Purpose over profit: How Generation Z is redefining business

TOKYO/KYOTO -- Riho Matsumaru's revelation came in March. While studying in London, the 21-year-old joined a student protest against the climate crisis, one of hundreds of events held simultaneously across the globe. The message of the protests resonated with her, and spurred her to try to drive action back home.

"There is a growing sense of crisis in me," she said. "I feel anxious and frustrated about our current society. ... I want Japan to be as active as the rest of the world."

On Sept. 20, Matsumaru will join hundreds of thousands of young people in more than 100 countries in a mass "strike" for the climate, timed to coincide with a major United Nations summit in New York. The "Fridays for Future" movement is inspired by the 16-year-old Swedish student Greta Thunberg, whose weekly walkouts from school have transformed her into a global icon. The movement has spread rapidly this year, and has made its way to Asia; young people in Malaysia, India, the Philippines, Bangladesh and Japan are all set to strike this September.

Last month, a small group of young people gathered in Kyoto to prepare for a walkout in the city. Among them were Matsumaru and Yuhei Tsukamoto, a first-year master's student at Kyoto University and coordinator for Fridays for Future Kyoto.

"Our society won't change unless we take action," Tsukamoto said. "There are a growing number of young people in Japan with the same spirit. We need to come together in order to organize bigger protests. Catching the public's attention will lead to change."

School students in New Delhi take part in a "Fridays for Future" climate protest in April.   © Reuters

Matsumaru, Tsukamoto and Thunberg herself are representative of a generation that is set to reshape the political and economic landscape worldwide. Globally connected and highly conscious of social and environmental issues, Generation Z -- individuals born in the mid-1990s and the first decade of the 2000s -- are coming of age into an era of rapid social, technological and environmental change.

Even more so than the millennial generation that preceded them, they are demanding greater things from their leaders and the companies that they interact with; to attract them, businesses now have to adapt and to improve, to focus on and to demonstrate that they are ethical and sustainable.

"More than any other generation that came before, Generation Z is more prepared to open their wallets for a brand that promotes causes about social impacts, such as climate, LGBTQ, racial or social justice," said Sertac Yeltekin, chief operating officer at Singapore-based, socially focused venture capital fund Insitor Partners. "This gives them unprecedented power to shape the success or downfall of companies. They are intrinsically aware that they can drive this corporate change."

Shaped by uncertainty

The millennial generation, born from the early 1980s to the mid-to-late 1990s, were often characterized as individualistic to the point of narcissism -- children of relative plenty who came of age in an era of global economic growth. Generation Z, by contrast, have been shaped by uncertainty -- political, economic and environmental. Twentieth-century models of employment have been eroded by technological change. Governments no longer seem to have the answers to economic stagnation and social tension. An impending climate catastrophe is casting a pall over their futures, and previous generations are failing to take action.

Born in 1997, Rina Usui, a fourth-year student at International Christian University in Tokyo, plans to march against climate change for the first time on Sept. 20. "It's natural for me and my friends to think about the environment because it's our future," she said. "Trying to make a change and finding a solution to lessen our worries or concerns for tomorrow is common sense. ... When I talk to my parents about the climate crisis, they say that experts will deal with it. That really surprises me, and makes me realize the gap between my generation and those that are older."

This has profound implications for businesses. Through to 2030, Gen Z will make up the largest consumer segment worldwide, according to market research provider Euromonitor International. Nine hundred and sixty million of those individuals will be in Asia, and the companies that want them as employees and as customers will have to get better at being better -- proving their environmental, social and governance credentials to a demographic cohort that cares, and that does its research.

"In reality, many of the companies still see ESG as a sort of fad," said Masaya Yomaru, who studies Gen Z at Japan's largest advertising agency, Dentsu. "The way things are going, they will need to start thinking of sustainability more as a crucial part of business. ... Gen Z has an abundant amount of information, and thus have the power to choose and demand. If this group of tech-savvy young people who have a high level of literacy on social issues turn against a company, it will be very damaging."

