Proceeding with the discussion of the primary requirements for sustainable enterprises, as initiated in previous articles in this column, it is necessary to delve deeper into the management of any business (large or small) through the lens of sustainability principles. Such an investigation is crucial for all companies aiming to improve their operations in a manner that is ethical, respectful of others’ rights, and mindful of the environment in which they operate. Furthermore, this approach is foundational for investors—both domestic and international—who aspire to align with sustainable finance practices. Observing the management behavior of existing businesses allows for the identification of virtuous actions that are most deserving of support for further development.
In the October 1 article titled “AGENDA 2030: HOW TO INTEGRATE Economic Growth, Social Development, and Environmental Sustainability,” I outlined the main content of my book, published by Guerini e Associati, which explores sustainable development and the associated actions and benefits. Building on this discussion, the priority for every organization emerges clearly: integrating economic, social, and environmental objectives so that long-term development encompasses all dimensions of sustainability and yields the greatest overall impact. As a result, a winning investment strategy must inherently be linked to a sustainability framework.
Sustainable Business Strategy
Local businesses have historically demonstrated sensitivity to the social dynamics of their respective regions. In practice, many already manage their operations with an emphasis on social development alongside economic growth, effectively implementing corporate social responsibility (CSR)—the first pillar of sustainability. More recently, these enterprises are increasingly adopting an environmental consciousness, recognizing the necessity of accounting for their ecological impacts. However, full corporate sustainability remains an exception, achieved in only a few cases, despite the significant spread of best practices, particularly in the northeast of Italy.
To accelerate progress toward this essential goal, businesses must adopt a transformative shift in corporate strategy. This entails developing a new framework that integrates economic objectives (such as returns for all productive factors) with related social and environmental goals, including minimizing harmful environmental impacts.
While this new framework is broader and more complex than the conventional strategies historically adopted, it should not be overly daunting for corporate management. The goal is not to add new activities to existing ones in an effort to address all global challenges, but rather to carry out planned activities in a way that contributes to social improvement and respects the environment. For example, a footwear company will continue producing shoes competitively and efficiently, but the production process must respect human rights and align with climate mitigation and natural resource conservation goals.
Of course, these adjustments are not negligible and will require greater effort and additional costs to address social and environmental needs throughout the production process. However, as noted in previous articles, the initial sacrifices will be more than compensated for by the long-term benefits. Consequently, the strategy must focus on long-term horizons, extending appropriately to the primary deadlines of the 2030 Agenda (namely 2030 and, with some additional foresight, the definitive objectives of 2050). The extended timeline provides sufficient room to achieve these goals while distributing the associated costs. Moreover, during the process of revising existing strategies, opportunities for cost reductions and operational efficiencies may emerge, with new expenses offset by streamlining and production innovations.
Ultimately, the additional annual commitment required for this transition should be manageable for most companies, including small businesses, with the exception of specific sectors with high energy demands. For these sectors, public subsidies are often available.
Strategic Adjustments to Implement
It is important to note that organizations already engaged in social or environmental activities (e.g., social enterprises and those in the third sector) typically have strategies aligned with these objectives. For them, the focus will be on expanding and enhancing existing targets.
Conversely, market-oriented enterprises need to integrate social and environmental goals into their current strategies. Within this context, it is essential to highlight key integrations required for achieving sustainable corporate development.
This involves incorporating the well-known ESG (Environmental, Social, Governance) elements into the strategy, which previously did not include them. Now, with the introduction of the so called CSRD (Corporate Sustainability Reporting Directive), the elements to be considered, monitored and evaluated are well specified, unlike before, and therefore comprehensive guides are available for the setting up of the whole planning process and for the most usual annual reporting schemes, in order to present the results, both to internal management and external stakeholders
This strategic shift inevitably adds complexity, as companies must now monitor not only economic and financial performance but also environmental, social, and governance metrics. The aim is to ensure that progress in one dimension does not undermine another. However, as noted in previous articles, a well-executed long-term management approach prevents such trade-offs.
