Is Sustainability the New Finance?

In an exclusive interview with Sam Israelit, Bain & Company's Chief Sustainability Officer, we gained valuable insights into the current ESG (Environmental, Social, and Governance) landscape. We discussed the significant challenges businesses are facing, the role of technology in sustainability reporting, and the trajectory of this burgeoning field.

With over two decades at Bain & Company, Sam Israelit has transitioned from assisting clients with supply chain transformations to leading the company's sustainability initiatives: “I spent 23 years helping clients with supply chain transformations...now sustainability has become a critical topic.” In our interview, Sam offers strategic insights for companies to become frontrunners in a field that's vital for business competitiveness and our collective future.

What are your thoughts on Sustainability as it stands today?

The analogy I often use is sustainability now is a lot like finance in its early days. If you go back to the early 20th century, you see that finance gradually became a formal function and discipline. Sustainability is currently in the same place.

Israelit draws an intriguing parallel between the current state of sustainability and the early days of finance. Nowadays, every business function must weigh the carbon impact alongside cost implications. For instance, companies developing new products must assess the carbon footprint of their materials. Similarly, when establishing manufacturing locations or distribution networks, it's just as critical to assess carbon implications as it is to forecast costs.

He predicts that we will eventually witness a merging of carbon accounting, emissions reporting, and financial operations. Thus, companies must begin to assemble carbon management teams to work in concert with their finance departments. Already collecting cost data routinely, these companies must now also focus on carbon data collection.

“Companies are accustomed to public finance reporting. It's time to take carbon reporting as seriously because it will become mandatory. The resources and processes involved bear a strong resemblance to those used in finance.” Sam suggests companies ask themselves if their internal audit includes carbon impacts or if they need an external audit of their carbon programs. He believes this is the trajectory ESG reporting will take over the next three to five years for many companies.

What are the main challenges companies face in relation to Sustainability? What steps are advised to overcome them?

The three main challenges companies face align with the practical steps toward embarking on a decarbonization journey: firstly, acquiring accurate data about your supply chain; then, understanding the practical steps to decarbonize your operations; and finally, navigating through multiple frameworks and regulations.

The push for carbon impact disclosure is intensifying from all stakeholders, presenting practical challenges for companies. According to Sam, the primary obstacles in meeting these demands, ranging from mandatory reporting to performance expectations, begin with the collection of precise data.

“A significant challenge is that many companies haven’t yet invested in the infrastructure and processes necessary to gather data and accurately calculate their carbon footprint. That’s a fundamental challenge, given that if you want to reduce your footprint, you probably need to know what it is when you start”, he notes. The initial step for a company looking to mitigate its climate impact is to identify the primary emission sources within its supply chain. Afterward, the company must consider what decarbonization entails for their operations. Despite the establishment of ambitious targets by organizations worldwide and mandates from regulatory bodies, companies often grapple with identifying tangible steps toward decarbonization. “Sustainability cannot be siloed within one department; it must be integrated across the entire organization, necessitating a cross-functional approach. And decarbonization initiatives need to be owned by the business, not the sustainability team.”

The third challenge is the evolving regulatory landscape. “It can be quite overwhelming when you first consider it”, he acknowledges from his discussions with clients. Frequently asked questions include how to set targets, report impacts, and choose appropriate metrics and formats.

Sam observes that while mandatory reporting is well-established in other business domains, the greatest struggle for companies lies in voluntary reporting. Balancing demands for transparency and the development of decarbonization strategies often leads companies to defer investment decisions, the impacts of which may not be apparent for many years. However, he asserts that the consequences of inaction are becoming increasingly visible, prompting companies to take sustainability more seriously.

Supply Chain Management and Sustainability – What’s the relationship?

The pandemic served as a catalyst for companies to re-assess their supply chain strategy. Given increasing pressures from investors, employees, and customers, sustainability has become a critical lens they are including in their transformation efforts.

Sam observes that prior to the pandemic, sustainability was merely one aspect of supply chain management. The disruptions brought on by the pandemic have since thrust sustainability to the forefront of corporate strategy, particularly in technology sectors where supply chain vulnerabilities have been exposed. As a result, companies are now integrating sustainability into their risk assessments and resiliency plans, responding to the intensified scrutiny from customers, employees, and investors on their sustainability strategies.

