ADI IGNATIUS: I’m Adi Ignatius.
ALISON BEARD: I’m Alison Beard, and this is the HBR IdeaCast.
ADI IGNATIUS: So Alison, look, as you know, there has been increased scrutiny in the past year or two over sustainability efforts, particularly in the U.S. Many companies have doubled down on their commitments, but some have deprioritized it under stakeholder and even political pressure, and given everything else that they need to worry about.
ALISON BEARD: Yeah, I think with all the geopolitical turmoil, economic uncertainty, and the rise of AI and everyone figuring out what they need to do about it, it does feel like many organizations have put ESG on the back burner, or at least they’re not talking about it as much as they used to, even though it’s obviously still very important and something a lot of consumers still care about.
ADI IGNATIUS: So today’s guest is a believer in sustainability, but thinks companies are handling it wrong. I mean, look, I think about myself. I buy sustainable products. I will pay a premium for them. Those products that are lighter colored and you assume that they’re better for the environment. As his research shows, most people will not do that. But he has a framework for thinking about sustainability, not as a constraint that we need to limit our mix of products or what they could do, but as a source of innovation, sort of a new lens on sustainability work.
ALISON BEARD: That seems really smart, because I think the companies that do see the most gains from sustainability efforts really embed it into their strategy, it’s how they plan to win, right?
ADI IGNATIUS: Absolutely. So today’s conversation will focus on how to be smart about sustainability and to ensure that it drives innovation and growth. My guest is Goutam Challagalla. He’s a professor at IMD Business School and co-author, along with Frédéric Dalsace, of the book, Clean Winners: Sustainability Strategy That Puts Customers First. Here’s our conversation.
I want to do some context setting first. And I’ve read your book. It’s great. You’re clearly not comfortable with some of the assumptions that one hears about consumers and about sustainable products. So I want to talk about a few of them. So let’s start with this one. The idea that customers will pay a premium for a product that is sustainable, that contributes to the social good. Will they?
GOUTAM CHALLAGALLA: Very few will. It’s less than 10 percent in all the research that we’ve done. Green customers are willing to make that trade off. I’ve asked this question of thousands of executives. What is the highest percentage of green customers in your market? In Europe, even in the U.S., I’ve never heard a number greater than 10 percent.
ADI IGNATIUS: I feel like I’ve seen data, I’ve seen reports that suggest the opposite, that green products are finally profitable or are finally generating a significant market size. Is that data, I don’t want to say willfully wrong, but optimistic, let’s say?
GOUTAM CHALLAGALLA: It’s definitely optimistic. And I’ll tell you a few reasons why I think it’s optimistic. One is a lot of the research confuses what I call as the way customers state things and we take it at face value. Let me give you a very simple example. A lot of consumers would say, “I bought a Tesla, because I’m very environmentally conscious.”
Well, actually, nobody buys a Tesla to save the planet. Let’s be very clear, right? You bought a Tesla first and foremost, because you wanted on demand transportation. That’s the reason to buy. Then if I am conscious about the environment, I could narrow down my choice to those products that have a certain footprint in this particular case.
There’s another problem. Let’s say a company changed its packaging and you were already buying that product. Now when they change the packaging, you continue to buy that product. Suddenly it’s called a sustainable product and there’s more demand. As more and more companies change things like packaging, suddenly it looked like they care more about sustainable products. It’s not the case at all.
ADI IGNATIUS: Okay. But let’s go back to your automobile example for a second. So yes, you’re right. The job to be done is to get from point A to point B. But if I’m deciding between buying an electric car or buying a massive gas guzzling SUV, the job to be done hasn’t changed. But as a consumer, the decision I’m making is to be green, relatively green. We’re still buying cars. We’re not walking, but relatively green. And isn’t that a strong, powerful market?
GOUTAM CHALLAGALLA: I think there is. But maybe I should explain the three segments. There are green, blue, and gray customers. So think about reasons to buy and reasons to care. Reasons to buy other job to be done. I want to get from point A to point B, but it’s also about my image.
The green customers are saying, “Okay, maybe I’m willing to trade off my image for getting a particular type of a vehicle or a product or so on.” Luckily with Tesla, those type of trade-offs often didn’t exist. Now, you have a second group of customers called the blue customers. These are customers who will buy if there is an incentive or if they can pass on the cost to somebody else. I often joke that Apple is a blue company, because they pass on those price increases to consumers every September.
