Companies facing the challenge of systemic change

The role of companies is now more crucial than ever in achieving the Sustainable Development Goals. Especially, their leaders and sustainability managers are increasingly important in defining and guiding the strategy and purpose of organizations. However, the magnitude and complexity of systemic challenges (climate emergency, biodiversity crisis, resource scarcity, loss of competitiveness, increasing inter- and intra-state inequalities, water stress, geopolitical conflicts, etc.) far exceed the capacity for action and impact of individual leaderships and organizations. 

Therefore, to understand the complexity of current challenges and build a significant deliberative and practical space to activate the necessary changes, it is increasingly essential to engage in business debates with honesty and mutual trust. This dialogue should not be limited to describing and sharing the challenges and opportunities each company faces separately but should adopt an integral and holistic vision of their entire environment, allowing them to understand the nature and magnitude of shared challenges to take responsibility for the future of the economic, ecological, and social systems in which they operate. 

An integral and holistic vision of the business environment is necessary to understand the nature and magnitude of shared challenges

Between September and December 2023, within the framework of our seventh Annual Report of the ODS Observatory (Esade – Fundación laCaixa), a series of meetings and interviews took place with the sustainability managers of 13 companies listed on the Spanish Ibex35. With all of them, we analyzed the main challenges they face in the current systemic crisis scenario and the growing sustainability risks increasingly impacting their strategies and business models. 

Challenges of systemic change

This article presents some initial conclusions from these meetings and outlines some of the main lines of research on the new leadership models currently being promoted by Esade’s Chair of Leadership and Sustainability. 

Below, we summarize some of the initial conclusions: 

1. Companies are paying more attention to the risks arising from climate change and other systemic disruptions due to their inextricable link with financial materiality. This fact has driven the participating companies to intensify the development of mitigation and adaptation strategies aimed at building long-term resilience. Similarly, the Corporate Sustainability Reporting Directive (CSRD) and the new European taxonomy urge companies to delve deeper into data presentation and establish value associations between sustainability issues and those traditionally associated with the financial realm. Thus, contacts and integrations between sustainability and financial departments are increasingly frequent. 
2. The framework of short-term incentives under which companies operate continues to hinder their ability to build long-term resilience. Furthermore, defining a business purpose linked to sustainability can be compromised by factors that prioritize immediate economic return, solely focusing on profit maximization and traditional investment criteria. This situation is evident in the centrality that quarterly reports still hold for large listed companies. ESG investors, although increasing, are still a minority and coexist with traditional investors, who have predominated in financial capitalism in recent decades, primarily seeking maximum short-term profitability. Companies identify these different investment streams as a factor that can affect their sustainability goals. For now, it is unclear what levers could consolidate a predominant role for ESG investment. 
3. Companies frequently find themselves in situations where sustainability and economic profitability do not go hand in hand, generating internal tensions that disrupt the traditional perspective of the triple bottom line or shared value. While we have observed that this contradiction can dissolve if profitability is viewed in the long term, the economic dimension tends to ultimately prevail. Overcoming this barrier is one of the key issues of corporate sustainability. Measures aimed at resolving this, such as introducing variable remuneration aligned with sustainability, are insufficient against a systemic logic of incentives that prioritize economic value. 
4. The pressures generated by competitive logics in some markets can lead companies to prioritize an orientation towards increasing sales and extractive growth at the expense of sustainability. In these situations, companies are incentivized to reproduce and perpetuate these logics to survive and not lose competitiveness, despite their detrimental aggregated effects on social value creation. Similarly, competitive logics can hinder data sharing to find joint solutions to sectoral problems, negatively impacting collaborative models and alliances associated with the 2030 Agenda. 
5. Companies are still far from integrating and reflecting the entirety of their negative externalities to product costs. This internalization could entail additional costs that classical business models are not prepared to assume today. Thus, the debate emerges over who should bear these additional costs. While companies highlight the need to introduce cultural changes in customers to accept higher prices, there are also cases where companies take on that responsibility. Similarly, companies point out that these efforts must be made in a coordinated manner to avoid losing competitiveness. 
6. The different paces of commitment to sustainability regulation between regions—Europe being the most ambitious—cause imbalances that can lead to competitiveness losses for companies. The absence of global governance and uniform rules on these issues generates concern among companies. While some interpret these disparities as negative obstacles that lead to competitiveness losses, others see them as opportunities to lead in their respective sectors on a global scale. 

New leaderships

In conclusion, the dynamics and incentive systems of the current economic model—such as the sole focus on economic profit, emphasis on the short term, or competitive logic—often represent structural barriers to sustaining and accelerating transformations. Many companies, despite recognizing their adverse effects, feel powerless against the negative impact of these trends and incentive systems beyond their control. 

Sustainability leaders will be crucial profiles to introduce, deploy, and extend these debates

Despite this, there is a willingness in the business world to start debating the systemic transformation of these dynamics collectively, coordinately, collaboratively, and fairly. In the coming years, business leaders will need to play an active role in the growing debate about the necessary revision of the current capitalist model. To do so, they will need to review their positions based on systemic thinking approaches, aimed at new transformative leadership models. Sustainability leaders will be crucial profiles to introduce, deploy, and extend these debates. Only the proliferation of transformational leadership will make the necessary transformation of our economic, energy, social, and value models possible.