How do you see the current regulatory landscape for Sustainability in the US and Europe?

Companies that haven't started their sustainability reporting efforts are in for a rude awakening upon realizing the complexity of the task.

He commends the proactive companies that are already preparing for regulations like the European Corporate Sustainability Reporting Directive (CSRD). In contrast, he notes a concerning regulatory uncertainty in the U.S., which is causing some companies to delay necessary investments in reporting infrastructure: “A year or two is not that long when you have to put in place an entire data infrastructure to gather information and implement processes for reporting.”

However, he acknowledges recent initiatives, such as those in California, that are encouraging companies to take sustainability reporting more seriously.

How can companies and regulators collaborate to reach the targets set?

Standards-setting bodies need to include companies as part of the conversation around regulations, so they can bring their perspectives on the practical implications of these targets.

To advance sustainability goals, Israelit advocates for a dialogue between companies and regulators to ensure realistic and achievable targets. He cites the World Economic Forum's collaborative approach as a model, bringing together various companies to discuss sustainability strategies.

Standards-setting bodies need to understand the challenges companies are facing while they think about regulatory standards, as firms can contribute to finding practical solutions.

Can technology help companies collect data and decarbonize their supply chains?

Technology plays a pivotal role; we need to equip people with tools to understand the impact of their decisions on carbon emissions.

Sam believes technology is essential for managing data and aiding in the decarbonization process. He provides as an example, the solution created by Bain to decrease their internal carbon emissions: “We developed a system to calculate the carbon emissions of each client project.” This helped them monitor business travel as their biggest source of emissions and implement mitigation strategies.

Is it only about the Environment? What about Social and Governance?

The Environmental aspect of ESG is currently in the spotlight. The Social component must be the next area of focus, with Governance naturally following.

While the environmental effects of climate change are visible and pressing, Sam anticipates a shift towards the social dimension, with diversity, equity, and inclusion becoming critical parts of ESG regulations and reporting. He envisions stricter standards for social impact reporting, akin to environmental standards, and suggests that governance will evolve to address decision-making processes related to sustainability commitments.

How do you see the future of climate change? Are you optimistic about it?

Sam maintains a positive outlook, envisioning a future where collaboration between companies and regulators, empowered by technology, will lead to effective solutions. As a first trend, he anticipates a convergence of carbon management with financial management. Secondly, he is enthusiastic about a continuous rise in investment in alternative energy sources, spurred by different tech startups. Also, he believes in the continued research and development around low-carbon impact materials such as alternative plastics. Lastly, over the next decade, he believes that more and more people are going to realize that climate change is real and then they will increasingly expect companies to do something. And as part of that, there will be a willingness to pay for more sustainable products.

However, he cautions that the current pace of change is not fast enough and warns of more severe climate events as a result. Despite this, he is hopeful that innovation and commitment to sustainability will grow as the realities of climate change become more apparent.

How is Bain supporting its clients towards their sustainability goals?

We're embedding sustainability into everything we do.

For over ten years, Bain has woven sustainability into the fabric of its client engagements, championing social impact and celebrating carbon neutrality since 2012. Bain's methodology integrates sustainability assessments into each project, harnessing their expertise to deliver well-rounded, informed counsel to clients. Sam highlights Bain's holistic approach, citing a case where a firm's distribution network is being transformed to improve resilience and cost-efficiency. He underscores the firm's initiative in preparing consultants with the skills to assess and understand the carbon implications of business decisions, ensuring that clients receive nuanced guidance that supports informed decision-making.

The Founder's Studio at Bain has also launched a SaaS solution – ESG Flo – that leverages AI to help companies build a robust ESG data infrastructure, further evidencing Bain’s dedication to facilitating sustainable progress.

Conclusion

The journey towards sustainability in business mirrors the foundational days of finance, setting the stage for a new era where environmental, social and governance responsibility is as integral as financial accountability. As Bain & Company's Sam Israelit points out, companies are learning to navigate this shift, facing challenges in data accuracy and regulatory compliance. Yet, with the right tools and strategies, businesses are poised to turn sustainability into a competitive advantage. The future looks promising for those who start now, embedding sustainability deeply into their operations, as it will not only become mandatory but also a marker of corporate leadership and commitment to our planet and communities’ health.