The Business Case for Sustainability

In 1970, the economist Milton Friedman stated: “The social responsibility of business is to increase its profits.” This is seen as the conventional model for many organisations. However, times are changing. Social and environmental pressures influence businesses to alter their infrastructures to limit environmental impact and change what Friedman saw as a business’ responsibility.

Sustainability within business is redefining that model, ensuring value is created for a new, wider perception of who the stakeholders are. Included in this group are employees, shareholders, supply chains, communities, society and the health of the planet.

But why pursue sustainability within business? What are the direct benefits? This blog explores the key advantages that make the business case for sustainability.

• Securing a Competitive Advantage
• Innovation, Market Trends & Proposed Legislation
• Decreased Risk Through Sustainability
  
  

A Sustainable Future Through Stakeholder Engagement

Sustainability can and does reflect strategic value. That value is derived first and foremost by the insight of key stakeholders from each group mentioned above. Creating a dialogue with these actors allows a business or organisation to remain at the forefront of current events, innovations, market trends and social and environmental realities.

Similarly, as we can see in the UK and beyond, sustainability within business is fast becoming legislation. The UK has promised to become net-zero in its carbon emissions by 2050, in a legally binding target passed in 2019. This is expected to produce up to two million ‘green collar' jobs and create exports from a low carbon economy valued at an estimated £170 billion.

Businesses need a good relationship with their stakeholders, which allows them to stay abreast of innovative ideas and current developments within their industry and broader markets.

Without these relationships and communication channels, there can be a wide margin of error for future developments regarding whether they align with proposed legislation or customer preferences. In one study on stakeholder engagement, it was written that this type of engagement “is not just corporate social responsibility but enlightened self-interest.”

Innovation, Market Trends & Legislation

Investing in sustainability as a core business function requires and creates innovation. When this is captured, businesses can match their work with the greener sensibilities of the average consumer and the increased legislation that will most likely be introduced following the UK’s move towards net-zero.

Sustainability as a core practice is already seen in many businesses today, with a report by IBM stating:

Nearly six in 10 consumers surveyed are willing to change their shopping habits to reduce environmental impact. Almost eight in 10 respondents indicate sustainability is essential for them. And for those who say it is very/extremely important, over 70 percent would pay a premium of 35 percent, on average, for sustainable and environmentally responsible brands.

This is a market trend that isn’t going to slow. Sustainable businesses are more popular with the next generation of buyers, with 73% of millennials willing to pay more for sustainable goods and 62% of Gen Z preferring to buy from sustainable brands. But to be sustainable requires several changes:

• Supply chain management: Choosing suppliers of equipment or raw materials that are sustainable themselves.
• Product/service redesign: How can a product or service be changed to reduce its impact? This includes thinking about what it takes to make or undertake and how it’s used.
• Facilities management: Can renewables power a production facility or office? Is energy-efficient equipment being used on-site? These are the kinds of questions that should be asked and answered when capturing sustainability on-premise.
• Waste recycling: An important part of both product redesign and facilities management. Each business should decrease its waste production and find greener alternatives when it comes to disposal.

All of these require and create innovation. While yes, it may take time and investment to become sustainable, there’s also the opportunity for new product ranges, new markets, new audiences and a better alignment between corporate strategy, consumer needs and government regulations.

Decreased Risk Through Sustainability

One of the most significant considerations and challenges for growing businesses is climate change, whether business leaders realise it or not. Climate change-induced natural disasters, conflict and water or resource scarcity - these are all business killers.

According to a report by CDP, within the next five years, companies around the world will face up to $120 billion in costs incurred by environmental risks. Suppliers face a financial impact of $1.26 trillion. These are significant impacts that will be felt across the board unless mitigation and resilience measures are invested in.

For example, we see the risks manifest in many industries today. In agriculture, climate change impacts how much food can be grown, decreasing crop yields in vulnerable areas and increasing the price of goods and imports.

Manufacturing is already experiencing water shortages. In 2004, Coca-Cola shut down one of its production plants in India due to water scarcity - which also harmed its reputation.

Traditional risks manifest in quick changes to markets, such as competition or breaches in regulation. The dangers of climate change to business take a long time to be felt, but they can affect multiple aspects of a business’ infrastructure when they do manifest. Managing these risks requires businesses to start planning how they can invest in sustainability to protect themselves from future risk.

There’s also the opportunity for financial benefits through increasingly in-demand products or services and potential cost savings through sustainability. Companies with effective environmental, social and governance (ESG) strategies tend to do better in today’s economy, with a report by McKinsey stating:

A strong ESG proposition helps companies tap new markets and expand into existing ones. When governing authorities trust corporate actors, they are more likely to award them the access, approvals and licenses that afford fresh growth opportunities.

The same report states ESG and sustainability inroads support a decrease in operational costs of up to 60% alongside creating efficiencies in resource use and waste disposal.

Sustainable companies are more likely to deliver significant increases in positive financial performance over time, with a study by the Centre for Sustainability and Excellence (CSE) finding 73% of companies with high ESG scores recorded increased revenues year upon year.

Similarly, in academic reviews carried out by Arabesque and the University of Oxford, it was concluded that good sustainability and ESG practices resulted in:

• A lowered cost of capital.
• Better operational performance.
• Improved stock price performance.

In all, the business case for sustainability is this; Sustainability, in the form of ESG practices and infrastructure redesign, can capture better financial performance, decreased risk of regulatory breaches, and more interest from consumers and investors. In fact, from 2016 to 2019, investments in sustainable businesses or projects grew by 34%, totalling around $30.7 trillion. 

In terms of business longevity and growth, sustainability is a key contender for securing long-term success in both national and international markets.