The third development stage of sustainability-oriented strategic management (Strategy 3.0) builds on the first, market- and finance-oriented stage and the second, technology- and innovation-oriented stage and develops these further. The increasing importance of sustainability in the face of climate change is accompanied by changing political conditions for climate protection. Europe must master the challenge of better combining its ambitious climate policy with the achievement of competitive advantages for the domestic economy.
In this blog post, I explain the basics and characteristics of strategic sustainability management and discuss the complex relationship between management and politics.
Changing political conditions for climate protection
The political science school of strategy processes has a long history of development, which is of particular importance for the topic of sustainability. This school views the development of strategies as a negotiation process, the outcome of which depends heavily on the power, legitimacy and urgency of relevant stakeholders.1
Since the European Parliament elections in 2019, the political conditions for climate protection have changed. A key promise of the EU Commission was the „Green Deal“, which was supposed to make the continent fit for the industrial race with China and the USA. For a number of reasons, these expectations have only been partially fulfilled. In Germany, the Building Energy Act (GEG) in particular, which came into force in 2024, stands for an ideological policy that reinforces the concerns of many people.2
In this year’s elections to the European Parliament, the Greens/European Free Alliance group suffered major losses. The European People’s Party (EPP) once again became the strongest group. Following her re-election, EU Commission President Ursula von der Leyen announced that her top priority would be the competitiveness of the European economy. To this end, she wants to present a „Clean Industrial Deal“ that improves the framework conditions for companies. The climate protection legislation that characterized her first term of office is to be made more business-friendly.3 This development illustrates the influence of politics on sustainability management.
Complex relationship between management and politics
In recent decades, the topic of sustainability has been characterized by a complex relationship between management and politics. On the one hand, this complexity results from the broad spectrum of corporate sustainability management, which ranges from passive to active. The sustainability-oriented policy fields react to this with different approaches, which can have a promoting and a regulating character. This results in different patterns of behavior.
For some years now, European policy has focused on more strictly regulated sustainability reporting in order to encourage passive companies to adapt their behavior. There is a risk of excessive bureaucratization, which is perceived as an unnecessary barrier, particularly by active companies.
At the same time, policymakers in industrialized countries practice different forms of promoting sustainability on both the supply and demand side. These are aimed at sustainability innovations to tackle climate change. While German policy, for example, has primarily promoted the demand side of renewable energies with taxpayers‘ money, Chinese policy is systematically building up domestic global market leaders who are trying to squeeze out foreign competitors. This pattern has contributed to Europe’s increasing dependence. At the same time, as European policy promotes sustainability awareness, customers in some fields are confronted with diminishing European supply. In view of this situation, a strategic reorientation of European sustainability policy and sustainability management appears necessary.
Before we take a closer look at the characteristics of such a realignment, I would like to outline the basics of strategic sustainability management, which we consider to be the third development stage of strategic management (Strategy 3.0).
Fundamentals in technology, society, politics and economics
This third stage has evolved from a topic for specialists, the foundations of which were laid in technology, society, politics and the economy. It is relatively little known that the concept of sustainability in Europe has its roots in forestry. For example, the Electoral Saxon Forestry Code of 1560 stipulates that trees that are cut down must be replanted. In the course of the industrial revolution, however, the principle of not depleting a resource base has become less important.
The scientific and engineering discipline of environmental technology also has a long history of development. The German Ministry of the Environment divides the market for environmental technology (GreenTech) into the following segments:4
– Environmentally friendly generation, storage and distribution of energy
– energy efficiency
– raw material and material efficiency
– sustainable mobility
– circular economy
– sustainable water management and
– sustainable agriculture and forestry.
This segmentation provides an initial orientation of the dynamically changing GreenTech market.
The term Corporate Social Responsibility (CSR) describes the voluntary contribution of business to sustainable development. The concept originated in the USA in the 1920s and has gained in importance since the 1950s and 1960s. The European Union (EU) has been addressing the topic since 2001 and issued a directive on the subject in 2014, which was transposed into German law in 2017. The ISO standard 26000 „Guidance Social Responsibility“, which has the character of a guideline, was adopted back in 2010.5 The criticism of corporate social responsibility is that the CSR concept only plays a subordinate role for many companies and primarily serves to improve their image.
