work with often make major changes to their portfolios through investments, divestitures, and innovations.
Royal DSM is an unlikely contender for the top spot on the Dow Jones Sustainability Index. The company was founded in 1902 by the Dutch government to mine coal that the country owned for the first half of the last century (DSM stands for Dutch State Mines). In 1965 the government closed the mines, forcing DSM to restructure and focus on its growing chemicals business. But by the turn of the century DSM was struggling. Growth was stagnating, it was rocked by volatile oil prices (a key driver in the chemicals business), and the tides were turning towards anti-pollution regulations that could have serious consequences for the business. Again, business as usual didn't seem like a good bet.
DSM was forced to come up with a new strategy. DSM's new CEO, Feike Sivesma, responded immediately. After taking over in 2007, he pivoted the company to life sciences, selling its carbon-intensive petrochemicals business for $2 billion and using the money to make 25 acquisitions over the next decade. Ten years into DSM's journey, the Dow Jones Sustainability Index ranked DSM number one in the chemicals industry. DSM's transformation is notable because the chemical sector has always been environmentally intensive. But its evolution shows that even a sector as hard to reduce its environmental impact as chemicals is moving toward more sustainable strategies.
Many, if not most, businesses face this dilemma in some form, sometimes more acutely. Some operations are unsustainable and carbon intensive. Others are less so, but may still be in their infancy. The challenge is to generate new answers to the question “where to operate” in real time, while finding ways to finance and manage the transition.
In 1970, Bruce Henderson of BCG introduced the “growth-share matrix” to advise companies on where to focus their portfolios, with market share on one axis and growth prospects on the other. The prevailing thinking at the time was that companies with low growth and high market share could invest in ventures with better growth potential. However, in the modern business environment, a transformation is underway as companies increasingly realize they need to go beyond growth-share considerations and incorporate sustainability factors into their strategy equation.
