Another well-documented example is the case of several airlines, including Qantas and Virgin Australia, which faced allegations of greenwashing for their carbon offset programs. Critics argued that these programs allowed airlines to continue with business as usual while shifting the responsibility for reducing emissions to passengers (Cuff, 2021).

Yes, some might say greenwashing’s end is in sight; that making ESG reporting mandatory or legislating for certain ESG elements will surely prevent misinformation. However, it’s also safe to say that regulations are only outside-in actions that legislating bodies can take. And with the right lobbying power and some very creative lawyers, no ESG reporting mandate can stay in the way of business as usual.

Therefore, for ESG to stick, the drive needs to be from the inside. Companies need to find a connection between ESG investment and profitability if the cycle of “ESG theater” is ever to be broken. Because whether we like to admit it or not, companies will not invest in something if that something doesn’t have a clear ROI. This was the case with innovation a decade ago, and this is the case with ESG today.

But finding this connection, where sustainability is not damaging profitability, requires creativity and innovation. Circular economy plays, for example, require companies to have radically new business models.

Sustainability and Innovation

ESG and innovation are intertwined forces shaping the future of business. Companies that prioritize ESG principles in their innovation endeavors are not only driving positive change, but are also securing a competitive advantage in a rapidly evolving global landscape. By harnessing the power of ESG-driven innovation, businesses can pioneer solutions that address pressing environmental and social challenges, ushering in a new era of sustainable progress. As awareness of environmental and social issues grows, businesses will have to increase their investments in innovative solutions aligned with ESG objectives.

Nike has made strides in sustainability by innovating around ecofriendly materials, reducing waste, and promoting fair labor practices. Their sustainability initiatives have not only enhanced their brand image, but also attracted environmentally conscious consumers, leading to higher sales and profitability. But let’s not forget about Nike’s innovative spirit that predates the “ESG revolution.” Let’s remind ourselves of open innovation initiatives the company had with Apple, for example. Or the fact that they experimented with new distribution channels such as a SNKRS App that’s dedicated solely to limited edition sneakers and apparel.

The same is true for IKEA. In recent years, the Swedish furniture retailer has invested heavily in renewable energy, sustainable sourcing, energy efficiency measures, and innovative new materials. Their commitment to sustainability has not only reduced costs, but also attracted environmentally conscious customers, leading to increased sales and brand loyalty. They were also the first company in their industry to come up with a new business model where consumers were involved in the assembly process of the furniture. Besides, IKEA is currently one of the few furniture manufacturers offering returns and repairs—a new business model that has the potential of disrupting the industry for years to come.

It is therefore safe to say that companies that diligently built their innovation practices and innovation culture over years, are going to strive for a sustainability-focused future. And conversely, the ones that failed at making innovation a repeatable and sustainable process over the past decade, or the ones that were content just with the theatrical aspect of innovation, will most likely be the ones that will struggle the most when it comes to sustainability, too. Failing to see the ROI from ESG, like they failed to see the ROI from innovation, they will revert to what they know best, theater. ESG will be seen as a “nice-to-have,” a side activity, a cost center, or at the very best, an activity they have to perform just for appearances.

Taking Action Today. Building An Innovation System

Certainly, the importance of integrating ESG factors into corporate strategies cannot be downplayed. However corporate leaders should not perceive ESG as an additional burden, but rather as a unique avenue for innovation. Instead of being overly concerned about establishing a specific ESG practice, the focus should be on cultivating a robust innovation system designed where sustainability is prioritized

Strategy: Establish an innovation-oriented hypothesis linked to the overall business strategy that clearly clarifies why and how an innovation- or human-centered and purpose-driven focus will propel the organization forward.

Processes: Enhance the practices and capabilities of the organization through fit-for-purpose tools, frameworks, methodologies, and key practices designed to drive experimentation and strategic creativity.

Governance: Enhance the pragmatic management of innovation to ensure only solutions based on real customer/market need or purpose are initiated, and to provide feedback for decision-making and strategy iteration.

Culture: Embed innovation-focused behavior into the fabric of the organization so it becomes a measurable driver of outcome-driven innovation and a core organization-wide capability.

Leadership: Enable senior teams, management teams, and key influencers to become innovation leaders who are able to translate the future and the innovation-led strategy into day-to-day, purpose-driven actions, behaviors, and outcomes.

In essence, the key lies in creating an innovation system that seamlessly aligns strategy with practical implementation, governance, organizational culture, and effective leadership.

Only through such a well-functioning innovation ecosystem can a company bridge the gap between sustainability and profitability.

It’s not just about compliance or looking good on paper. It’s about embedding sustainability into the core fabric of the organization’s operations, thereby fostering innovation, driving positive social impact, and ensuring long-term financial viability.

Conclusions

Embracing ESG innovation is not just a moral imperative; it also makes good business sense. Companies adhering to ESG principles are more resilient in the face of changing market dynamics and investor expectations. Sustainable innovation enhances brand reputation, attracts responsible investors, and fosters customer loyalty. Moreover, ESG-driven innovations often result in cost efficiencies, driving profitability while contributing positively to the environment and society.

We are not doomed. But if we really want to see suitability happening, maybe we need to take a hard look at our ability to innovate.

This article was Dan’s contribution to the book ‘Driving Sustainable Innovation’ published in June 2024 by Brightline and Thinkers50.

The complete book is available for purchase here.