A (2:49)

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 Gautam Chaligala. He's a professor at IMD Business School and co Author along with Frederic Dalzace of the book Clean Sustainability Strategy that Puts Customers First. Here's our conversation. I want to do some context setting first and you know, 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 contribute to the social good. Will they?

C (3:30)

Very few will. It's less than 10%. 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 US I've never heard a number greater than 10%.

A (3:53)

I feel like I've seen data, I've seen reports that suggest the opposite. Right, 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.

C (4:09)

Let's say 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.

A (5:30)

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, you know, 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?

C (5:58)

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 are the 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.

A (7:09)

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.

C (7:22)

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.

A (7:44)

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 US 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?

C (8:09)

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, right? The problems are still there. If there's water scarcity before, there is still water scarcity today. If you're 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.

A (9:00)

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?

C (9:11)

The wrong question to ask is, how do we become more sustainable? Because that prioritizes sustainability over everything else, right? 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.

A (10:21)

I like that. So, you know, HBR wrote a lot about Paul Pullman. I would say, you know, he was lionized even among, you know, kind of the green community, as the example of, you know, here's the CEO who's doing the most for these sustainability goals, it was hard to figure out who was number two. You know, do you similarly look at Unilever under Paul Pullman so glowingly, or do you? I'm. I'm imagining you have a slightly different perspective.

C (10:47)

So I actually listened to Paul Pullman 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. Right. 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 are 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 drives where there was a tight fit.

A (12:33)

What was the great quote about Mayonnaise?

C (12:36)

Oh yeah, this quote on mayonnaise is fantastic. Right. 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.

A (13:15)

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. You know Patagonia, I love Patagonia. I will pay a premium for Patagonia. So what are you talking about here? You know, that seems to be an example where the mission and the margin are quite aligned.

C (13:43)

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 your 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 and the grand scheme of, of the clothing market is a niche player.

A (14:22)

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.

C (14:42)

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, right? 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 is headquartered in the UK and they have this product called Finish. It's a detergent in the dishwashers, very product focused, right? 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 the 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 choreography. 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.

A (17:23)

So is your suggestion that in the segmentation work that companies would do in identifying green customers, blue customers, gray customers, you know, 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.

C (17:49)

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 are the largest pool and the blue customers, Collectively these are 90%. If you don't appeal to them, you can't scale sustainability. It will 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 very important. Sustainability trade offs are very difficult for consumers to make or customers to make. We grew up making what I call as eye for eye 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. Eye for eye, 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, right? 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,

A (19:45)

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C (20:26)

Yes.

A (20:27)

So that's not easy. Right? 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.

C (20:44)

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 conceit? 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 axis, 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.

A (23:06)

This is a confusing time, I think, for business leadership that believes in everything you're talking about, which is, you know, 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?

C (23:47)

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, right? 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.

A (24:45)

Should companies even have chief sustainability officers? Is that a period piece? And we move on from that or is that still important?

C (24:52)

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 advance warnings, attending the right meetings, influencing that regulation, you know, 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.

A (25:52)

You know, if a CEO wants sustainability to become a real source of competitive advantage, not a CSR initiative, what are two or three things they should do right now to reorient their business to this direction?

C (26:06)

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 there 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 ten 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.

A (28:24)

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. Are people receptive to the message at this point?

C (28:41)

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 cause more market. Those are companies that are fleeing from. From it. Then there are companies that are frozen and said, let's wait and wait it out. Then there are companies that 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 say 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 as Sustainability 1.0 was in a way required, because if you don't have people with passion, you don't change the world, Right? 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. Bunch of them very recently. I have never faced resistance, not once.

A (30:59)

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?

C (31:12)

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% 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 dot com 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.

A (32:49)

All right, that's a great point to end on. Gautam, I want to thank you very much for being on ideacast.

C (32:54)

Thank you so much, Adi.

A (32:59)

That was Gautam Chalagala, professor at IMD Business School and co author of the book Clean Sustainability Strategy that Puts Customers First. Next week, Alison looks at how understanding circadian rhythms might just give you a business advantage. If you found this episode helpful, share it with a colleague and be sure to subscribe and rate IdeaCast in Apple Podcasts, Spotify, or wherever you listen. If you want to help leaders move the world forward, please consider subscribing to Harvard Business Review. You'll get access to the HBR mobile app, the weekly exclusive insider newsletter, and unlimited access to HBR Online. Just head to hbr.org subscribe and thanks to our team, Senior Producer Mary Dewey, 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.