So, I think a lot of times the research has not distinguished between these different types of consumers. And when you ask consumers, you get certain answers and we confuse the two. That’s the reason why we vastly overestimated the percentage of green customers.
ADI IGNATIUS: In your view, are company sustainability strategies delivering significantly to profit or to shareholder returns at this point? Is that happening frequently? Rarely? None at all?
GOUTAM CHALLAGALLA: I’ll tell you the evidence that we have seen. And we’ve looked at meta analysis. The correlation is 0.12. Is it statistically significant? Absolutely. But if you are a business, it’s not very meaningful. So the relationship actually is very weak when you look across hundreds of studies.
ADI IGNATIUS: So one more contextual question, and this is about writing this book right now. I mean, to what extent is there even still an appetite for sustainable products? Again, as a consumer, I have an appetite for sustainable products, but we have a government in the U.S. that seems to want to promote oil and gas above everything. And as you write in the book, there is green fatigue among many consumers. So to what extent is that appetite out there?
GOUTAM CHALLAGALLA: See, I think it all depends on how you frame this. I think today, if you say, “I have a green product and we have done this decarbonization.” Many consumers, especially in the US today, are not paying attention. Partially because even in the EU, by the way, the study showed that 42% of the messages have some greenwashing. So consumers naturally have their antennas up. However, many consumers realize that the problems have not gone away. The problems are still there. If there’s water scarcity before, there is still worth the scarcity today. If you are feeling the pain from an extreme temperature, it’s still there today. Now, we care less about the cause of why that is, but those pains are still there.
ADI IGNATIUS: So let’s talk about the better approach. How does one get from having ambitious sustainability goals to really developing a market strategy that gives them competitive advantage?
GOUTAM CHALLAGALLA: The wrong question to ask is, how do we become more sustainable? Because that prioritizes sustainability over everything else. And often that led to increase of costs and so on, but didn’t necessarily create consumer or customer value. And what we found again and again is the willingness to pay is very little. So the wrong question again is how do we put sustainability at the center? How do we become the most sustainable companies? In fact, we call these the enthusiasts, and we’ve seen both an investor backlash in companies that have gone down that path.
So what do we need to do? Instead of asking, how do we become the most sustainable company? We should say, how can we use sustainability as a catalyst to create more customer value? Now, if I’m being very bold and ambitious, I’m going to refer to the words of a former president, John F. Kennedy. And instead of saying, “Ask not what you can do for sustainability, but what sustainability can do for your company.”
ADI IGNATIUS: I like that. So HBR wrote a lot about Paul Polman. I would say he was lionized even among the green community as the example of here’s the CEO who’s doing the most for these sustainability goals. It was hard to figure out who was number two. Do you similarly look at Unilever under Paul Polman so glowingly? I’m imagining you have a slightly different perspective.
GOUTAM CHALLAGALLA: So I actually listened to Paul Polman recently. There’s so many ideas we agree on. And I think here’s what was a problem at Unilever. See, when you have a CEO, like you said, very lionized, right? So now if the CEO says, “We are going to prioritize sustainability,” he never said, “We are not interested in making money.”
He actually never said that. However, people listen to what they want to listen to. And so what happened is he wanted to put a purpose on many brands. Lifebuoy, as an example, had a purpose. Dove had a purpose. Now, if you’re a company with 400 brands, how many brands can you legitimately create a purpose that actually makes sense to consumers? Now, as a test, I’ve often asked in my executive sessions, write down the purpose of one or two brands you really love. People massively struggle.
So if sustainability fits in naturally with the functional and emotional benefits that you’re anyway providing, no problem, then it’s a tight fit. But if it is sitting on top of, that can be a problem, because you don’t get very long to tell your message to consumers. Now, here’s the problem, wastage. Think about doing this across tens of brands, across geographies, different languages, so much marketing goes to waste. I don’t think Unilever had more than 10 to 15 brands where there was a tight fit.
ADI IGNATIUS: What was the great quote about mayonnaise?
GOUTAM CHALLAGALLA: Oh yeah. This quote on mayonnaise is fantastic. Terry Smith, the activist investor, said, “Any company that thinks they need to define a purpose for mayonnaise has, in our view, lost the plot.”
And I think what happened is whether Paul Polman intended it or not, people were making the wrong trade-offs, and that’s really what happened. And so, I don’t blame Paul Polman, but I think everybody under him wanted to really show, “We have a purpose, we are behind you,” and that’s really what happened. There was a lot of wastage.