Important impetus for the topic of sustainability has come from environmental organizations such as the Club of Rome. This network of experts, founded in 1968, commissioned the report „Limits to Growth“ in 1972, which became very important in the wake of the oil crises of the 1970s.6 The publication is based on the system dynamics method developed by MIT professor Jay Forrester, which is used to analyze complex interdependencies in dynamic systems. The sometimes spectacular activities of the campaign organization Greenpeace, founded in Canada in 1971, are aimed at mobilizing the general public.
In 1983, the United Nations (UN) founded the World Commission on Environment and Development (WCED). In 1987, its perspective report „Our Common Future“ (Brundtland Report) provided an important description of the guiding principles of sustainable development. The focus is on the topic of intergenerational justice.7 The UN conference in Rio de Janeiro in 1992 introduced a global right to sustainable development for the first time, although individual countries are responsible for its implementation. In 2015, the UN formulated 17 global challenges for countries and companies with the Sustainable Development Goals.
Climate change has become a key sustainability issue in recent decades. An important orientation was provided by a report published by Nicholas Stern in 2007, which attempts to calculate the global economic damage that will occur if humanity does nothing to combat climate change. Stern puts the damage at 5.5 trillion euros per year by 2100.8 This dramatic figure has contributed to the mobilization of politicians and the formulation of ambitious sustainability goals to tackle climate change.
At the end of the 1990s, the distinction between the three dimensions of sustainability – economic, environmental and social – emerged, expanding the traditional focus of companies on the economic dimension.9 However, this extension does not provide a satisfactory answer to the question of how conflicts of objectives between the dimensions can be mastered. In the meantime, sustainability has become a buzzword with an unclear meaning. The simultaneous use of the term in the sense of the original meaning „lasting“ contributes to this. In addition, many users of the term do not distinguish between ecological and sustainable.
This conceptual ambiguity is further reinforced by the ESG criteria. The abbreviation ESG stands for Ecology, Social and Governance. The overlap between the sustainability dimensions and the ESG concept therefore lies in the ecological and social dimensions. The economic dimension, on the other hand, is narrowed down to the aspect of governance in the ESG concept. The topic of ESG also has a long history of development. An important impetus came in 2004 from the „Who Cares Wins“ report published by financial institutions on behalf of the UN. The ESG concept has become increasingly important in the financial market in recent years.10 Assessments are often based on the analysis of rating agencies, which, however, use different criteria. These methodological shortcomings have contributed to a series of greenwashing scandals that have unsettled investors.
The third development stage of sustainability-oriented strategic management has emerged from the interaction of these foundations,11 whose characteristics I would like to explain below. Pioneers with a credible sustainability strategy are an important source of knowledge from which other organizations can learn.
Focus on a credible sustainability strategy
The starting point for our book „The future of the car has only just begun – ecological change of direction as an opportunity“, published in 1994, was the vision of managers at a large automobile company.12 Unfortunately, they were unable to realize their inner conviction at the time, and developments took a different course. Toyota successfully introduced its hybrid drive and much later Tesla became a pioneer in batteries and digitalization. What others can learn from these pioneers is that when it comes to sustainability, it is also important to use technology as a means of satisfying customer needs. These lead users are often willing to pay a price premium for credible sustainability promises.
One example of a company with a successfully implemented, credible sustainability strategy is Werner & Mertz, the Mainz-based manufacturer of cleaning products and its well-known Frosch brand.13 In the following illustration, I have summarized four reasons for the company’s success in the area of sustainability.
Many sustainability pioneers are family businesses whose shareholders take action out of an inner conviction of the need for credible sustainability management. Reinhard Schneider, Chairman of the Management Board of Werner & Mertz, describes how his vision of making the company more ecological arose from an economic crisis.
The Frosch brand has become known above all for the mechanical recycling of packaging waste as the most direct form of a circular economy. To this end, Werner & Mertz launched its Recyclate Initiative together with partners in 2012. The company writes on its website: „The majority of our packaging now consists of 100% recyclate, of which between 75-100% comes from household collections such as the Yellow Bag – the rest comes from the European deposit bottle collection.“
For Reinhard Schneider, it is of central importance to take a critical stance towards the numerous distraction traps used by a network of players to merely feign sustainability. One example is the tricks used in greenwashing. This includes the use of the term „climate-neutral“ to promote third-party measures that have no connection to the company’s own value creation.
Studies show that the Frosch brand achieves outstanding trust premiums with relevant stakeholders. In this respect, credibility and acting out of conviction pay off in the long term. Sustainability can obviously have a meaningful effect, which is perceived as a reward by employees and customers.
Such trust premiums are best achieved when a company views its sustainability management as a connected system.
