Sustainability in business | Deloitte Insights

Hypothetical case study

Anticipating sustainability beyond a tactical horizon

Scientary is a fictional multinational life science company looking to review its corporate strategy in face of the upcoming sustainability challenges. The company has a global footprint, with facilities in Europe, the United States, and China, including R&D and production sites. Recently, Scientary faced calls from its stakeholders to review the company’s impact on society and the environment and commit to relevant corporate sustainability goals. Therefore, Scientary decided to apply strategic foresight methods to anticipate the upcoming drifts in its industry over the next 15 years in order to develop a robust, resilient corporate strategy that reflects sustainability developments:

• Understanding deep market dynamics by driver research: Scientary decided to complement its traditional materiality assessment, which serves as a foundation for its future strategy, with detailed driver research. This would identify drivers of change in the next 15 years in its specific industry triggered by sustainability, especially from a social, technological, economic, environmental, political, legal, and security perspective. This analysis helped Scientary to sense relevant dynamics beyond the short-term horizon of a traditional materiality assessment, and expand its analysis into adjacent fields. It looked into the relevance of sustainability for its product portfolio, R&D activities, global supply chain set-up, workforce, and competitive environment.
• Assessing key developments by uncertainty analysis: Scientary decided to further investigate how strongly certain drivers could influence the industry over 15 years. It gained a comprehensive understanding of the level of uncertainty for each driver. This helped Scientary distinguish between the most critical and certain developments and the most critical but uncertain developments in the future in order to focus its efforts on the right strategic initiatives—something that is not usual in the field of sustainability management practices.
• Building an integrated, robust sustainable strategy: Eventually Scientary assessed whether its current strategy delivered on its defined aspirations, met stakeholder expectations, and anticipated industry dynamics in the mid- to long-term. Based on the conducted assessment, Scientary has been able to identify strategic options that are reasonably robust in the longer term and therefore formulate a more resilient, future strategy, including supporting initiatives, identification of capability gaps, roadmaps and milestones, and a necessary investment plan. This meant Scientary translated the gathered forward-looking insights from the driver research and uncertainty analysis into a structured corporate strategy that integrated sustainability into its long-term view. The company can therefore preempt future risks and seize new market opportunities beyond the short-term horizon, making its strategy far more resilient than any short-term strategic planning.

In comparison to traditional strategic planning, the followed process to assess and design a future strategy for Scientary, that reflects sustainability in a holistic way is more robust against the diverse, potential future paths since it embraces uncertainty in its process instead of excluding or simplifying it as in most planning or forecasting processes. In this way, sustainability can be moved beyond risk and compliance to identifying, innovating, and capturing revenue-generating opportunities.

Deep dive into sensing

A zoomed-out look to sense existing and emerging dynamics

Sensing methods aim to understand the current and future dynamics within a specific context: What are the crucial developments and how certain are we about them? Through various forms of structured research, sensing aims to identify drivers of change shaping the dynamics of a specific context. Going beyond mere descriptive analyses, sensing also involves the evaluation and categorization of the identified dynamics and provides a sense of direction regarding future developments. Above all, sensing focuses on identifying clusters of uncertainty.

Sensing methods widen the perspective of what constitutes the “environment” of a company and its own sphere of influence, i.e., it zooms out from the company’s immediate sphere of activity. These methods can set the basis for the perception of stakeholder expectations and raise awareness of companies’ externalities. For example, involving and interviewing human rights organizations as part of a sensing exercise can highlight emerging developments in the realm of digital ethics or lead to the discovery of human rights violations for further legal investigation.

Complementing other data sources, the insights from a sensing exercise, such as maps of a company’s broader ecosystem, constitute valuable input for materiality assessments, a key component of sustainability strategies nowadays. This is especially important given that materiality assessments often must cover a broad range of all relevant sustainability-related topics for an organization and they, therefore, benefit from a strategic foresight methodology.