ADI IGNATIUS: Look, I think Paul’s purpose was to change the world, to lead something that would become table stakes or even would lead to regulation, a level playing field, and the world is not ready for that yet maybe. But now some listeners are thinking, “Well, hang on, hang on. Patagonia. I love Patagonia. I will pay a premium for Patagonia. So what are you talking about here?” That seems to be an example where the mission and the margin are quite aligned.
GOUTAM CHALLAGALLA: So here’s what it is, right? We find that about 20% of companies or so are all in. Unilever was, Danone was, Patagonia is. And there will always be a few exceptions. But it’s also different when you are a few billion versus you’re 50, 60 billion. When you have a narrow range of products serving the higher end consumer versus you’re serving the mass market, very different markets, very different willingness to make trade-offs. Don’t forget that Patagonia, in the grand scheme of the clothing market, is a niche player.
ADI IGNATIUS: So in essence, some companies are treating sustainability as a constraint. And I think your point is that more companies need to view it as a source of innovation. So what separates companies that are actually innovating from those that are just messaging sustainability or pushing it at the margins?
GOUTAM CHALLAGALLA: I think this is at the crux of it and the core, and why I think it can be a source of competitive advantage if you use sustainability as a catalyst. Broadly, if you think about what is sustainability, sustainability is always either some wastage or inefficiency, or some hardship that is out there, maybe people’s health or using too much water. No business wants to use too much water as an example. No business wants to use way too much energy than what is required to come up with an efficient product, as an example. So if you look at these unwanted outputs, undesired outputs, they become the source of innovation. Now, the best way to maybe share this is through a very simple example.
If you take Reckitt, Reckitt is headquartered in the UK and they have this product called Finish. It’s a detergent in the dishwashers, very product focused. I want to have sparkling dishes. But then when they started thinking, “Okay, let’s understand the end-to-end journey. What’s happening in the entire dishwashing journey that consumers go through?” They found that about 50% of households actually rinse their dishes before putting them in the dishwasher. That uses 57 extra liters of water or roughly 20 gallons of water. They never thought of that before, but it’s only when they put on this lens of where is their wastage in the entire system? Where is their inefficiency? Where is their hardship to consumers? That’s when they saw that.
So they came up with a product where you can eliminate the rinse. Now think about it. Who wakes up after a lovely three-hour meal, nice glass of wine perhaps with a four or five course meal and says, “Wow, great. I got to go do the dishes.” You never see that, right? It’s a chore. They eliminated a chore which should appeal to every customer. You don’t need to be green. You don’t even need to be blue. We got gray customers. Gray customers are those who don’t care about sustainability. And then you can say, “Lower your water bill.” You don’t need to talk about sustainability. You saw an inefficiency, a wastage, and you addressed it.
ADI IGNATIUS: So is your suggestion that in the segmentation work that companies would do in identifying green customers, blue customers, gray customers, however you determine it, that there is a multi-product mix or that there should be a search for, let’s say what you just described, Finish that works for everyone on whatever level, however they’re thinking about the job to be done.
GOUTAM CHALLAGALLA: Here’s the thing. If you want to scale sustainability, meaning you want to reduce business inefficiency, you want to reduce wastage, you want to do that, you better appeal to the gray customers, because they’re the largest pool, and the blue customers. Collectively, these are 90%. If you don’t appeal to them, you can’t scale sustainability. It’ll forever be a niche.
Now, a business may say, “I don’t mind having a multi-product mix. I want something that is scalable, and I don’t mind introducing a niche product, because I know the green customers are willing to pay a hefty premium for it.” So you could have a multi-product, but I don’t think you will scale sustainability if you target mainly the green customers. Therein lies a problem. Most companies targeted the green and hope others would become like greens. Hope is not a strategy, as we know.
I think this is really important. Sustainability trade-offs are very difficult for consumers to make or customers to make. Let me explain why. We grew up making what I call as I for I trade-offs. I give up something to get something, right? I pay more and I get a nice iPhone. I pay more and I get a higher quality product. And we make these trade-offs all the time, I for I. Many sustainability trade-offs are, I give up something for somebody else. Those are harder. When push comes to shove, I for I dominates I for somebody else. So I’ll pay more, because one day my grandkids might be better off, harder to make for most people when push comes to shove.
ADI IGNATIUS: So I love the logic, but you’re asking people to make significant innovations.
GOUTAM CHALLAGALLA: Yes.
