Four Key Steps to Drive Sustainability-Focused Innovation

For companies—and investors—looking for top-line growth that is truly sustainable, there are four key success factors:

• Having an engaged CEO who recognizes the potential of sustainability-focused innovation as a driver of growth;
• Identifying the opportunities and assessing the benefits of sustainable innovation by obtaining input from parts of the company that are “seeing around the corner”;
• Having specific goals and key performance indicators, such as revenue and R&D targets for sustainable innovation; and
• When ready, putting sustainable innovation on the agenda for investor discussions.

1. Customer demand is the key reason companies focus on sustainability-based innovation, but CEO leadership is critical, especially when it comes to significantly stepping up a company’s efforts. When asked to identify the primary drivers of the integration of sustainability into the innovation process at their companies, nearly all respondents (17 out of 21) pointed to customers. Indeed, customers also featured prominently when respondents were asked about the key market forces that will galvanize sustainable innovation, broadly defined as innovation that realizes economic value and generates positive environmental and social impacts.¹ Respondents noted that customers are influencing sustainable innovation both from a product demand side and through increased pressure to improve the sustainability profile of supply chains.

Fourteen of the respondents also pointed to the CEO as a key driver of the integration of sustainability into innovation. But in practice, the level of engagement from the C-suite appears to be mixed: 11 out of the 23 executives describe their companies’ CEO and C-suite as highly engaged in driving sustainable innovation at their companies, with an equal number describing the engagement as medium or low. Notably, when respondents were asked to describe what could help their companies leapfrog toward sustainable innovation, a common response was stronger commitment from the C-suite and executive teams. For example, one respondent mentioned that C-suite commitment would help “move away from existing paradigms and practices”; another respondent noted the importance of “ensuring the C-suite makes it a priority for strategic marketing to drive this type of thinking throughout the innovation portfolio.”

Survey responses therefore reveal an opportunity to ensure greater engagement from senior leadership; for many companies, CEOs can likely take on a more active role in supporting sustainable innovation. And convincing them to do so may not be difficult: improving innovation is now a top priority for global CEOs, second only to accelerating the pace of digital transformation.² Sustainability-focused innovation’s potential to be a significant growth driver should get the attention of CEOs. At Unilever, for example, brands that communicate a strong environmental or social purpose are growing 69 percent faster than the rest of the business and delivering 75 percent of the company’s growth.³

2. Collaboration between the sustainability and innovation teams is not enough—success requires obtaining input from parts of the company that are “seeing around the corner.” Teams also need support from senior leadership as well as a long-term view that helps them identify specific opportunities and quantifiable benefits. Nearly all respondents (22 of 23) indicated that their companies’ innovation and sustainability functions are either closely (9) or somewhat (13) integrated. But close collaboration between these two functions may not be enough: only four respondents believe their companies have been very successful at incorporating sustainability into their innovation processes (and these same four companies also indicated that their CEOs and C-suite are highly engaged in driving sustainable innovation).

Where responsibility for sustainable innovation sits within an organization may also make a difference. Unsurprisingly, for half of respondents (11 out of 22), ultimate responsibility for sustainable innovation lies with the R&D/product development function. But interestingly, the primary responsibility for sustainable innovation lies elsewhere at three of the four companies that noted they have been “very successful” at incorporating sustainability into their innovation processes. At these companies, responsibility for sustainable innovation rests with the strategy and marketing functions.

Regardless of where the function sits, having input from parts of the company that are “seeing around the corner” may help companies overcome some common challenges of attempting to integrate sustainability and innovation. When respondents were asked to describe the key obstacles they have encountered, two common themes mentioned were short-termism and lack of clarity around financial benefits. For example, respondents noted difficulty in “quantifying the long-term benefits”; “lack of clarity regarding long-term opportunities”; and the challenge of getting teams to “see around the corner.”

3. Once companies identify the opportunities and benefits of sustainable innovation, they should set specific goals and KPIs, such as revenue and R&D targets. Companies can make sustainable innovation stick by deliberately integrating sustainability requirements and performance targets as part of innovation planning, a recent report by The Conference Board notes.⁴ Some of the challenges, such as quantifying the benefits of sustainable innovation, may stem from the absence of appropriate targets: fewer than half of companies surveyed have specific revenue or product pipeline targets in place for sustainable products or services. Even fewer companies are tracking the revenue generated from portfolios of sustainable products or services (6 of 22), or the R&D spend on these types of portfolios (3 of 22). The survey responses also suggest that incentives are largely absent: only two respondents indicated their companies have specific targets in place to incentivize sustainable innovation. One of these respondents noted that their company has incentives for developing new opportunities with customers based on sustainability anchors or benefits. The other indicated that their company ties compensation to portfolio growth, reductions in greenhouse gas emissions, and absolute energy savings.

4. Putting sustainable innovation on the agenda for investor discussions can help focus management attention and ensure accountability. Engaging with investors on the topic can be a powerful catalyst to address challenges such as the lack of clarity regarding long-term opportunities of sustainable innovation. There is ample opportunity to increase engagement: fewer than half of respondents (10 of 22) indicate their companies regularly speak with investors about sustainable innovation.

But discussing sustainable innovation with investors requires that the C-suite be engaged on this topic and able to articulate the value that it can bring to the company. CEO leadership is critical for achieving this fluency among the C-suite, and it is equally important for the sustainability and innovation teams to be able to speak the language of investors. To make this level of communication possible, strengthening the ties between these teams and the finance and strategy functions can be helpful.

Companies aiming to use sustainability as a means for growth can look to examples of others that have done so. At 3M, sustainability is now embedded into the product pipeline: as of 2019, all the company’s new products are required to have a Sustainability Value Commitment that demonstrates how the product drives impact for the greater good.⁵ Johnson & Johnson launched its EARTHWARDS program in 2009 to encourage the development of more sustainable products. These products account for 22 percent of J&J’s revenue, exceeding a goal set in 2016 of generating one-fourth of revenue from EARTHWARDS-recognized products by 2020.⁶ And at Dutch multinational DSM, the Brighter Living Solutions portfolio is composed of products and services that deliver high performance while providing additional benefits to society and the environment. These solutions accounted for 63 percent of the company’s sales in 2019, nearing the company’s goal of exceeding 65 percent of sales by the end of 2021.⁷ Notably, part of DSM’s Managing Board’s short-term incentive compensation is linked to the proportion of products that qualify as Brighter Living Solutions.⁸

Senior executives’ responses to this survey paint a picture of how the sustainability and innovation functions interact at some companies. The findings reinforce the important role that customers play as drivers of sustainable innovation; the findings also highlight an opportunity for CEOs to play a more active role in enabling this type of innovation. It is also evident that sustainable innovation programs would benefit from more input from the finance, strategy, and marketing functions. Input from these functions may help companies develop  targets and KPIs that incentivize sustainable innovation, help avoid some common challenges in driving innovation, and enable companies to communicate effectively with investors about an area that can create long-term value for the company and its stakeholders.