Why the trade-off narrative in business gets sustainability wrong

The AGSM Professional Forum 2024 examined how sustainable leadership is crucial for long-term business success and balancing profit with ESG priorities

Sustainable leadership is notoriously seen as requiring difficult trade-offs between short-term gains and long-term impact. However, sustainability and profits are not mutually exclusive; rather, the former is becoming increasingly essential to enduring business success.

Navigating the tension between these concepts lies at the heart of modern corporate strategy, where leaders grapple with a dual imperative, balancing traditional business metrics like shareholder returns with the growing role of environmental, social and governance (ESG) considerations. At the 2024 AGSM Professional Forum: Sustainable Leadership in an Accelerating World, industry experts said the tension and trade-offs need not be so fraught.

In a panel discussion hosted by Richard Holden, Professor of Economics at UNSW Business School, the panellists – Aware Super CEO Deanne Stewart, Nuix CEO Jonathan Rubinsztein and ANZ Non-Executive Director Richard Gibb – explained that businesses can prioritise strategies that promise both profitability and positive impacts. The link between sustainable practices and long-term financial returns is especially evident in the superannuation sector, according to Ms Stewart, who pointed to super funds’ mandate to invest for members’ long-term benefit. 

“At the end of the day, our job is to get the best possible returns for our members and their retirement,” she said. “By its very nature, it’s very long-term in focus, so sustainable practices, leadership and organisations are absolutely what we want. We want to invest in long-term, enduring companies that represent good value for our members.”

The need to align corporate strategies with long-term sustainability goals, both for ethical reasons and to ensure financial resilience over time, is why sustainability and sustainable leadership are at the core of the super system. Beyond the business case, these concepts also have a personal aspect, Ms Stewart said, as people think beyond practices and processes to consider the long term.

“For me, sustainable leadership is also thinking, personally, what does it mean to lead a team or an organisation that is truly enduring and has a positive impact?” she said, noting that it has increasingly become a question of pride. “Are you going to be proud talking about the next quarter’s shareholder returns? Or are you going to be proud, in a sustainable sense, of the impact you’ve had over a long period of time?”

Evolving priorities drive a ‘massive shift’

According to Mr Rubinsztein, a 200-year power shift has seen corporations and a few individuals amass massive power and influence in our society. This shift has created negative externalities – such as rapid industrialisation causing increased carbon emissions, unhealthy food systems underlying an obesity epidemic and unregulated social media causing a teen suicide crisis – that take a societal toll but, importantly, are not being “priced in”.

He recounted how, when he joined Unix – an intelligence software provider that uses artificial intelligence (AI) – he wanted to update its purpose statement, which at the time was “finding truth in the digital world”. “That’s quite a sexy purpose statement, but my question for my leadership team was, who cares?” he said. In other words, it wasn’t enough: “Who cares if Putin finds truth in the digital world? Is that a good outcome?”

As a result of that conversation, Unix’s purpose statement today is “being a force for good by finding truth in the digital world”. “As soon as that becomes part of your purpose statement, it becomes part of your DNA,” Mr Rubinsztein said. “Sustainability is thinking about how we as an organisation can do good, and then the cascading of that into what we sell, whom we sell to, and how we build our software. As an organisation, it’s asking how we can solve some of these wicked problems for good and actually create a purpose around improving the world.”

Read more: Leading through change for an inclusive economy and fairer world

Mr Gibb said he has witnessed a seismic shift during his career in the banking industry towards acceptance of ideas like sustainability, inclusion and reliance. “Even as recently as a decade ago, I don’t think those were words that had a lot of resonance within big, global banks,” he said. “There’s been a dramatic change in recent years, and those are now words that have real meaning in how banks, and financial services firms more broadly, operate and behave.”

As a result, many big organisations have now embedded what “started as a box-checking exercise” as a meaningful part of how they operate, Mr Gibb said. “It’s partly a function of the different pressures they’ve had from stakeholders,” he explained. “But I also think it is partly the expectation that employees have of companies today – not just banks, but all companies – and employees now have a real voice and a real force in getting companies to act sustainably.”

It’s a transition that has also seen corporations extend the universe of stakeholders they care about, as they are now incentivised to also consider the well-being of their customers, employees and communities. “It’s no longer just your shareholders or investors and optimising outcomes for them,” Mr Gibb said. “There has been a massive shift across those dimensions.”

The big question of trade-offs

While sustainable leadership and long-term thinking may seem like obvious choices – as the panellists noted, there isn’t exactly a movement for unsustainable leadership – the consensus is that these concepts inherently come with difficult trade-offs between short-term profitability and enduring organisational health. However, they emerged with another view of this dynamic.