ADI IGNATIUS: So that’s not easy. If we could do that every day, we’d all be rich, but innovations of this kind are probably relatively rare. I mean, I think you’re asking companies to think differently and maybe create an environment or a mindset where they can find those innovations. So talk about how that happens.
GOUTAM CHALLAGALLA: It really starts with mapping what are the sustainability investments we could potentially make based on the wastage that you are observing in the entire end-to-end chain? If I give you an example of John Deere, John Deere is of course one of the leaders of agricultural equipment. What John Deere noticed is that when you put a seed of corn on the ground, then you need to apply fertilizer. Often fertilizer is applied through the entire field, through the entire row. Most of it is wastage. John Deere was anyway on a digital journey. They said, “Why can’t we use computer vision to put fertilizer only on the corn seed? That’s going to save our farmer maybe 75% in fertilizer cost.”
So now what do we see? John Deere has noticed a problem with how the farmer is applying fertilizer. They have the equipment. They just paid attention to these. They were anyway on a digital journey. Now I can get paid potentially more for my equipment. You can actually get a premium for that. So what do you need to do as a leader? Don’t just focus on projects that have the greatest sustainability impact, because you want to be a leader in sustainability, but say, “Why don’t we add another axis of customer value?”
The moment you add that customer value access, you start looking for those projects that say, “Okay, there’s a big impact on sustainability, maybe water savings, maybe energy savings, things like that.” Maybe the health of people, maybe the mental health of kids, self-esteem of teenage girls, big crisis, as we know, and say, “How is that adding customer value?”
Focus on that other element. So the more you can make tie in these two, that’s the gap that was missing. We were making sustainability decisions based on impact on sustainability, but disassociated from customer value.
ADI IGNATIUS: So this is a confusing time, I think, for business leadership that believes in everything you’re talking about, which is true sustainable value up and down, let’s say their supply chains through their products. But I think they felt they needed to lean forward on sustainability, because they wanted to bring in employees who believed in the mission. They thought they needed consumers aligned, people who were evaluating on ESG would look for all of that. You’re basically saying that trying to build a sustainability culture itself is a distraction at best and maybe something worse. Am I understanding that correctly?
GOUTAM CHALLAGALLA: Yes and no. What’s happened over the last 10, 15 years, so many new things have been introduced into business, right? Sustainability, digital, now AI, and then agility, you’ve been exposed to all of them. So every time we say, “Now we need an agile culture, now we need a digital culture, now we need an AI mindset, we need a sustainability mindset.”
You are just causing more and more angst in the organization, because what that does is it means more committees, more specializations, more of everything. It just slows down decision-making at the end. You need one culture, a customer-focused culture, a culture that is focused on adding customer value. The moment you keep that straight in your mind, sustainability is a very powerful enabler of creating that.
ADI IGNATIUS: Should companies even have chief sustainability officers? Is that a period piece and we move on from that or is that still important?
GOUTAM CHALLAGALLA: I think it’s okay to have a chief sustainability officer. The regulation can be quite burdensome. So you need somebody who’s paying attention to that, providing advanced warnings, attending the right meetings, influencing that regulation, whichever way you think is better. However, if you genuinely want to integrate sustainability into the business, increasingly what I’m seeing, and I don’t want to name the companies, but they’re either putting sustainability under the innovation head or they’re putting sustainability under a particular business head, only because they want to make sure you also have the business customer value innovation lens to it. There was one company we interviewed and their chief sustainability officer said they had to deal with 18,000 changes of regulation just in one year. So you do need somebody out there paying attention to that.
ADI IGNATIUS: If a CEO wants sustainability to become a real source of competitive advantage, not the CSR initiative, what are two or three things they should do right now to reorient their business to this direction?
GOUTAM CHALLAGALLA: Number one is you have to be grounded in the world of your customers. Talk to your customers, really get a sense for what are their pain points in terms of what they’re willing to pay for. So that’s the first thing. And then say, where is their wastage in the system, in the entire system, that can actually influence those? So make that an innovation thing.
Right to play is simply what you do for regulatory reasons. That’s a defensive move. Everybody has to do that, otherwise you’re not in the game. There’s also a right to stay investments. I think a CEO needs to pay attention to right to stay. Right to stay are resilience investments.
I work periodically with one of the large companies in the chocolate business, in the coffee business. Cocoa and coffee futures are almost at a 47 to 50 year high. They will not get enough supply of coffee and cocoa. They need to make these investments into farmers. They need to make them more productive. They need to create a sustainable community for them in terms of how they manage their soil, how they do that. Otherwise, there’s not going to be enough supply. Those are resilience investments. Every CEO needs to say, “Is my business going to be resilient 10 years from now, five years from now? Can I provide these products where I’m positioned in the product?”
