Unpacking the Business Case for Sustainability – S U M A S

No one can deny that embarking on a sustainability journey is something all businesses should do. With growing resource volatility, species extinction and concerns around climate change and global warming, the world is more aware than ever of the need to go down a more sustainable path.

Yet, businesses are often reluctant to place sustainability where it should be – at the core of their strategies and operations. This is largely because there is still a general misperception that the cost of sustainability outweighs the benefit. Many businesses are stuck in the mindset of optimising short-term financial performance, whilst overlooking market drivers and the potential for long-term success.

The truth is, economic gain and value creation for shareholders should not have to come at the expense of other stakeholders. There is mounting evidence to support that sustainability and profits do not have to be mutually exclusive.

In the article The Comprehensive Business Case for Sustainability, published by the Harvard Business Review, a number of statistics and case studies have been collected as evidence of the economic viability of sustainability in business, some of which have been utilised within this article.

The article argues:
“Sustainable businesses are redefining the corporate ecosystem by designing models that create value for all stakeholders, including employees, shareholders, supply chains, civil society, and the planet.” All whilst ensuring that their companies are “better positioned to anticipate and react to economic, social, environmental, and regulatory changes as they arise.”

The Risks

In 2015, 8000 supplier companies reported on their level of climate risk in the largest study on climate change data and corporations. 72% of respondents claimed that “climate change presents risks that could significantly impact their operations, revenue, or expenditures.”

Social and environmental risks may only become evident over a longer term, yet there are clear examples of how businesses have been affected. For example:

  • The agribusiness company Bunge, reported a $56 million quarterly loss in its sugar and bioenergy segments due to drought in 2010.
  • The flooding in Thailand in 2011 caused 160 companies in the textile industry to halt their production, increasing global prices by 38%.
  • In 2004 Coca-Cola was forced to shut down one of its plants in India due to a severe water shortage.

Managing environmental and social risks requires long-term thinking and investment decisions that build longer-term capacity and promote adaptive strategies. Many large companies around the world are starting to address these threats and invest in long term strategies to mitigate the environmental and social risk factors that negatively affect business.

The Rewards

Improved Risk Management

The management of these risks can lead to many benefits other than mitigating threats. For example, the Rainforest Alliance certification, was invested in by Mars Unilever and Nespresso to address the threat to their cocoa supply chain.

In an independent study by COSA, the Rainforest Alliance reported that certified cocoa farmers in Cote d’Ivoire, for example, had a 173% higher yield in cocoa production and a 357% higher net income per hectare in comparison to non-certified farms.

Operational Cost Savings

Many sustainability initiatives that relate to improving efficiency, saving energy or reducing waste can be implemented at a very minimal cost and show a very quick return. Other initiatives such as sourcing in a more sustainable manner or improving the lives and wages of workers may be more costly than the former. However, these initiatives, much like a company would spend on good marketing activities, need to be seen as sound investments – not costs.

In the last 24 years, DOW invested nearly $2billion to improving their resource efficiency. Comparatively, they have saved $9.8 billion with a net profit of $7billion due to their reduced energy and wastewater consumption as a direct result of their investment. Similarly, the GE saved $300million by reducing their greenhouse gas emissions by 32% and water use by 45%.

Competitive Advantage

Sustainability acts as a tool to drive innovation in business and attract investors. This also results in financial benefits that accrue from increased competitive advantage. In fact, A 2013 UN report on sustainability found that 63% of chief executives “expect sustainability to transform their industry within five years.”

The graph, taken from the CDP report, showcases how suppliers are increasingly taking action in terms of identifying risks as well as participating in solutions to report on and reduce emissions. More so, how companies who have been participating for a longer period have an increased ability for risk recognition as well as emissions measurement and reduction.

An increasing number of consumers are showing concern and vested interest in sustainability, with “Nearly two-thirds of consumers across six international markets” believing that it is their responsibility to purchase products that are better for society and the environment. Consumers – especially millennial consumers – are also increasingly demanding transparency and social impact behind the products they are purchasing.

Improved Employee Satisfaction

Sustainability has been proven to be good for employee recruitment, retention and productivity. Employees are treated better and placed in healthier environments in companies taking sustainability seriously.

Employees are prouder to work with firms who are making a difference and providing purpose in their search for work-life balance. They are more motivated, productive and healthier. Studies show that businesses with better environmental standards and corporate social responsibility can increase productivity by around 16% and reduce employee turnover by between 25-50%.

Better Return

Between 2006 and 2010, the top 100 sustainable global companies experienced significantly higher mean sales growth, profit before tax, return on assets and cash flows in some sectors in comparison to conventional companies.

The evidence is becoming undeniable that sustainable companies are able to deliver significant positive financial performance, making sustainable businesses more attractive to investors.

According to a review by Arabesque and the University of Oxford, over 80% of the 200 studies that were analysed showed that good Environmental, Social and Governance standards:

  • lower the cost of capital,
  • Result in better operational efficiency and
  • Influence stock price performance positively

What now?

According to another article published by SUMAS, “Often sustainability is (mis)understood as ‘going back in time’”, but this is simply not the case. Sustainability in business is paramount to maintaining our environment and human life on this planet and has been proven time and again to make good business sense.

Many firms have already begun to acknowledge this and have started implementing wide scale changes. These businesses need to ensure that their sustainability efforts are more than just window dressing and ensure sustainability is embedded into their core business practices.

At the same time, more business executives and investors now need to look at the long-term. To not only see sustainable business as a good investment – but the only way business can be done going forward.

SOURCES
Harvard Business Review. (2018). Creating Shared Value. [online] Available at: https://hbr.org/2011/01/the-big-idea-creating-shared-value [Accessed 11 Nov. 2018].
BSR, (2018). From Agreement to Action: Mobilizing suppliers toward a climate resilient world. [online] Available at: https://www.bsr.org/reports/BSR_CDP_Climate_Change_Supply_Chain_Report_2015_2016.pdf [Accessed 21 Nov. 2018].
SUMAS. (2018). Ensuring Sustainability in Industry - SUMAS. [online] Available at: https://sumas.ch/ensuring-sustainability-industry/ [Accessed 14 Nov. 2018].
MIT Sloan Management Review. (2018). Explaining the Business Case for Sustainability Again … and Again … and Again | Andrew Winston. [online] Available at: https://sloanreview.mit.edu/article/explaining-the-business-case-for-sustainability-again-and-again-and-again/ [Accessed 12 Nov. 2018].
Harvard Business Review. (2018). The Comprehensive Business Case for Sustainability. [online] Available at: https://hbr.org/2016/10/the-comprehensive-business-case-for-sustainability [Accessed 11 Nov. 2018].
the Guardian. (2018). Three reasons investors are beginning to take sustainability seriously. [online] Available at: https://www.theguardian.com/sustainable-business/three-reasons-investors-consider-sustainability [Accessed 14 Nov. 2018].
SUMAS. (2018). Understanding Sustainability - SUMAS. [online] Available at: https://sumas.ch/understanding-sustainability/ [Accessed 14 Nov. 2018].

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