Interconnected fields of action of a company’s sustainability system
Sustainability pioneers pursued an integrated approach at an early stage and recognized that a company’s sustainability system consists of interconnected fields of action.14 In this respect, sustainability and innovation management are similar. The challenge in sustainability management also lies in linking these fields of action, which I would like to explain briefly.
The basis for creating and improving such an integrated system is the implementation of a credible sustainability strategy. This strategy is aimed at designing sustainable business models. Business model templates can provide inspiration for this.
Important impetus comes from environmental technology companies and increasingly also from digital companies that work with their customers to realize sustainability innovations. This depends on the cooperation of players from politics, science, business and society in stakeholder ecosystems. These stakeholder ecosystems are facing increasingly fierce international competition.
Politics influences the framework conditions for sustainable value creation at the respective locations. Artificial intelligence (AI) is also becoming increasingly important when it comes to sustainability. The company’s task is to retain customers in the long term with trust-building marketing.
Integrated sustainability reporting is becoming more important with regard to increasing the value of companies. The new Corporate Sustainable Reporting Directive (CSRD) of the European Union (EU) is in international competition with other reporting systems.
Depending on the initial situation, the transition to sustainability-oriented HR management and culture takes different forms. Successful pioneering companies prefer evolutionary change in the form of joint learning processes. Opponents of sustainability tend to try to block change with the help of the aforementioned distraction traps. One antidote is the development of sustainability competence among all stakeholders.
On the way from an outdated, bureaucratic silo organization to an agile, connected company, the topic of sustainability can have a meaningful effect throughout the entire organization. In this respect, strategic sustainability management opens up new ways of achieving competitive advantages.
Innovative technologies and sustainable business models have a disruptive effect.
Using innovative technologies to create sustainable business models
One challenge for specialized environmental technology providers lies in combining green technologies with digital cross-sectional technologies. In a study conducted before the boom in generative artificial intelligence, the Boston Consulting Group predicts that the market for digital green tech will grow by 25 to 30 percent annually between 2020 and 2027 to between 45 and 55 billion US dollars.15 In view of the weaknesses of established companies when it comes to digitalization, it is to be expected that digital giants will participate particularly strongly in this market growth alongside start-ups. One example is autonomous driving.
The Alphabet subsidiary Waymo is currently well ahead in the competition for the global leadership position. In 2020, Waymo launched a driverless robotaxi service on the outskirts of Phoenix (USA) and has been driving Jaguar electric vehicles throughout the city of San Francisco since October 2023. Google founder Larry Page’s vision, which involves considerable investment, could pay off in the foreseeable future. The question is when this business model will also be financially successful.16
Surprisingly, the widespread concepts for describing innovative business models have long ignored the topic of sustainability.17 A Sustainable Business Model Canvas forms the communication basis for a company’s sustainability issues. In addition to the effects on the environment and society, it contains other sustainability-relevant components.
The building blocks of the energy and mobility transition, for example, appear to be particularly relevant18
– political and legal framework conditions and
– interaction with stakeholders.
A common basis for communication can make an important contribution to cooperation between the players. This also applies in particular to the public promotion of emerging volume businesses.
Market leadership in volume business through public funding
In the first stage of development of market- and finance-oriented strategic management, the focus was on using experience curve effects to achieve market leadership in volume business.19 This strategic pattern of behavior is being reinterpreted in sustainability management. An important role is played by politics, which promotes research and development in promising technologies, supports applications with public funds and subsidizes companies. The solar industry provides a classic lesson from which Germany can learn how to do things better.
As a result of the Renewable Energy Sources Act (EEG), the use of the relevant products in Germany has been subsidized to the tune of hundreds of billions of euros. German manufacturers have also benefited from this, and for a while the German solar industry was a world leader. However, this period of success only lasted until subsidized Asian competitors gradually squeezed out the German suppliers in fierce price competition. Today, around 86 percent of the solar systems used in Germany come from Chinese manufacturers.
With the record expansion of photovoltaics, the risk of unstable grid situations is increasing. In the worst-case scenario, this can lead to local power outages. This is why new installations should finally be equipped with intelligent metering systems.20 The use of these smart meters in conjunction with dynamic electricity tariffs has been repeatedly delayed in Germany. This example shows that there is an urgent need for better coordination between political framework conditions and related business models. We already pointed this out in our book Smart Energy, published in 2010.21
The situation with electromobility is somewhat different. The pioneering role here was played by the US company Tesla. European politicians have put pressure on car manufacturers with tough targets. However, the majority of batteries come from Asian manufacturers. This has created a considerable dependency. The domestic automotive industry would like to see European solutions for the production of battery cells. However, the construction of some plants is currently being delayed.22
The examples show that there are considerable deficits in Europe when it comes to cooperation between politics, science, business and society. However, global market leadership in GreenTech volume business can only be achieved with efficient stakeholder ecosystems. This also applies to the development of new green growth areas.