A growing number of global companies have bowed to the needs of young consumers. Facing pressure from customers over low wages in their supply chain, this year Swedish fast-fashion house H&M Hennes & Mauritz made moves to improve transparency by launching a new website tool that lists details of their products' suppliers and their factories. In the U.S., McDonald's has said it will shift to using 100% cage-free eggs by 2025, and is increasing the number of vegan items on its global menus.

Those that fail to adapt can find themselves on the wrong side of fast-moving campaigns, as a "hyperconnected" generation of consumers can be quick to organize against them.

"Since they are engaged in rapid-fire banter and commentary, there is a lot of room for interpretation," said Patrick Reichert, research fellow in social innovation at IMD Business School. "As a result, companies face huge challenges to align their brand with the attitudes and expectations of Gen Z."

Consumer activism

The need for companies to focus on ESG goes beyond risk management, however, because younger consumers are increasingly integrating their social and environmental concerns into their buying decisions.

Ginjiro Nakayama, a fourth-year university student in Osaka, works part-time at Patagonia. The U.S. outdoor clothing company has undergone a resurgence in recent years, in no small part because of its long history of ethical and sustainable production. "I tend to think more about how my purchases affect the environment," he said. "I don't consume things just because it's cheap. I only buy things that are really necessary."

Gen Z already has substantial spending power. Research by the consultancy OC&C estimates that, in 2018, total direct spending by Gen-Z consumers was $2.4 trillion. This cohort also has a considerable ability to shape household spending. IBM research showed that 70% of Gen Zs have influence over how their family spends money.

A survey by Euromonitor found that 52% of Gen-Z consumers in Asia "try to have a positive impact on the environment through their everyday actions." That has helped to boost the profile of companies that embody the concerns of ethical consumers.

"This is an incredibly important time for leaders to adapt their practices, strategies, and innovation to fit Gen Z as this huge new generation will soon be the fastest-growing generation in the workforce and the most important group of consumer trendsetters," said Jason Dorsey, president of the Center for Generational Kinetics, a generational research and consulting firm.

"There is a growing sense of crisis in me," says 21-year-old student Riho Matsumaru, center. "I feel anxious and frustrated about our current society. ... I want Japan to be as active as the rest of the world." (Photo by Ken Kobayashi)

Lush, a U.K.-based cosmetics company, has defined itself by its ethical stances on its sourcing of ingredients, on labor conditions, on animal testing and on its use of packaging. The company set up its first Asia store in Tokyo in 1999, and today operates in nearly 50 countries with around 930 stores worldwide, 180 of which are in Asia.

Famous for its colorful, heavily scented products, the company has worked to reduce the amount of packaging it uses. Around 60% of the company's total products are now "naked," or free of packaging and preservatives, while it also offers products, such as shampoo, in solid form and free from plastic.

Lush has also ridden a wave of opposition to the use of palm oil in consumer products, which began in Europe but has spread around the world. Large-scale cultivation of palm oil is linked to the destruction of tropical rainforests, with implications for biodiversity and the climate crisis. Last year, Lush launched an Asiawide #SOSsumatra campaign to promote its new 100% palm-oil-free shampoo bar, which aimed to spread awareness of deforestation on the Indonesian island, and to raise funds for rehabilitation of land.

At cosmetics company Lush, around 60% of products are now "naked," or free of packaging and preservatives. (Photo by Ken Kobayashi)

The company's stands have occasionally attracted controversy. In 2012, Lush's support for the West Papuan independence movement put it in opposition to the government of Indonesia, which governs the region. However, its uncompromising activism has given it a loyal following among ethically-minded consumers.

"All of our initiatives and campaigns give us the opportunity to hit ground-level issues and impact real change, which is an important goal for us," said Annabelle Baker, director of Lush Asia Limited. "We will never think we have done enough."

