For almost three decades, sustainability’s definition has been extended to embody obligations of reducing CO2 emissions, of social responsibility or simply of the importance of protecting the environment. The sustainability’s current started almost 30 years ago and was named by John Elkington the “triple bottom line”, an essentially accounting process by which businesses track economic (profits), social (people) and environmental (planet) risks.
This framework, created as a tool to support sustainability targets, turned away from traditional measures of profits by focusing on comprehensive investment outcomes which are much more difficult to measure, yet extremely important. Basically, the main idea behind this concept states that a company can be managed in a both sustainable and profitable way. Throughout the time, companies have started becoming more disciplined about their sustainability agenda.
The importance of being environmental-friendly is not anymore disconnected from their main corporate strategies, but on the contrary, it is an important concern when it comes to their long-term business results.
The immediate need to tackle sustainability issues is straightforward: the world is extremely globalized and urbanized, there are constrained resources, and there is a fundamental problem of air and water pollution from industrial activities, meaning that the proportion of the challenge is definitely ample. However, despite the fact that businesses start to comprehend that it is more about sustainability than mitigating risks, it is still considered as a luxury investment. This statement is a consequence of the fact that managers are skeptical about placing sustainability in their business growth plans as they believe that its costs may exceed benefits. Nevertheless, business experience and academic research state something completely different: comprehensive sustainability frameworks result in revenue growth and tangible business returns, shortly in sustainable value creation.
According to the 2017 EY Global Institutional Survey, more than 80% of participants acknowledged the fact that ESG (environmental, social and governance) factors have crucial consequences on the long term financial performance of their businesses. These observations are stressed once again in 2018 in an annual letter addressed to the CEOs of the world’s largest companies by Laurence "Larry" Fink, Chairman and CEO of BlackRock:
“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate. Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.”
Finance and treasury terms fulfill a critical role in companies’ perception of the potential beneficial impact of sustainability programs. Research indicates that between 2006 and 2010 the top 100 sustainable firms encountered higher return on assets, sales growth, cash flows from operations, profit before taxation and return on assets in some industries compared to other industries. Moreover, during the recession in 2008, companies which included sustainability in their core strategies attained “above average” performance within the financial markets.
According to a McKinsey survey, nowadays there is an increased number of organizations implementing sustainability practices and reporting efforts into their strategies. Mounting evidence shows that focusing on reputation management it is not the only argument behind a company’s interest in sustainability. To be specific, a positive impact on business performance, cost savings, attracting customers and investors, engaging stakeholders or retaining employees are among the reasons which make the firms aware of the full potential of changing their business environment.
Historically, most of the business models focused on generating value essentially for shareholders, usually at the expense of the rest of stakeholders. However, throughout the time, sustainable practices redesigned the corporate environment also in terms of how much they engage other stakeholders such as employees, suppliers or the planet. Moreover, much of the sustainable value creation comes from the need to continually communicate and listen to the key stakeholders especially in order to be prepared for environmental, social, economic and regulatory changes.
Stakeholders’ collaboration within a company is therefore crucial to prevent conflicts and to disrupt a firm’s capacity to operate on both budget and schedule.
RETAINING AND ATTRACTING EMPLOYEES
Nowadays, the choice of a certain career is not driven anymore primarily by money, but rather by the way an employee’s engagement within the organization can make a difference. Research shows that employees’ disposition and attitude are better within companies which are embracing sustainable environmental policies, compared to other companies. It is widely recognized that a company surrounded by motivated employees will ensure a boost in productivity.
These sustainable practices intend first of all to improve the ESG performance, producing a positive impact on society and environment which can increase efficiency, trustworthiness and therefore productivity. Thus, in return, the company will see its HR statistics linked to retention, recruitment and motivation constantly improving. Studies prove that such a company can therefore decrease its annual quit rates by 3-3.5%.