Development of new green growth areas
The venture capital firm Kleiner Perkins sees the following six priorities in the goal of zero greenhouse gas emissions by 2050: 23
– Electromobility
– renewable energies
– green agriculture
– rainforest and oceans
– energy-intensive production and
– the extraction of CO2 from the atmosphere and storage.
The economic potential of carbon dioxide removal (CDR) is considerable, but was underestimated for a long time. There is now a broad consensus that CDR is a complementary approach to CO2 reduction. Of interest to German industry are the opportunities offered here for mechanical and plant engineering, but also for start-ups.24
This example also shows that each of the green growth areas and the green tech sector as a whole require better coordinated programs as part of a European sustainability strategy. It will be interesting to see to what extent the new EU Commission meets the demand to add an industrial policy dimension to its „Green Deal“. This demand is partly the result of industry’s concern that the new approaches to sustainability reporting would overburden companies.
This concern relates to the core question that a number of industries are asking themselves, namely how they can overcome the challenge resulting from the conflicting goals of economic, ecological and social sustainability dimensions and how the evolutionary change to sustainable companies can be achieved.
Evolutionary change towards sustainable companies
In most industries, the realignment to sustainable companies is a complex, long-term process that requires coordinated activities in a number of related fields of action. Therefore, the often politically motivated idea of a short-term „green transformation“ is unrealistic. Although these transformation attempts usually fail, the buzzword „transformation“ is still widely used.25
Realistic and reliable political strategies for technologies and sectors are an important basis for successful change towards sustainability. These can include a time frame, but should not have the character of rigid targets. The example of the European transition to electromobility shows how difficult it can be to achieve such targets.
Within this time frame, European companies must be able to financially master the evolutionary change from existing to sustainable business models. The location structure can play an important role in this portfolio analysis. For example, a new, ecologically better business model may not be economically viable at an existing location in the foreseeable future, but the preservation of jobs makes an important contribution to social sustainability. The steel subsidiary of the long-established company Thyssen-Krupp is currently in this situation. The publicly funded transition to the production of „green steel“ in Duisburg provides a possible model for the steel production of the future. At the same time, safeguarding jobs in the western Ruhr region is of great importance in terms of regional policy. The example shows how difficult it is to successfully restructure a company, look for new investors and at the same time drive forward ecological change.26
In addition to these specific challenges, the new Corporate Sustainability Reporting Directive (CSRD) of the European Union (EU) means a considerable amount of additional work for all larger companies. There is a risk that the priority of change will shift towards sustainability reporting and that innovations will be neglected. It therefore seems necessary to subject the reporting approach to a critical cost-benefit analysis and to develop it further if necessary.
Summary of the characteristics of a Strategy 3.0
We have shown that the third development stage of sustainability-oriented strategic management (Strategy 3.0) is based on credible corporate behavior. The challenge here lies in connecting the relevant fields of action. In this way, innovative technologies can be used to create sustainable business models.
This is important, but often not enough. Targeted public funding must also be provided in order to achieve and defend market leadership in volume business. The European economy has often failed to do this well in the past. Better coordinated European programs are therefore needed to open up new green growth areas. The transition to sustainable companies is an evolutionary process. It requires the ability to engage in joint learning processes and more dialog-based action by stakeholders, from the design of the political framework to the implementation of strategies.
These characteristics of strategic sustainability management are summarized in the following table. It is crucial for Europe’s success that politics, science, business and society work better together.
Both sustainability management and innovation management are cross-sectional disciplines that combine the classic business management functional theories.27 This requires connective skills, as does interaction with stakeholders. Training and further education should therefore place a high priority on developing these skills. Interdisciplinary programs and projects are particularly suitable for this. Based on this insight, we are currently designing a new Master’s degree course in sustainability management. In addition, better cooperation between the relevant policy areas also appears necessary in the context of an international sustainability policy.
Conclusion
- With its „Clean Industrial Deal“, the European Union wants to improve the framework conditions for companies when it comes to sustainability.
- Based on various principles, sustainability-oriented strategic management ties in with the political science school of strategy processes.
