Purpose and Profits: In Embracing Sustainability, Businesses Create Value
As we move into another new decade this millennium, climate change continues to affect the lives of every species on the planet, including ourselves. Due to its reliance on land, resources, fossil fuels, and the non-stop cycle of production and consumption, human industry is a large part of the climate change picture, with one study finding that just 100 companies are responsible for 71% of global emissions. The scientific journal Environmental Sustainability found that the prioritization of rapid production and turnover of products within the business world has us on pace to produce 27 billion tons of solid waste by 2050, and the abundance of packaging has resulted in an island of plastic twice the size of Texas floating in the Pacific Ocean. Stated bluntly, if businesses don’t act responsibly as members of the global community, the majority of many species will not survive past the 21st century.
The good news is, sustainability is on the radar of most companies, as society is increasingly expecting from businesses more than just delivering a product and making profits. In a survey conducted by Markstein, 70% of consumers wanted to know what the brands they support are doing to address social and environmental issues, and according to a Cone Communications’ study on corporate social responsibility the majority of Americans not only expect companies to take action against climate change and will make a purchase because a company advocated for an issue they care about, but they will also stop purchasing from a company that doesn’t care about climate change. This position extends past the consumer as well, with 61% of young emerging leaders saying that business models should only be pursued if they achieve profitable growth while also improving societal outcomes according to a recent survey by Accenture and the World Economic Forum. Even investors are considering these factors with increasing frequency, utilizing a concept of accounting for ESG (environmental, social, and governance) factors when making investment decisions, with research provider ETF Flows says ESG investments are up $15 billion in the year’s first two quarters of 2020.
What does sustainability in business mean?
A sustainable business supports the community and economy dependent on a healthy planet by working to operate without impacting the environment negatively. They see beyond maximizing profits, recognizing that the sustainability of their business is dependent on the sustainability of the earth. Company strategies that utilize sustainability have the ability to foster longevity because a business can only truly thrive by contributing to the health of the structure within which they operate, creating long-term value by being socially responsible and protecting our use of the planet’s resources. The fact of the matter is that sustainability isn’t just good for the environment or society at large — it’s also good for the business itself. Below, I explore just a few of the many ways a business can benefit from becoming more sustainable.
Cost savings
While it may seem that prioritizing sustainability would eat into profits, development of sustainable business practices actually lends itself to efficient operation. By streamlinings effort and conserving resources, businesses can improve productivity while also reducing cost. Dow Chemical has invested less than $2 billion since 1994 to improve its resource efficiency and has to date saved over $9 billion from reduced energy consumption and water waste in its manufacturing process, and Wal-Mart’s global supply chain was able to save $12 billion through an effort to reduce packaging globally. Although these are two examples from large corporations, Reducing cost also encompasses energy conservation strategies that can be as simple as switching to energy efficient light bulbs and replacing old computers to more sophisticated efforts such as installation of geothermal heating and cooling systems. Efforts that have a greater overall impact will likely be more expensive to implement, but the long-term results often justify the investment such as with solar panels, which can save the average commercial property owner around $6,000 a year. Additionally, federal, state, and local governments offer a range of financial incentives such as tax credits, accelerated depreciation for certain capital expenses, exemptions from state or local sales taxes, and rebates for operating with environmental responsibility. Moreover, companies can add value by improving employee retention through purpose alignment, raising prices or achieving higher market share with new or existing sustainable products.
Consumer demand
As previously discussed, consumers are increasingly viewing sustainability not only as a plus, but a necessity. Today’s consumers are taking into consideration a company’s impact on the environment when deciding where to purchase goods and services, and are more likely to purchase from companies that practice sustainable habits. Implementing sustainable practices shows the world that your business is interested in more than just making a profit, and new revenue streams can open from those who are favorably predisposed to companies showing positive track records in social and environmental issues. In 2018, the Lego name became synonymous with environmental responsibility when it announced plans to produce pieces made from plant-based sources instead of plastic. In a prime example of actions aligning with messages, the Danish toy company followed through on their plans, and have since announced that they plan to use sustainable materials for all of their core products and packaging by 2030. This action saw Lego named number three in the Reputation Institute’s annual list of “World’s Most Reputable Companies for Corporate Responsibility.” Similarly, other big brands are using their already large platforms to promote sustainability. Colgate ran a public awareness ad during the Super Bowl promoting water conservation, highlighting ways in which businesses can advocate for sustainability even outside of the scope of their own product and practices. Consumers are no longer simply searching for a solution to their problem — they want to know that the businesses they are supporting are doing their part to support them back.
Risk management
In order for a business to not only survive but thrive, it must be able to accurately assess the risks that arise and preemptively mitigate them. With energy costs rising and uncertainty in supply, it is important for companies to begin thinking about the risks environmental factors may pose on the longevity of their business. Operational disruptions from climate change, resource scarcity, or community issues all hold the potential to break a previously successful business, and those that take these factors into account better position themselves for the future. For example, in 2009 Nestlé launched a plan that coordinates activities to promote sustainable cocoa, working to produce stronger and more productive plants while also teaching local farmers efficient and sustainable methods, purchasing beans from farms that use sustainable practices, and working with organizations to help tackle issues such as child labor, poor access to health care, and inadequate education. In doing so, they were not only able to increase their brand’s reputation for sustainability, but also ensured that their own supply chain would not be affected by a scarcity of resources brought on by unsustainable practices. Additionally, businesses with a great sustainability program perform better financially, with S&P 500 companies that have included sustainability in their strategy seeing an 18% higher ROI than those that don’t and companies with high ratings in ESG factors outperformed the market in medium and long-range terms. This can also be seen in share price, with an investment of $1 made at the beginning of 1993 in a value-weighted portfolio of high-sustainability companies would have grown to $22.60 by the end of 2010, compared to $15.40 for the portfolio of low-sustainability companies, according to studies conducted by the Carbon Disclosure Project.
Where to begin
While implementing small changes like recycling or switching to energy-efficient light bulbs are effective changes not to be discounted, in order for real change to occur sustainability must start from to top. The sustainability efforts of a business must align with its overall strategy, or they will often lack commitment or prioritization. A study conducted by Boston Consulting Group and MIT found that while 90% of executives find sustainability to be important, only 60% of companies incorporate sustainability into their strategy, and a scant 25% have it in their business model. Companies that stand out in sustainability must bridge the gap between knowing sustainability is an important aspect and taking action in implementing it. They must also go beyond simply complying with regulations and take a proactive approach to sustainability, rather than be forced to react to a crisis such as with Nike’s infamous abusive labor practices scandal in the 1990’s that led to public anger and boycotts. However, one can also learn from Nike’s struggle, as they were able to turn their image around by becoming a pioneer in establishing transparency, something that is vital for assessing and improving sustainability practices.
Sustainability is not only vital to the health of the planet, but also the business itself. The future of sustainable business lies in the creation of resilient business strategies that take sustainability as their foundation. By engaging doing so, a business is more than just a provider of products and services — it is a provider of true value to the world in which it operates.
Originally published at https://www.linkedin.com.