So, the essential approach of the new strategy examines the economic activity planned for the future and identifies the consequent impacts on the three elements mentioned above and also assesses the related economic-financial risks, which will usually be lower than those of the old strategy, precisely because every environmental, social and governance impact, sooner or later, ends up giving rise to monetary movements that may be favourable or unfavourable (for the company and for the stakeholders, including the community of reference) depending on whether the new strategic decisions are more or less oriented towards the sustainability of the company’s activity.
The actions to be planned and implemented will vary widely but, particularly for SMEs, can be limited to a few key measures closely tied to their specific economic activities. Below are some general examples to illustrate potential initiatives.
Key Sustainable Actions to Plan and Implement
Aligned with the ESG framework, businesses can begin by addressing environmental improvements within their economic activities, focusing particularly on reducing greenhouse gas emissions. This aligns with the UN 2030 Agenda objectives, specifically:
- Increasing access to clean and affordable energy (Goal 7);
- Ensuring responsible consumption and production (Goal 12);
- Mitigating climate change (Goal 13);
- Protecting life on land and underwater (Goals 14 and 15).
To achieve these goals, companies should aim to minimize the energy demand of their buildings, production processes, and transportation systems. Any residual energy requirements should, as much as possible, be met with renewable energy sources (primarily hydro, solar, and wind). Companies achieving full energy transition by 2050 can consider themselves environmentally excellent, gaining sustainability credentials along with economic advantages such as lower energy costs, energy self-sufficiency, and reduced exposure to adverse events.
Turning to the social dimension, actions should focus on the satisfaction of stakeholders and not only of the investor, whose interests are often sacrificed to satisfy others. Of course, afair remuneration to the shareholder for the risk capital provided must also be safeguarded, but fair expectations must not be compromised:
- of employees, who are entitled to a decent wage, as well as satisfactory working (and especially safety) conditions;
- of suppliers and customers (along the entire production chain), who also aspire to a fair remuneration for the factors of production employed;
- of the local community of reference, through an increase in the added value resulting from the company’s virtuous activity and through a fair contribution in terms of taxation for the public services that each organisation also enjoys.
All these measures mainly promote the social objectives of the aforementioned Agenda, as they
- they reduce the poverty of underpaid workers (goal 1);
- with the reduction of poverty, they also reduce hunger and enable greater health and well-being, better quality education, gender equality, availability of clean water and energy (goals 2 to 7);
- implement decent work and economic growth for all relevant stakeholders and communities (goal 8);
- develop the relevant businesses and sustainable innovation of the activities involved (goal 9);
- reduce inequalities (goal 10);
- alleviate social degradation in the target cities and communities (goal 11);
- make production chains more socially responsible (goal 12);
- promote justice and sound institutions (goal 16).
In this way, in addition to a relevant reputation in its social and market context, the company will be able to adequately develop its current business and obtain, from the increased cooperation of stakeholders, long-term benefits that no other initiative would allow it. Here, too, the fair remuneration of all employees is not prohibitive for a well-managed company that is able to virtuously involve all benefiting employees to the best of its ability.
Finally, governance is also essential, since it is the overall decisions that involve all people and organisational and operational practices. A lack of management sensitivity towards sustainability would produce inefficiency and disorganisation even if all staff were strongly motivated towards sustainable excellence. In other words, there is a need for effective governance of sustainable development that can only be realised with an open mindset towards new goals and complemented by a solid competence in this regard. This does not mean that all administrators must be experts in sustainable development, but that each one must at least have the basic knowledge to assess and promote the innovative activities to be implemented. Then the operational lines will be left to the responsible managers and officials.
One of the essentialstrategic policies, peculiar to directors in this field, is the relationship with investors (shareholders and creditors) who are the stakeholders to be ‘converted’ to sustainability, bearing in mind that it is they who would lose part of their past exclusivity, sacrificing a share of current returns, in order to obtain far more satisfactory future benefits and returns. SMEs, however, are facilitated in this regard by the fact that many of their directors are also investors, often with a majority of the capital, and thus the broader strategic aims are pursued in a unified manner.
An examination of the company’s strategy is therefore essential for any new investment and the decision to join or not to join, either by internal parties or by new external investors, must depend on its assessment.
