The focus on sustainability at business schools around the world is proving to be, well, … sustainable. No longer a short module, a footnote or a brief talking point, ESG is being embedded into programmes, into school campuses and into academic research. This is not only a reflection of the wider business world we live in, where a transition is needed to tackle the global climate crisis, but also of the wants of prospective students.
The Graduate Management Admission Council’s (GMAC) latest Prospective Students Survey shows that almost half of respondents view sustainability and CSR as a curricula must-have. INSEAD announced last month that the renewed MBA curriculum will embed sustainability into all its 14 core courses. The school whose one-year MBA program ranks #2 in the Financial Times will introduce a mandatory capstone challenging students to integrate sustainability learnings across all management areas.
Future leaders who’ve studied at business school can directly impact on the sustainable and socially responsible solutions and policies of the companies they work for. But to effectively tackle climate change we need contributions from all businesses, whether or not their executives have a graduate management education.
So how can business schools maximize the impact on environmental issues into business decisions, and not just the companies their alumni go on to work for? One of the most effective approaches to contribute towards global sustainability efforts is to provide industry-leading insights and research for wider application.
From climate finance and energy transition to technological innovation and talent management, business schools are building a bridge between academic research and an impactful approach to ESG.
One of the biggest hurdles for a meaningful energy transition is the financial cost. However, many companies are unaware of the long-term financial implications that not switching to net zero can also have – especially those who hold the purse strings, such as the CEO or key shareholders.
Counting the cost of heatwaves
An article published in Forbes at the end of December led with the sobering headline that 2022 had broken all previous records for the number of extreme weather events that had occurred around the world.
Research conducted by Dr Oliver Schenker, Professor of Environmental Economics at Frankfurt School of Finance and Management, with Dr Daniel Osberghaus, Senior Researcher at the ZEW Mannheim Research Unit ‘Environmental and Climate Economics’ found that an average heat wave causes around US$360 million in losses, due to the impact such conditions has on imports worldwide.
The researchers state this loss is due to heatwaves causing a fall in labour productivity. Subsequent supply shortfalls then negatively impact on global trade: Less is exported and importers have to accept the losses of affected exporters or switch to other exporters, generating additional costs.
Linking ESG to C-Suite compensation
Though the number of CEOs committing to ESG goals and metrics is increasing, research from Vlerick Business School shows that only 6% of CEOs pay is linked to environmental performance. But including these ESG metrics in a CEO’s remuneration has a positive effect on a company’s ESG performance, according to research from University of Mannheim Business School
Professor Stefan Reichelstein, Director of the Mannheim Institute for Sustainable Energy Studies at the University of Mannheim Business School, in collaboration with Igor Kadach and Gaizka Ormazabal at IESE Business School and Shira Cohen at San Diego State University reviewed the executive compensation of over 4,395 public firms from 21 countries, and found that companies that include ESG metrics in their executive compensation schemes experience more tangible improvements in their CO2 emissions. Not only does it correlate to tackling their own climate emissions, but it also means that these firms are recognized more for their environmental efforts with higher ESG scores from external rating agencies too.
Shareholder support for climate action
If CEOs take a greater interest in ESG when it directly relates to their financial rewards, the same can be said for shareholders. However, one factor that could be more motivating to tackle climate change for shareholders is if they directly experience the impacts of global warming themselves, according to research by the Rotterdam School of Management (RSM), Erasmus University.
The study conducted by Dr Guosong Xu at the Rotterdam School of Management Erasmus University (RSM) and Dr Eliezer Fich at Drexel University found that support for pro-climate initiatives can rise by as much as 38% if shareholders have first-hand experience of natural disasters.
More striking, shareholders in affected locations were more likely to pledge their support in spite of risking a decrease in the firm’s value. If climate change is an issue close to home, the importance of tackling it drastically increases.
Be careful how you communicate
However, if firms are performing well in terms of their environmental efforts, and the CEO sees this issue as one that is close to their heart, research by Columbia Business School suggests they shouldn’t shout from the rooftops about it, as it could actually demotivate employees.
The study, conducted by Vanessa Burbano, an Associate Professor of Management at Columbia Business School, examined the effect of an employer communicating a stance about a social-political issue, such as the impact of climate change, on employee motivation. Interestingly, Burbano found CEOs taking a stance on a social-political issue had virtually no positive impacts on motivation whatsoever. In fact, it had a demotivating effect for employees if they disagreed with the sentiment, and no statistically significant motivating effect if employees agreed with sentiment.
This may explain why only a quarter of companies in South Pole’s 2022 Net Zero report said they do not plan to talk about their climate goals. Andrew Winston, a leading thinker on sustainable business strategy points out in the Harvard Business Review that “some companies seem to be moving toward a muddled middle-ground of what has been called “greenhushing” – going ahead with environmental and social efforts, but trying to stay quiet like a teenager sneaking in after curfew.”
But Winston urges business leaders to develop their courage muscle and show employees and stakeholders what they stand for. Though you should pick your battles wisely he argues that by taking a stand publicly, companies can help move public opinion, bring out supporters, and quiet the critics.