Asian brands are notorious for being late to the show when it comes to sustainability, lagging behind their U.S. and European counterparts in embracing environmental, social and governance initiatives. Research by Nikkei found that among 263 global companies studied, there were only eight companies in the Asia-Pacific region that reached the top 50 of a ranking on "ROESG" scores -- derived by multiplying the company's return on equity percentage number with an ESG score; 80% of the top 100 were Western corporations.

This may be changing, particularly among those that are exposed to global markets.

Following rising criticism over the conditions of workers within the global apparel supply chain, Uniqlo parent Fast Retailing published a list of the core factories that sew its garments in 2017; this year, it revealed all of its major suppliers.

"Customers everywhere else, including Asia, are increasingly aware and knowledgeable, and interested in a sustainable future," Yukihiro Nitta, group senior vice president and head of sustainability at Fast Retailing, said. "We are working to understand and reply to these needs."

Traditional companies that are less visible to consumers are also making changes, aware that down the line their corporate customers will have to demand traceability and sustainability.

Fuji Oil Holdings, Japan's largest palm oil processor, has recently begun to improve the transparency of its supply chain. Since 2016, it has laid out annual targets on improving its palm-oil sourcing, and in October last year it began operating a 60 million ringgit ($14.4 million) processing plant in Malaysia, in partnership with United Plantations, a local company, aiming to achieve full traceability of the palm oil that it buys by 2020.

Fuji Oil has also been making inroads into the emerging, but potentially enormous, market for meat alternatives. Growing awareness of the environmental cost of meat production, notably among younger consumers, is driving an increase in vegetarianism and so-called flexitarianism, where people consciously cut down on the amount of meat they consume.

In the U.S., meatless burger pioneer Beyond Meat listed on Nasdaq in May. Its stock has since surged more than 500%, giving it a market capitalization of more than $9 billion.

Fuji has invested in developing soy-based alternatives to meat and dairy products, including an imitation uni -- sea urchin gonads, which are a delicacy in Japan -- made from vegetable oils and soy.

"The emergence of flexitarian consumers around 2015 was a turning point and pushed us to accelerate our business on vegan products," said Kiyohito Suzuki, executive officer at Fuji Oil. "We understand that young consumers are finding value in eco- and people-friendly products," he added.

Japan's Fuji Oil Holdings has begun developing imitation sea urchin, prompted by the rise of "flexitarianism" in recent years. (Photo courtesy of Fuji Oil Holdings)

Authenticity first

Gen-Z consumers are already entering the workforce; as they and the rest of their cohort start to earn, they will have a greater capacity to shape consumer markets, meaning that the trend toward ethical consumption is likely to accelerate.

To adapt, companies need to do more than simply put an ethical gloss on their existing businesses -- instead, they need to fully embrace and adopt the values of the new generation.

Usui, the climate activist, said she "seeks authenticity from companies but [doesn't] know what to believe," especially with all kinds of information floating online. "I wish I could talk to people who are actually making the product, or something. I want a connection."

Cleared land at an oil palm plantation in Johor, Malaysia.   © Reuters

Truly aligning with Gen Z's values will require far deeper transformation for most companies.

Articulating and achieving a purpose, though, is difficult to do -- and harder to fake. "Vision" and "mission" have become common terms at many companies, IMD's Reichert said. "However, why a business exists is a bigger and more complex question. Purpose is not only about economic exchanges -- it reflects something more aspirational. ... [However], if consumers deem the purpose to be too generic, unauthentic or if a company violates its self-imposed ethical standards, the consequences come fast and hard."

Authenticity means doing more than just throwing money at corporate social responsibility, or marketing initiatives, experts said. It means bringing social metrics into the core of the business, and cleaving strategy to values.

"The only way for companies to be in unison [with Gen-Z consumers] at this game is to become a true corporate activist -- with the caveat, 'be genuine.' This generation's decisions about anything is driven by values and can only be adopted by a brand that is as sincere as Gen Z is about these issues," Insitor's Yeltekin said. "If they detect any inauthenticity in your branding, they switch allegiance from being your company's promoter to your company's detractors."