The Business Case for Sustainability

by Dan Dugal

The rules of business are changing.

In a 2010 article in Harvard Business Review entitled "The Sustainability Imperative," authors David Lubin and Daniel Esty named sustainability the next business megatrend, comparing it to two previous trends that altered the business landscape—quality in the 1970s and ‘80s, and information technology in the ‘90s. That same year, Accenture and the UN Global Compact released a report entitled "A New Era of Sustainability," in which 93 percent of global CEOs surveyed said that sustainability is important to the future success of their businesses.

Whether you call it "going green," "corporate social responsibility" or "sustainability," this megatrend owes its initial definition to Our Common Future, a report produced by the Brundtland Commission in 1987, which states: "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs." The three primary tenants of sustainability are economic growth, environmental protection and social equality, often referred to as the triple bottom line of planet, people and profit.

In business, sustainability is causing a paradigm shift away from the strict shareholder capitalism advanced by prominent leaders like Milton Friedman and Jack Welch. You might call this new paradigm stakeholder capitalism, in which value is measured and accrues to the triple bottom line. Increasingly, studies are showing that a focus on providing value to the triple bottom line is not a zero-sum game. That is to say that delivering value to environmental and societal stakeholders yields return to shareholders as well.

License to Operate

Social media and websites like change.org and sumofus.org have made it remarkably easy to rally hundreds of thousands of people to specific causes, from the obvious to the not-so-obvious. One recent example involves a group of women at a Walmart seafood supplier in Breaux Bridge, Louisiana, who went on strike to protest the working conditions in their own plant and other plants around the world. Their campaign, aided by nearly 100,000 signatories on sumofus.org, made such an uproar on Twitter and Facebook that Walmart suspended its contract with the supplier, triggering follow-up investigations by both non-governmental and governmental agencies.

The lesson here is two-fold. First, this is a public relations nightmare and a "potential-to-put-you-out-of-business" material risk for the supplier. Second, organizations are responsible for their supply chain all the way back to the harvested raw materials, whether they have visibility through the supply chain or not. In this story, the villain is not a well-recognized seafood producer; it's a Walmart supplier. Whether they are legally responsible or not, customers and other stakeholders are increasingly willing to hold organizations ethically responsible.

Alternatively, organizations that have demonstrated good social responsibility can gain access to markets more quickly than their rivals. It's not that they are fast-tracked through permitting and regulatory hurdles ahead of competitors; rather, they are less likely to be held up while special investigations or inquiries are completed. These companies can also pass through a downstream customer's supplier validation processes more easily. Large companies that have already begun to measure their own sustainability are quickly turning their attention to their supply chains, as they discover that much of their environmental impact lies not within their own processes, but in both upstream supply chains and downstream distribution networks. When customers come calling for sustainability metrics, a proactive company can get fast-tracked to the top of their supplier list.

Cost Reduction and Avoidance

Companies often begin their green journey by scrutinizing waste production and energy consumption. This is typically where it is easiest to calculate returns on projects and where those returns are high enough to pass typical gate reviews for managerial approval. The U.S. Postal Service avoided $400 million in energy costs from 2003 to 2010 through energy-efficiency programs that targeted facilities. IBM saved $43 million and avoided 175,000 metric tons of carbon dioxide emissions in 2010 alone from its energy conservation projects. Many companies are discovering that when they go looking to reduce their carbon footprint, they discover significant economic savings as well.

While energy efficiency is one source of savings, waste reduction and recycling is another. In many cases, waste hauled to a landfill can be separated and sold by recyclers on commodity markets, with a portion of those sales returned to the company. It's tough to get a better return on investment than turning an expense into a revenue stream.

Employee Engagement

It is not enough to attract top talent. Organizations must keep employees engaged and not lose their high performers to competitors. Despite high unemployment levels, the best and brightest talent still looks for more than a salary when seeking companies with which to partner in their careers.

A 2007 MonsterTRAK.com survey found that 92 percent of students and entry-level hires look for an environmentally-friendly company when job hunting. A more recent study conducted by Net Impact in 2012 reports that 45 percent of students would be willing to work for 15 percent less "for a job that makes a social or environmental impact." Over half (58 percent) would work for 15 percent less for an organization that held similar personal values. The ability to make a positive social or environmental impact was also rated highly by Net Impact respondents. Those who can make a difference were more satisfied with their jobs by a 2:1 ratio over those who don't have similar opportunities.

Companies that make a real commitment to sustainability see their workforces more engaged, more loyal, more satisfied with their jobs, and better positioned to contribute innovative ideas.

Brand Value

After the Deepwater Horizon explosion, BP stock took a dive from $59.88 to a low of $27.02 on June 25th. That's a loss of 55 percent, or $104 billion, of its market value in just 35 days. The value of BP's stock—and the value of its brand—have never fully recovered.

Obviously, the risks to brand value are real, but the benefits are also real. A UC Davis study released in January, “Going Green: Market Reaction to CSR Newswire Releases," showed that in the days following the voluntary disclosure of greenhouse gas emissions, the value of companies’ stock rose by 2.3 percent. Further, the study found that smaller companies with limited public information availability benefited the most. What's interesting is that the content of the disclosure—whether companies outperformed their rivals—was not taken into consideration. Only the act of disclosing the information itself was studied. It turns out that shareholders find "green disclosures" valuable regardless of green performance—for now.

Access to Capital

Investors are now evaluating companies based on environmental and corporate social responsibility measures. Dozens of sustainability indexes have been created to make investing in responsible companies easier, the most well known being the Dow Jones Sustainability Index. Growing numbers of nations—including scores of European countries and three out of four BRIC countries (Brazil, India and China)—and stock exchanges are requiring corporate social responsibility disclosures, in addition to financial disclosures, for publicly traded companies. For those companies that provide the data, Bloomberg makes sustainability disclosures available to 310,000 financial analysts on the same screen as their financial metrics.

Investors have good reason to look at sustainability performance. A report released earlier this year from MIT's Sloan Management Review entitled "Sustainability Nears a Tipping Point," concluded that "embracers" were three times more likely than other companies to realize additional profit from their sustainability initiatives. The report defines embracers as companies that: 1) have built a business case for sustainability; 2) view sustainability as being necessary to be competitive; and 3) have put sustainability permanently on the management agenda.

Conclusion

The benefits of creating a holistic sustainability strategy for your company are many: a stronger, more trusted brand; a more engaged workforce that drives innovation and cost reductions; lowered risk profiles; better access to capital; and overall improved financial performance. The rules of business are indeed changing. Just as those organizations that adapted to embrace previous megatrends gained competitive advantage, those that embrace sustainability are the ones most likely to flourish in the coming decades. iBi

Dan Dugal, MBA, is an independent consultant with more than 15 years of experience crafting solutions that support strategic business growth, improve business processes and reduce costs. He can be reached at dfdugal@gmail.com.

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