The environmentally-conscious consumer
Either way, companies need to understand how to best adapt the marketing of their green products. The marketability of the product, and the likelihood of consumers using it, depends on the type of green product according to research from NHH Norwegian School of Economics.
Professors Siv Skard, Lars Jacob Tynes Pedersen and Sveinung Jørgensen, found that where consumers value the strength and effectiveness of a product – such as heavy-duty cleaners, recycled tyres and disinfectants – their environmental credentials are viewed with greater scepticism and pick up than what the researchers describe as gentle products – such as make-up, body lotions and shampoos. As a consequence the researchers state that companies need to be more careful about the packaging and descriptions they use for products. Gentle products, for instance, should emphasize the eco-friendly qualities in their packaging, whilst heavy-duty cleaning products should focus on their strength and guaranteed results.
When sustainability backfires
The packaging of a product is something that can make a break the launch of a new green product, says Marta Pizzetti, a Professor of Marketing at emlyon business school. Her research interests deal with corporate hypocrisy and misbehavior (e.g. brand transgressions, greenwashing), ethical and sustainable consumption and consumer well-being. A study with Diletta Acuti, from the University of Portsmouth, and Sara Dolnicar, from the University of Queensland looks at three key reasons why going green can actually lose you customers.
Their findings show that labelling, packaging and information that highlighted products as sustainable, can actually serve to be a deterrent to consumers when they see this information as ambiguous or even contradictory. Consumers are naturally sceptical of companies that make an active effort to come across as sustainably-focused, and are more likely to think of them as “greenwashing”.
Other key reasons identified in the research are the quality concerns over a shift to green, with many consumers associating sustainable products with a lack of quality, taste or performance. Personal perceptions that come with using sustainable products can also be an issue. The researchers found that some consumers worried that they would be judged by their peers for purchasing the product in question, or even labelled as “feminine” or “hippies”. This can lead to potential customers actively avoiding products and choosing less sustainable ones as a result.
Greenwash, Greenwashing, Greenwashed
So companies face the balancing act of refining communication to demonstrate the effectiveness of their eco-friendly product, without overdoing it to be dismissed as ‘greenwashed’.
It is perhaps no surprise that consumers perceive plenty of corporate activities, initiatives and products as ‘greenwashed’, given research from Northwestern Kellogg which found that many asset management firms have not improved when it comes to ESG practices, despite signing the largest global ESG initiative – the UN’s Principles for Responsible Investment (PRI).
Aaron Yoon, an Assistant Professor of Accounting & Information Management at Kellogg School of Management, and Soohun Kim, from Kaist College of Business, analyzed active mutual fund managers’ commitment to ESG using the PRI. While signatories attract a large increase in fund flow after signing, on average, they found no improvements in their average fund-level ESG scores and also no evidence that they are engaged in buying or selling ESG performing stocks. This is something that Yoon states many would conclude as “consistent with greenwashing”.
ESG investment adds up
But it is not just large companies and investment funds that need to pay attention to their sustainability commitments in order to contribute to global efforts to tackling climate change. SMEs, which make up the biggest share of businesses in Europe, have a vital role to play. And ESG investment may well be to their advantage.
Research by Professor David Veredas and doctoral researcher Dimitrios Kolokas at Vlerick Business School shows that investing in ESG initiatives can make SMEs much more resilient. In fact, on average an 11% increase in an SME’s ESG performance will decrease their credit risk by 3.5%.
They conclude that sustainability-driven SMEs are more resilient to large shocks, making them more creditworthy. Therefore, investing in sustainability is not only good for the planet, but good for profit too.
Small steps that can be more effective
And it is smaller-scale initiatives that researchers at Durham University Business School state can have a greater impact on reducing the global temperature than large-scale global initiatives like the Paris accord. Dr. Francesco Bellelli, Ph.D. student at Durham, alongside Professors Riccardo Scarpa and Ashar Aftab, found that smaller regional environmental agreements are twice as likely to be authorized than larger global agreements.
The researchers reviewed 263 multilateral environmental agreements between 198 countries, finding that regional treaties are a much more effective tool for solving environmental issues because they can more easily engage small groups of countries in action. On the contrary, the negotiation of global agreements requires finding a compromise among many nations, which could end up penalizing participation in the agreement or hindering its environmental effectiveness.
Connecting the dots to get started
Even if businesses want to play their part in a push towards net-zero, many simply don’t know how to do so.
At ESMT Berlin, Professors Catalina Stefanescu-Cuntze, Joanna Radeke & Dr. Vlada Pleshcheva, state there is a knowledge gap between sustainability data and sustainability action. The researchers are working with the leading science and technology company, Merck to bridge this gap through sustainable modelling.
The researchers created a predictive model for greenhouse gas (GHG) emissions, which allows companies to generate predictive outcomes for their 10-year horizon under a range of scenarios considering myriad variations of the modelling factors. With this overall range of predictive outcomes, companies can better calibrate corporate decisions, with a fuller understanding of sustainability impacts.
So as business schools and their faculty contribute to creating the sustainable future leaders of tomorrow, their impactful research can help to serve the world today.
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