Climate Change is one of the most pressing issues faced by our plant at the moment. To fight it, we must all do our part, making sure we focus on more sustainable practices that preserve the environment. However, those with bigger and more resources have the power to do much more. These include corporations. Large corporations have often been blamed for contributing the most to Climate Change due to their inefficient and resource-consuming manufacturing processes, and other practices in general which are said to be motivated by profit rather than social benefit. However, many businesses are now moving towards corporate sustainability, making sure their practices are much more eco-friendly.
Moreover, smaller businesses are now concerned with sustainable practices as well, identifying it as a necessity for modern-day business operations and success. So what is sustainability in business? How does one achieve it? What are its benefits? Let’s take a deeper look into the subject and identify how and why it has turned into a necessity for contemporary businesses.
What is Corporate Sustainability?
Today’s business executives have a host of problems at hand. Another one that they now have to focus on is sustainable business practices. Sustainable practices are those that “1) at minimum do not harm people or the planet and at best create value for stakeholders and 2) focus on improving environmental, social, and governance (ESG) performance in the areas in which the company or brand has a material environmental or social impact (such as in their operations, value chain, or customers)”. Combining these two factors leads to environmental sustainability along with profitability in business. However, many people have the misconception that one can not co-exist with the other – Striving for sustainability can not lead to profitability. However, this notion can be disproved by the various benefits that corporate sustainability can accrue for business.
Benefits of Sustainability in Business
The modern-day business ecosystem is evolving, with Sustainable businesses playing a huge role. Business models are now being designed to provide value to all stakeholders. These include customers, shareholders, workers, and civil society. Mark Kramer and Micheal Porter, two very famous Harvard professors, came up with the idea of “shared value generation”. They argued that businesses can create economic benefit and value by focusing on solving social problems or by creating sustainable practices in business operations. The increased value can provide various benefits to the business, the industry it operates in, and the environment it exists in. Here are a few examples of the benefits of Sustainability in business:
1. Encourage Innovation
Environmental degradation has been an age-old process, and coming up with new sustainable practices requires one to innovate. Businesses have to redesign products and their processes to meet environmental sustainability standards. However, this process of innovation is one that is ongoing and constantly evolving according to consumer needs and wants. FMCG companies like Procter and Gamble recognized the increasing demand for sustainable products by consumers. Hence, they conducted a life cycle assessment of its products. They found that U.S. households spend 3% of annual electricity budgets on heating water to wash clothes. Hence, in 2005, they launched a U.S. and European line of cold-water detergents that require 50% less energy than warm water washing.
There are numerous other examples, like Mercedes making car mats through recycled plastic, Addidas making football shows out of recycled material, and so on. These companies had to invest and innovate in order to come up with new ways to make sure their products, services, and processes were environment friendly. This innovation is unlikely to halt any time soon, with a growing focus on the sustainable development of businesses and economies throughout the world.
2. Financial Stability
This might seem like the most unlikely benefit, but it is true. As mentioned earlier, sustainable practices foster innovation and drive shareholder satisfaction, which translates into higher profitability. Another huge factor that executives fail to take into account is the cost-savings that will result from environmentally friendly practices. These practices have made operations more efficient. This operational efficiency can be due to better waste and resource management, reducing waste and hence the cost of disposing of it. One study showed that corporations get an average internal rate of return of 27% to 80% on their low carbon investments.
Moreover, investors are now able to track the high performers on ESG (environmental, social, and governance factors) and are correlating better financial performance with better ESG performance. As awareness regarding environmental sustainability increases, investor confidence and will improve and with it capital availability. Another example of cost savings can be in the supply chain and logistics of the company. This will also give an opportunity to the business to create value in each stage of the value chain, from sustainable suppliers to efficient transportation. Wal-Mart, for example, aimed to double fleet efficiency between 2005 and 2015 through better routing, truck loading, driver training, and advanced technologies. By the end of 2014, they had improved fuel efficiency by approximately 87% compared to the 2005 baseline.
The ongoing cycle of the benefits accrued by sustainable practices will all contribute towards improving financial performance.
3. Customer Satisfaction and Loyalty
As awareness about sustainability increases, consumers are shifting their tastes. We are now witnessing more environmentally conscious users, with a focus on sustainable businesses. Moreover, brands that focus on sustainability will surely create loyalty among customers who are environmentally conscious. As a matter of fact, one study claimed that among various factors researched, the news coverage regarding environmental and social responsibility was the only significant factor that affected consumers’ evaluation of a company and intention to buy. Moreover, many consumers consider it their moral duty to buy sustainable products or products from companies with sustainable practices.
4. Improved Brand equity
Another benefit of sustainability in business is improved Brand Equity. While this should not be the motive behind conducting these activities, it certainly is one of the benefits. As businesses pursue sustainability, they can market their efforts to gain more goodwill from the public. Moreover, they may want to raise awareness regarding the subject among other similar businesses. During this process, consumers start to associate the brand with their sustainable products and practices, bettering brand equity, and creating a unique identity.
5. Easier Access to Capital (Human and Financial)
Corporate Sustainability allows companies to attract Human and financial capital with more ease. As mentioned before, investors are now focusing more on what companies do rather than how they perform. Therefore, they are shifting focus on investing in businesses focusing on sustainability.
Moreover, employees will be intrinsically motivated by working for a company that is socially responsible. Not only this, but the business will be able to attract top talent who want to be a part of something bigger than themselves. Research has found that contemporary workers are focusing more on “mission, purpose, and work-life balance”. Companies that invest in sustainability initiatives tend to create sought-after culture and engagement. This is because of company strategy focusing more on purpose and providing value to society.
Corporate Social Responsibility Programs: A step in the right direction?
In a bid to be more sustainable, many large corporations have launched Corporate Social Responsibility (CSR) campaigns. These are sole campaigns focused on socially responsible activities for the companies. Some of these programs are forced due to the regulations that many companies face about sustainability. However, are these programs really a bid to do better, or is it just another publicity stunt?
As we can see, sustainability efforts are no longer an option for businesses. While they have become a necessity, it is not exactly a bad thing. Business Sustainability efforts can lead to value generation and accrue financial benefits to the firm as well. Let us know your thoughts on sustainability in the comments below!