- The pioneers view the fields of action of their company’s sustainability management as an interconnected system.
- One challenge for European companies lies in designing business models that combine environmental engineering and digital technologies. Public funding plays an important role in achieving market leadership in volume business.
- With regard to the development of new green growth areas, Europe should learn from past mistakes and improve cooperation between stakeholder ecosystems. This requires the capacity for coordinated programs.
- In the transition to sustainable companies, it is important to find an appropriate balance between innovation and reporting.
Literature
[1] Mintzberg, H., Ahlstrand, B., Lampel, J., Strategie Safari – Eine Reise durch die Wildnis des strategischen Managements, Ueberreuter 1999
[2] Gusbeth, S. et al, Bye-bye, climate protection? In: Handelsblatt, June 14/15/16, 2024, p.44-50
[3] Scheer, O., Volkery, C., Von der Leyen’s new start, In: Handelsblatt, July 19/20/21, 2024, p.1,12-13
[4] Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (ed.), GreenTech made in Germany 2.0 – Environmental Technology Atlas for Germany, 2nd edition, Vahlen 2009
[5] Schneider, A., Schmidpeter, R. (eds.), Corporate Social Responsibility – Verantwortungsvolle Unternehmensführung in Theorie und Praxis, 2nd ed., Springer Gabler 2015
[6] Meadows, D., The Limits to Growth – Report of the Club of Rome on the State of Humanity, Deutsche Verlags-Anstalt 1972
[7] The World Commission on Environment and Development, Our Common Future, Oxford University Press 1987
[8] Stern, N., The Economics of Climate Change – The Stern Review, Cambridge University Press 2007
[9] Elkington, J., Cannibals with Forks – Triple Bottom Line of 21st Century Business, Capstone Publishing 1997
[10] Hill, J., Environmental, Social, and Governance (ESG) Investing – A Balanced Analysis of the Theory and Practice of a Sustainable Portfolio, Academic Press 2020
[11] Servatius, H.G., Strategy 5.0 for mastering the new challenges. In: Competivation Blog, 28.06.2022
[12] Berger, R., Servatius, H.G., Krätzer, A., Die Zukunft des Autos hat erst begonnen – Ökologisches Umsteuern als Chance, Pieper 1994
[13] Schneider, R., Die Ablenkungsfalle – Die versteckten Tricks der Ökologie-Bremser, Oekom 2023
[14] Servatius, H.G., Competitive advantages through the design of a sustainability system. In: Tomaschewski, D., Völker, R. (eds.), Sustainable corporate development, Kohlhammer 2016, pp. 27-32
[15] Vikash, J., et al, The Next „Digital“ – Unlocking $50 Billion GreenTech Opportunity, April 2022
[16] Rest, J., Vorsprung durch Technik. In: Manager Magazin, July 2024, p. 32-38
[17] Osterwalder, A., Pigneur, Y., Business Model Generation – A Handbook for Visionaries, Game Changers, and Challengers, Wiley 2010
[18] Servatius, H.G., Mit einer Strategie 5.0 zu Erfolgen bei Digital GreenTech. In: Fesidis, B., Röß, S.A., Rummel, S. (eds.), With digitization and sustainability to climate-neutral companies – strategic frameworks and best practice examples, SpringerGabler 2023, pp. 71-93
[19] Servatius, H.G., Evolution of strategic management. In: Competivation Blog, 28.06.2024
[20] Stratmann, K., Fear of the solar infarction. In: Handelsblatt, July 30, 2024, p. 1, 4-5
[21] Servatius, H.G., Schneidewind, U., Rohlfing, D. (eds.), Smart Energy – Wandel zu einem nachhaltigen Energiesystem, Springer 2012
[22] Backovic, L., Fasse, M., Hubik, F., Concern about Europe’s battery production. In: Handelsblatt, June 27, 2024, p. 22-23
[23] Doerr, J., Speed & Scale – An Action Plan for Solving Our Climate Crisis Now, Portfolio Penguin 2021
[24] Stratmann, K., Billion-dollar business CO2 withdrawal. In: Handelsblatt, June 26, 2024, pp. 10-11
[25] Servatius H.G., Triple strategic realignment. In: Competivation Blog, 17.06.2024
[26] Wermke, I., „Without hopeful values and without whitewashing“. In: Handelsblatt, August 12, 2024, p. 19
[27] Servatius, H.G., Innovation and sustainability systems combine classic management tasks. In: Competivation Blog, 09.09.2021