Unlocking the Value of Sustainability
In celebration of World Environment Day on 5 June Community Business have enlisted the services of a sustainability expert to author our IMPACTxAsia thought leadership piece and explore the social and financial value of engaging in sustainable business practices. Sustainability encompasses environmental, social and governance elements. While our work at Community Business encompasses the social and governance elements of sustainability, we acknowledge the need for responsible businesses to embrace sustainable environmental policies. We hope that, this World Environment Day, we can re-invigorate a discussion around holistic sustainable business and encourage responsible leadership throughout Asia. Our RBN Network acts as a thought incubator for responsible business in Asia and we host regular events to facilitate knowledge sharing and learning on responsible business and corporate social responsibility.
Unlocking the Value of Sustainability
In an increasingly volatile and uncertain world, organisations globally are being confronted with a complex cocktail of social, environmental, technological and market challenges. The need to address resulting sustainability issues as the world becomes more populous, prosperous and urbanised is well-recognised and the scale of the challenge is vast.
The fact that it’s the right thing to do is clear; however the reasons why investment in sustainability reaps benefits to business sometimes evades us and sustainability often remains seen as a luxury investment or a public relations device. To dispel that myth, and in celebration of World Environment Day on 5 June, we thought it useful to summarise, with concrete examples and data, the reasons why investment in sustainability does in fact create value and contribute to the bottom line.
Before running through some of the key reasons to take sustainability seriously, as the old saying goes: the proof is in the pudding, and therefore a few words on the financial performance of sustainable companies. An increasing number of studies show that sustainability programs are not only correlated with strong financial performance, but also have a role in creating it. An overarching study by Deutsche Bank, for example, evaluated 56 different studies which concluded that companies with high ratings for environmental, social, and governance (ESG) factors have a lower cost of debt and equity and 89% of the studies show that such companies outperform the market in the medium (three to five years) and long (five to ten years) term.
A Boston Consulting Group study released in October 2017 noted that companies going the extra mile in ESG areas record higher valuation multiples and margins than companies with less of a focus in ESG areas.
Source: Calvert, 2017
As a result, investors are sitting up and paying attention. According to the 2017 EY Global Institutional Investor Survey, more than 80% of respondents agreed that ESG issues have real and quantifiable impacts over the long term and also that CEOs should be laying out long-term board-reviewed strategies each year. These statements were based remarks made in the February 2016 memo from Laurence Fink, Chairman and CEO of BlackRock, to the leadership of the world’s largest companies, which was further echoed in his 2018 memo stating:
"To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society...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”.
- Larry Fink, Chairman & CEO, BlackRock
Gone are the days that sustainable products came only at exorbitant prices and didn’t live up to the usability and quality of their non eco-friendly alternatives (e.g. expensive natural household cleaners that didn’t really work). Nowadays technology and innovation has meant that sustainable products can be competitive in terms of quality and price.
Parallel to this, there has been a shift in the minds of today’s consumers: today’s consumer expects the companies that they buy products and services from to be responsible. According a McKinsey global survey of 7,751 consumers, 87 percent of customers are concerned about the environmental and social impacts of the products they buy and 54 percent are willing to pay a premium for products that are sustainably manufactured. In another survey by Globescan, nearly two-thirds of consumers across six international markets believe they “have a responsibility to purchase products that are good for the environment and society”, which therefore means that sustainability information has a significant positive impact in a consumers’ purchase decision making.
In assessing a business' environmental and social impacts, as well as emerging trends, a sustainable business may identify new opportunities in redefining or pioneering new products and services to meet environmental standards or social needs. As sustainable companies put emphasis on stakeholder engagement and collaboration across company departments and supply chains, this may further increase business innovation.
Some noteworthy examples of where sustainability creates new business opportunities:
Last month, Unilever revealed its fourth consecutive year of growth for its ‘sustainable living’ brands, which delivered 70% of its turnover growth and grew 46 percent faster than the rest of the business.
Nike embedded sustainability into its product development process and thus creating the Flyknit line, the $1billion dollar success story which served not only to cause Nike’s net income to spike by 40% in the three months after it was released but also helped to reduce waste by 80% compared with regular cut and sew footwear.
GE’s Ecomagination division, which delivers resource efficient and clean tech products to consumers, delivered $38 billion in revenue to the company in 2016, and a total of $270 billion in revenue since 2005.
IKEA’s Sustainable Life at Home range - items which enable customers to save energy, water, waste and money - has generated €1.7 billion for the company according to it’s latest sustainability report.
