Sustainability – An obligation and a Strategy

In recent years, many companies have started focusing on sustainability practices, leading to discussions on its importance for business strategy. The key question is whether sustainability is just a necessary condition for corporate survival or if it can also provide a competitive edge leading to superior financial results.

Some argue that while sustainability practices, like adopting efficient environmental systems, are becoming widespread, they don't necessarily offer a competitive advantage since most companies can easily adopt these practices. This view suggests sustainability is essential for a company's legitimacy but not a unique selling point.

However, others believe that sustainability can be a strategic asset. By implementing innovative practices, such as circular economy models or strategies enhancing employee satisfaction, companies can stand out. This approach suggests sustainability is not just about being the same as everyone else but about differentiating oneself in the market.

This debate ties back to Michael Porter's distinction between operational effectiveness and strategy. Strategy is about being unique, choosing a distinct position that's hard to replicate. The question remains: is sustainability just another operational tool, or can it truly set a company apart?

An analysis of  data from MSCI ESG Ratings over six years to see how sustainability practices are evolving across industries, show that sustainability practices are becoming more uniform, suggesting they're becoming a necessity rather than a strategic differentiator. Yet, the adoption rate varies by industry, influenced by factors like the practices of the industry leader and the prominence of environmental and social issues.

Further analysis revealed that while common sustainability practices don't significantly impact return on capital, they are positively related to market valuation. In contrast, strategic sustainability practices, which are less widely adopted and harder to replicate, are linked to better financial performance and market valuation.

Sustainability is both a necessity and a potential differentiator. As some practices become standardized, they're essential for all companies. However, there's still room for companies to gain a strategic advantage by adopting unique sustainability practices that others find hard to imitate. This dual perspective highlights the complex role of sustainability in modern business strategy.