Recalling his campaign to embed “being a force for good” in Unix’s purpose statement, Mr Rubinsztein first pointed out that governments have a foundational role in defining the boundaries in the trade-off between “good” and “bad”. He cited the environmental sphere, where governments must decide whether and to what extent offshore gas drilling, for example, is allowed. That then sets the boundaries that enable societies to apply pressure for change.

“The government has a job, and I think it fails in those scenarios when it doesn’t price in carbon or tax the massive negative externalities arising from social media or food inequality," said Mr Rubinstein, who explained that in these areas, governments can step up from a sustainability standpoint and promote the change societies want. “There is a lot of equity in doing good. I think people undervalue the reality that our employees, customers and partners want to do good. And, in fact, I think the trade-off often isn’t as big as we expect," he said.

Subscribe to BusinessThink for the latest research, analysis and insights from UNSW Business School

Balancing short- and long-term priorities is especially important for the nearly $4 trillion superannuation sector, given the “significant force” that the big super funds wield in Australian capital markets, Ms Stewart said. She argued that, often, no trade-off is even necessary. “What do you ultimately want to invest in: a company that’s managing its climate change risks – one of the biggest risks in our portfolio – or a company that is not managing the transition, not managing for resilience, but might be okay or even able to maximise profits in the short-term?

“If you’re looking to hold a company for the medium and long term – and, ultimately, that is where we’re rewarded and where we’re incentivised from a member perspective – then the two [profit and ESG] line up,” she said. “They are not mutually exclusive; in fact, they really support each other over the short term.”

And, as Prof. Holden pointed out, as the marshal of such a massive scale of investment funds, the superannuation sector “can’t just take its short-term profits and move on”. “Australia is, in a sense, at the forefront of needing to think about this because of the structure of our national savings and superannuation sector,” he said.

Ms Stewart agreed that the long-term requirements of superannuation investments constitute a net positive, adding that pension and sovereign funds also benefit from this constraint. “If you think longer-term, ESG considerations and the culture and conduct of organisations play out massively in the risks that arise, but also in the opportunities you can invest in,” she said. “It’s a competitive advantage.”

Not-so-efficient markets

Another question that prompted less optimism involved the efficient markets hypothesis and whether equity markets and the so-called market for corporate control are doing their job. Prof. Holden asked if these markets foster long-term thinking or focus too much on short-term gains.

According to Mr Gibb, ANZ’s approach to this tension has hinged on adding a “sustainable lens”. He believes there is now a greater focus than ever in corporate culture about the actions companies take. “I do think that the expectation of investors and markets these days is that companies will act with a sustainable mindset and not just look to optimise earnings and outcomes, but also consider these other factors,” he said. “At the end of the day, companies live and die by their reputation.”

Mr Gibb acknowledged some trade-offs will be necessary in the climate context, especially for the banking sector around responsible lending and divestment from industries like fossil fuels. “The reality is, we are going to need fossil fuels for the next decade or so; there is going to need to be support for those companies and, frankly, engagement from super funds and banks putting the right influences and pressures on those companies to transition. They’re as well-placed as anybody to have that effect. So, when we talk about trade-offs, people need to bring a degree of pragmatism to it,” he said. “I think the equity markets are starting to recognise that.”

Ms Stewart pointed out that while markets are good at pricing in financial risk, they fail to price in the lack of transparency and information around non-financial risks. “We would argue that, over the medium and long term, they often become the financial risks,” she said. “While I think markets are efficient on the one hand, where the efficiency needs to increase is around ESG, which is not this thing sitting on the side – it is those true risks sitting inside that entity. They’re just not always fully understood, disclosed or priced.”

Sustainable leadership in the AI age

The panellists expressed cautious optimism about the future of sustainable leadership in a time of great technological change, although Mr Rubinsztein warned of significant societal challenges ahead, particularly related to AI and income inequality.

“I absolutely think we’re on the chasm,” he said, calling the social unrest stemming from the growing gap between rich and poor a “global existential risk”. “I’d suggest that AI has the potential to massively speed that up and increase the ratio between rich and poor.”

Ms Stewart conditioned her optimism on societies’ ability to keep the required guardrails front of mind. She agreed with Mr Rubinstein that social media is an example of a flashpoint where technology has already advanced enough to do damage before society has had time to consider the consequences.

Ultimately, though, Ms Stewart stressed that sustainable leadership must remain a “watchpoint” for Australia, even in a technologically evolving world. “We have to get going on this journey fast and not be left behind in terms of the true value and opportunity that it represents," she concluded.