Significant cost reductions can result through efficient management of energy and water, as well as minimising waste. These reductions are directly seen through lower utilities and waste bills, in addition to reduced purchasing of unnecessary items as a result of efficient planning. Through its resource efficiency program, Dow Chemical has saved more than $9.8billion from reduced energy consumption and wastewater in its manufacturing processes. By streamlining its fleet efficiency from 2005-2015, Wal-Mart managed to improve fuel efficiency by 87%, a resulting reduction of 15,000 metric tons of CO2 emissions, and cost savings of $11million.
Risk and Resilience
Businesses need to have high levels of resilience in order to survive in our increasingly complex world. Sustainable business strategies can help an organisation to identify social and environmental impacts and trends, which can often mean splitting from the norm of short-termism to taking a long-term view. This helps to improve the resilience of a business in case of sudden operational changes such as liabilities resulting from extreme weather events or the mitigation of potential cost increases that may result from local resource scarcity.
Water, for example, has historically been considered a free raw material and therefore used inefficiently. As water scarcity increases around the world however, companies are beginning to feel the burn of higher costs and difficulties in supply. In 2014 for example, Coca-Cola was forced to shut down one of its plants in India due to water shortages (also as a result of community protesting that the company was using too much water).
This also has important implications for supply chain risk management. In the latest Carbon Disclosure Project Supply Chain Report, in which 10,000 supplier companies were asked on behalf of their buying partner organisations, 76% identified inherent climate change risks that have the potential to generate a substantive change in their business. These risks are particularly felt by companies in the agriculture, food and beverage sectors, where the impact of climate change can alter growing seasons, increase pests and disease and decrease crop yields. According to a report from the Food and Agriculture Organization of the United Nations, between 2005-2015, natural disasters cost the agricultural sectors of developing country economies a staggering $96billion in damaged or lost crop and livestock production.
Employee Attraction and Retention
Having a clear, shared organisational purpose beyond profit has become a recognised way to creating an engaged workforce. Now more than ever, people want more out of work than money; they want meaning and purpose from their jobs and to be able to see how their contribution to the workplace makes a difference. This becomes all the more prevalent when taking into account millennials who are reported to be "the most socially conscious generation since the 1960s” and who are willing to take a pay cut to work for a socially responsible company.
This is where sustainability practices come in to help to bridge the tension people feel between their personal values and their work by providing a higher purpose. Well-known for his outspoken and unwavering commitment to sustainability, Unilever CEO, Paul Polman, believes that central to creating a vibrant and sustainable company, is to find ways to get all employees - from top to bottom - engaged in the company’s sustainability efforts.
One study found that employee morale was 55% better in companies with strong sustainability programs, compared to those with poor ones. It is commonly accepted that better morale and motivation translates into reduced absenteeism and improved productivity. Another study showed that organisations that adopted environmental management and product standards experienced a 16% increase in productivity over firms that did not adopt environmental practices.
Corporate responsibility performance also positively impacts retention rates. Studies show that firms with greater corporate responsibility performance can reduce average turnover over time by 25-50% as well as reduce annual quit rates by 3 percent to 3.5 percent, which amounts to a 25‐30 percent reduction, as compared to those without sustainability programs.
Brand and Reputation
According to the 2017 KPMG Global CEO Outlook, reputation and brand is the third most important risk to business, as well as having the second greatest potential impact on growth in coming years. Further, a bad reputation costs a company at least 10% more per hiring, translating to as much as $7.6 million in additional wages to make up for a poor reputation in a company with 10,000 employees. Harmful association to a brand due to negative social or environmental impact can have catastrophic effects on reputation and consequently business value. The BP oil spill in the Gulf of Mexico, the sexual harassment cases at Uber and the emissions scandal at VW are some examples to name but a few.
Brands are increasingly under pressure to show they are creating shared value and demonstrating social purpose, with several companies declaring bold ambitions such as Nike’s goal to “double our business, with half the impact” and Unliever’s three main goals to: improve health and well-being for more than 1 billion people; reduce environmental impact by half; and enhance livelihoods for millions.
Although brands are under the spotlight and encouraged to prove they are doing more, the use of weak or unsubstantiated claims, also referred to as “green washing” can similarly lead to extensive reputational damage as consumers become more knowledgeable and critical in their views.
One important driver not discussed is that of growing compliance legislating companies to take action on sustainability. This is growing globally and will only rise. However this begs the question: will companies wait for legislation to “surprise” them or get ahead of the curve and benefit from their proactive stance?
Embedded sustainability efforts clearly result in a positive impact on business performance, as a final thought perhaps we may refer to our efforts not as a corporate responsibility, but rather as corporate opportunity.
About the Author: Written on behalf of Community Business by Rebecca Donnellan, Director of Sustainability at MGM MACAU