The relevance of sustainability is subject to public perception and can change significantly over time.10 By periodically sensing and scanning the environment for novel sustainability-related drivers of change, materiality assessments can be made to respond dynamically to changes in the organization’s market or regulatory environment. The increasing prominence of sustainability makes such methods useful to identify new fields of action and ensure a company retains its license to operate and avoids scandals.11

With the help of modern artificial intelligence (AI)-based sensing tools, the identification of relevant sustainability-triggered topics and material issues can be further enhanced. Natural language processing (NLP) enables the automatized analysis of vast amounts of news articles and social media posts, streamlining the traditional desk research that still dominates activity in the sustainability domain. This also offers a continuous, neutral perspective on key drivers of change, guarding against behavioral biases on the part of the involved stakeholders and ensuring holistic consideration of social and environmental developments, including fringe events.

In addition to informing materiality assessments, sensing offers a valuable building block for stakeholder engagement. Scanning the environment for relevant political deciders, NGOs, and suppliers of critical technologies provides guidance on organizing solution-oriented ecosystems. Forming the right alliances is crucial for tackling systemic issues, such as challenges in public education12 or biodiversity loss,13 and creating a positive impact across the entire value chain.

Deep dive into modeling

Making sense of the insights from logical perspectives on potential future paths

Modeling methods build upon the outcomes of sensing insights or the existing understanding of drivers of change within a specific context. They help to develop concrete, reasonable hypotheses about how the future might unfold within a logical, systematic model. The key is to conceive how critical elements in an environment are going to configure and interact to form a novel setting. Given the complexity associated with sustainability-triggered challenges and issues, especially the diversity of relevant topics and the wide range of societal responses to them, modeling methodologies are particularly fruitful for strategizing in this field.

The best-known methodology in this context is scenario analysis, which provides the means to differentiate potential states of the world in the long-term future. Based on the most critical uncertainties for a specific context, the scenarios have the potential to capture divergent, yet plausible outlooks of a specific environment, e.g., what might the sustainability-driven future environment of retail banking look like in 10 years? Through rich, detailed narratives, scenarios stretch the imagination and nurture awareness of different potential changes, and, most importantly, can create conviction about necessary strategic moves. Applying scenario analysis creates a unified frame of reference, which allows for efficient communication about future outlooks and thereby facilitates cultural change. In addition, scenarios provide a framework for the development of a company’s vision and/or strategic options.

As an example, the decarbonization of our energy system is shaped by numerous drivers of change, from the development of green technologies to the level of political ambition. Aggregating these drivers into meaningful scenarios provides a structured, reasonable perspective on one of the most complex issues of our time, as we set out in The Future of Power14 and The Future of Energy15. Moreover, it highlights specific opportunities and risks linked to the dynamics of the industry. The Task Force on Climate-related Financial Disclosures actively recommends the application of scenario analysis to identify risks and opportunities associated with climate change, stating that the approach “can challenge many traditional practices and structures within a company, as well as its culture”16.

Modern AI-enhanced tools mean that the unfolding of scenarios can be tracked continuously and kept up to date. This is possible using modern NLP algorithms and the definition of indicating assumptions, which are aligned with the underlying uncertainties as well as trends that build the foundation of the scenarios. These indicators can then be leveraged to track changes in response to current qualitative data (such as news, new patents, social media posts, etc.) as well as quantitative data (such as derivates, stocks, market sizes, etc.) and collectively show the level of scenario realization on a continuous basis. This makes it possible to monitor specific sentiments and dominant perspectives within certain pockets of society via social media screening. These technological enhancements help organizations keep up with the complexity of a sustainability-driven business environment, especially with regard to the ongoing, dynamic changes in sustainability regulation around the globe, the high number of diverse stakeholder voices in social media, and the constantly evolving and/or emerging green technologies.