So right to play investments, everybody has to make. They’re defensive. Right to stay investments are resilience, forward-looking, you better make them, otherwise you may not have a business 10 years from now. Then you have right to win. These are the optional investments. And what we are saying is these right-to-win investments make them in a way that they’re related to customer value.
So I think first, a CEO needs to have clarity on, “Where is my money really going? How are we actually looking at these different type of investments? Is too much going into just right to play and we are not doing enough in the others?” That’s the first place I would start.
ADI IGNATIUS: Are companies receptive to this conversation now? Or again, I’m coming back to the question of sustainability fatigue and other priorities and this huge sense of uncertainty that every company is feeling for so many reasons. AI, you talked about geopolitical changes. Are people receptive to the message at this point?
GOUTAM CHALLAGALLA: So I’ll give you four types of companies we’ve encountered here. There are those who are fleeing from sustainability. And I say that may be a good thing, because they were greenwashing anyway. They weren’t serious to begin with. They were, in fact, causing more market confusion, because they put all kinds of labels and cosmo market. Those are companies that are fleeing from it. Then there are companies that are frozen and said, “Let’s wait and wait it out.”
Then there are companies that are saying, “We want to fight back.” But they’re often taking a black eye. They’re taking a punch to their face. Then there are those who say, “We can actually flourish, because these problems are not going away.”
Many CEOs I have spoken to, in private, they will say, “There is no dialing back. There is absolutely no dialing back for resilience reasons, for motivation reasons of our employees, and for actually innovation reasons.” The only thing is they’re not as loud. So they’re still saying, “We can flourish with sustainability.”
And I think that’s important. You have to believe you can genuinely flourish, because you’re adding more customer value. So what I feel is this first phase of sustainability we’ve gone through, what I call a sustainability 1.0, was in a way required, because if you don’t have people with passion, you don’t change the world. But as in any large movement, we make some mistakes. But now companies are saying, “We can reorient. We see where the value is.”
I can tell you one thing, Adi, and this gives me a lot of gratification. Every time we have explained this logic and tied it to innovation, tied it to not just cost-cutting, but actually a source of competitive advantage. I have not once, including when I’m with CSOs, including those who are from the oil and gas industry, and I had a bunch of them very recently, I have never faced resistance, not once.
ADI IGNATIUS: All right. So looking ahead, five years, 10 years, what will distinguish the companies that truly win from innovation through sustainability from those that are simply more in a compliance mindset?
GOUTAM CHALLAGALLA: Every company has to decide where to allocate resources. You could be in a compliance mindset, continue to do the regular innovation. And we’ve really tested this out. And not empirically, I can’t show you mathematical data or statistical data, but through case studies. Here’s what we find. Those companies that continue on their regular path of innovation, they’ll do just fine. They’re innovating and they just do the bare minimum. But companies that take this broader lens and incorporate sustainability, they accelerate the pace of innovation, because they find more things to innovate on. And when you find more things to innovate on, that’s a source of competitive advantage, so you will actually accelerate. So many companies are realizing that. About 10 to 15 percent of companies are realizing that. So it can become a source of competitive advantage.
Let me give you a very simple analogy. In 2001 or so, if you remember, the dotcom bust happened. A lot of bad companies went out of business. Does that mean the internet went out? Companies that stayed on digital transformation, we saw later thrived. Sustainability problems are not going away. So companies that stay on this journey with this innovation lens will continue to thrive. I’m firmly convinced it’s a source of competitive advantage, because it drives innovation, a better form of innovation.
ADI IGNATIUS: All right, that’s a great point to end on. Goutam, I want to thank you very much for being on IdeaCast.
GOUTAM CHALLAGALLA: Thank you so much, Adi.
ADI IGNATIUS: That was Goutam Challagalla, professor at IMD Business School and co-author of the book, Clean Winners: Sustainability Strategy That Puts Customers First. Next week, Alison looks at how understanding circadian rhythms might just give you a business advantage.
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And thanks to our team, senior producer Mary Dooe, audio product manager Ian Fox, and senior production specialist Rob Eckhardt. And thanks to you for listening to HBR IdeaCast. We’ll be back with a new episode on Tuesday. I’m Adi Ignatius.