In an increasingly uncertain world, companies try to improve their brands and establish their social ambitions in order to be able to face the competition. According to the 2017 KMPG Global CEO Outlook, brand reputation takes the third place among the main risks businesses have to face. At the same time reputation is forecasted to suffer a significant potential impact on growth in the upcoming years.
A bad reputation due to a negative impact on environment and society can have tragic consequences on a company. The Volkswagen’s diesel emissions scandal or the BP oil spill in the Gulf of Mexico remain some examples which inflicted considerable reputational damage taking into account that customers are becoming extremely critical about the importance of sustainability.
As mentioned before, customers are becoming more and more aware of the ecological footprint of the companies they are buying from. Nowadays, customers are opting for eco-friendly alternatives of their favorite products. As we gain a boost in innovation and technology, and as the demand for sustainable products is increasing, companies can thus be competitive in both quality and price.
According to a McKinsey global survey of 7,751 customers, 87% of the respondents are worried about the environmental and social impact of the products they purchase and 56% of them are ready to pay a premium for products manufactured in a sustainable way.
Still, companies state they are unconvinced about the customers’ interest in eco-friendly products as sometimes those products do not reach their true expectations and therefore their willingness-to-pay is affected.
Nevertheless, there is definitely a shift in the minds of consumers as they expect more transparency, clarity and integrity from the companies, especially when it comes to buying their products.
In operating and managing a business from an environmental risk perspective, companies can redefine products and services through innovation opportunities. Those redefined products can thus comply with the environmental guidelines, help in attracting customers, engaging employees, and in turn, also attracting the right investors.
Companies like Kellogg, General Motors or Microsoft are planning to rely mostly on renewables while gas and oil important companies such as Total are heavily investing in areas such as electric vehicles or energy storage.
Most investors are nowadays looking for sustainable companies to invest in. Some of them, however, are still having troubles in linking sustainability to business value.
Contrary to traditional forms of corporate risks, the environmental and social ones are long-term risks, sometimes out of a company’s control. Extreme weather events or civil conflicts can force an organization to improve its resilience to survive. Water, for example, was historically seen as a free raw material and thus used ineffectively. For instance, Coca-Cola was compelled in 2014 to shut down its plants in India, as a result of water shortages (due to their inefficient use of this raw material).
Many companies around the world see their supply chains affected by climate change and poor labor conditions. Important disruptions in the supply chain may affect the production as the latest depends on natural assets such as clean air or biodiversity. Managing these risks imply making smart decisions today and creating strategies which can adapt to the changing environment tomorrow. That being stated, a company has an interest in exploring the social and financial value of being environmentally responsible, mainly because of the risks it faces.
While the importance of sustainability is well-recognized, it has at the same time contributed to a fragmented landscape for firms, regulators and investors. The problem comes from the complexity of producing comparable sustainability reports.
When it comes to sustainability it is difficult for companies and investors to develop rules-based standards and as a result, sustainable companies have been reporting their performance by various standards or methodologies. Such a situation creates unfairness for these companies because they are sometimes incapable to prove their footprint on the environment, society and on the financial system. As a result, companies must learn how to work together to standardize the sustainability reporting, mostly in order to be capable to reward the right economic and social actors of the business framework.
Through this article, it has been highlighted the fact that sustainability efforts result in a positive impact on an organization from diverse perspectives, among which the financial one. That is, the sustainability approach it is not anymore a “nice to have” or a very faraway decision, but rather an element that should be embraced in the daily operations of any company.
As firms are ready to act solely in case they see the gains from sustainability, they are constrained to discover innovative ways to efficiently measure it. Once they are sure about the business value that sustainability brings within their organizations, they will be prepared to develop a whole new mindset among the broad spectrum of decision-making and align activities and objectives across different departments.
When making business decisions and identifying opportunities, companies must consider the value creation for all the stakeholders such as customers, employees, investors, society and planet. By failing to do so, they will face significant risks and be less effective than their competitors in such an uncertain business environment.
Business Consultant at AION Consulting