In addition to modeling enriched, holistic scenarios, a dedicated uncertainty analysis for the most crucial and uncertain topics a company faces might be required. Identifying a set of potential end states for, say, energy prices, and evaluating their systemic relevance to the company, can help to develop a reasonable, forward-looking hypothesis. The Delphi method is a widely used technique for business forecasting and policy-making. It offers the possibility to tap into the “wisdom of the crowd” by formulating a concrete question about the future, i.e., “how high will the price of a ton of CO2 be in the year 2030?” or “how large will the market for sustainable fashion be in 2040?” and conducting repeated expert surveys to find an answer. While the Delphi method usually engages with a defined set of experts, it can be effectively complemented by big data analytics in order to reinforce the process with additional evidence or deep dive into specific assumptions, e.g., by continuously monitoring the price dynamics of CO2 on global exchanges or early-warning signals related to these price developments and aligning these insights with the expert-based assumptions.

Deep dive into acting

Translating insights into action

While strategic foresight is often focused on methods to sense and model, it is necessary, having made sense of the generated insights and logical models, to act upon them. The strategic foresight perspective changes at this point from “outside-in” to “inside-out”—from “how will the environment affect our company?” to “what effect will we have on our environment and which strategic choices do we have?”

It is important to distinguish the methods required at this stage from the modeling in order to prevent focusing too early on actionable insights directly related to an organization’s current activities and thereby limiting the considered range of possible outcomes. To prevent this operational blindness, the acting methods should be conducted as independently as possible of sensing and modeling.

A shift in mindset on the part of business leaders is particularly crucial. It is one thing to imagine a sustainable future and the way stakeholder groups might evolve. Acting, however, is about asking the right questions based on this future and, together with business leaders, aligning all relevant strategic choices:

• What is our sustainability agenda and winning ambition?
• How do we manage our company’s portfolio (products, customers, initiatives, etc.)?
• What are sensible strategic initiatives and how do we implement them?
• How can the organization achieve and fuel its sustainability ambitions?

Using one or multiple scenarios, business leaders can challenge the robustness of their current strategy with the help of a stress-testing exercise: How effectively does the current strategy baseline perform against a specific scenario set? Here, the orientation and organization of the company is tested under the different scenarios, qualitatively or quantitatively. This makes it possible to differentiate which strategic initiatives or business units are robust in a sustainability context and which are risky—for example, in that they lag behind competitors or might face greenwashing accusations.

Well-informed materiality assessments highlight which areas of society and nature are impacted by the company and therefore require attention, and the setting of dedicated targets for improvement. When business leaders are in the process of developing long-term scenarios they should ask themselves which they prefer and how they can set a strategic course aiming at their realization. They should integrate long-term sustainability ambitions into their corporate strategy. Profitability and sustainability should not be seen as separate but be placed on an equal footing when choosing which markets will be supplied and which products and services will be developed.

In order to plan their next actions and reactions within a shorter-time horizon, business leaders can engage in business war gaming exercises, e.g., in interactive, lab-based formats. This is especially relevant to anticipate new competitive pressure arising from the sustainability transformation, such as the shift towards emission-free technologies.

Conclusion: Strategic foresight helps to navigate a sustainability-driven world

Overall, a strategic foresight mindset can become a source of highly relevant forward-looking intelligence in the context of our increasingly sustainability-driven future—a future that is characterized by complexity, diversity, systematic dependency, and uncertainty. It makes it possible to break free of disadvantageous management practices, strategic tunnel vision, and a short-term perspective, and instead embrace the complexity that comes with breadth and a long-term sustainability-oriented perspective. Applying strategic foresight helps organizations to:

• develop a level of comfort when facing critical uncertainties
• keep a holistic, unbiased perspective on its environment
• think beyond a tactical horizon in the strategy formulation by reflecting the long-term drifts in business ahead.

Strategic foresight is most effective when applied as a way of strategic thinking that fuels the decision-making process. It is not a one-time exercise, but a dynamic, continuously informed way of looking at possible futures and a key enabler for organizational resilience.