We are often asked what “benefits” Sustainability can bring to business, so let’s explore answers to this question in this article by going through the Business Case for Sustainability.
First of all, a business case is “a type of decision-making tool used to determine the effects a particular decision will have on profitability.” (Businessdictionary.com). Therefore, the Business Case for Sustainability aims to showcase what Returns of Investment or benefits a company can get when investing in Sustainability. As we will see, the investment can have monetary returns, or returns with intangible value.
Disclaimer: there are many different frameworks to build the Business Case for Sustainability, however, it’s important to highlight that any framework needs to be adapted to the context and culture of an organization. There is no “one size fits all” solutionwhen it comes to activating Sustainability (and its ROI) within an organization.
The Business Case for Sustainability
In the following we will showcase the framework by Andrew Winston (Harvard Business Review, 2016) that we find particularly compelling for business, but of course there are other useful frameworks that we have listed at the bottom of this article (so keep on reading till the end 😉 ). Winston explores the ROI of Sustainability for business by asking the question “what happens with my money?” and suggests 4 streams of returns as a result of different types of Sustainability actions:
- Revenues – Make more money: Sustainability innovation and differentiation yields profits and increase in turnover.
- Intangibles – Ensure future money: Innovation and sustainability engagement ensures long term viability to earn money , as companies keep attracting and retaining important stakeholders such as customers, talents, investors. It’s not always easy or possible to put a monetary value on “intangible” returns. However, Winston highlights that “intangible” values have become mainstream in today’s business cases: for example S&P 500’s market capitalization value include 84% of intangible assets (versus only 17% in the mid-70ies).
- Costs – Spend less money: Relates to resource and process efficiency that typically reduces costs over time.
- Risks – More reliable money: Reducing risks and avoid costs helps building long term resilience and viability for the business.
The 4 streams are often interrelated: for example, being able to attract and retain talent, saves recruitment money; offering eco-innovative products and services go hand in hand with resource efficiency in the production and improved risk management in the supply chain. Overall, the combination of the above make the company more attractive and maintains its license to operate.
Real life examples
Revenues – Making more money thanks to sustainability
Engaging in sustainability through socially- and environmentally conscious products and services, has major benefits in terms of revenue growth and profits.
- A study from NYU Stern University (2019) reviewed consumption of sustainability-marketed products in 36 categories over a 5 year period. Key findings were that products marketed as sustainablewere driving 50.1% of product and category growthand outperformed their peers (non-sustainable products), across all categories, with a 5.6x faster growth.
- Another example is the outdoor fashion company Patagonia: its radical position as a corporate citizen with the “mission to save the planet” has attracted upscale, environmentally conscious consumers and enabled the company to quadruple its turnover in the last ten years to around $1 billion (Source: A. Winston, HBR, 2020).
Intangibles – Ensure future money thanks to sustainability
Employees and customers are increasingly demanding of responsible business behaviors when it comes to environmental and social impacts of business activities and want to be part of the positive change.
Especially younger generations of customers and (future) employees, who will live with the climate-related consequences of “business as usual”, are particularly concerned and therefore demanding towards companies:
- “A recent survey of 10,000 people aged 18-25 in 22 countries around the world, found that climate change was their most pressing concern.” (Source: Daily Telegraph UK, 2019)
- 76% of Millennials consider a company’s social and environmental commitments when deciding where to work and 64% won’t take a job if a potential employer doesn’t have strong corporate social responsibility (CSR) practices. (Source: 3BL Media, Cone Communications Millennial Employee Engagement Study, 2016)
- Gen Z are willing to pay up for sustainable brands: 73% would pay more (up to 10%) for sustainable items (Bloomberg, 2020).
Last but not least, sustainability drives brand loyalty and retention: according to a study of FleishmannHilllard (“What companies must do to stay relevant in the face of today’s issues”, 2018), 66% of U.S. consumers and 80% of U.K. consumers say they have stopped using certain products or services because the company’s response to an issue does not support their personal views.
Costs – spend less money
Resource and process efficiency is part of operational excellence and yields cost savings and optimizations. When an organization invests in saving natural resources (water, energy, emissions etc.) in their operations, the long-term impact is not only positive for the environment and people, but also for the company’s bottom line. These can be quick wins when companies start engaging in Sustainability.
The financial benefits of Unilever’s eco-efficiency program for example, enabled the company to avoid costs since 2008 (source: Unilever website):
- over €122 million through water efficiency across factories
- over €733 million through energy efficiency across factories
- around €223 million through material optimization (less material and waste production).
Another example from Google (source: Ellen McArthur Foundation): the company’s server management is based on Total Cost of Ownership with a circular approach to optimize the end of life of servers (maintenance, refurbishment/remanufacturing, redistribution/secondary market sales and recycling). This practice results in hundreds of millions of dollars per year in cost avoidance and a new revenue stream (sales of second hand server spare parts).
Reduce risks / more reliable money thanks to sustainability
Companies face many types of risks in their operations and markets, when it comes to future regulations and risks related to global sustainability issues (climate change, global warming, biodiversity loss, resource depletion, social issues etc.). Identifying and integrating these in the company’s risk management system is key to reduce future costs and losses related to these risks.
An example of an industry with high risks related to climate change is the insurance sector. Insurance companies face high risks related to global warming and climate change as we may face more frequent, extreme weather events (flooding, droughts, storms…).As weather-related insurance claims rise, insurance companies have more to pay out: an example is the Superstorm Sandy in New York with insurance losses estimated to have been around 30% higher because of the 20cm rise in sea level at the tip of Manhattan. (Source: Bank of England). Therefore, as climate change-related damages become more widespread the industry’s traditional calculus, which has allowed for affordable coverage of manageable risks, becomes obsolete (Source: A. Stone, Forbes).
According to the Deloitte analysis “How insurance companies can prepare for risk from climate change”, actions of insurance companies to mitigate climate risks (and avoid costs and losses) should include:
- Improving the assessment of climate risk through advanced analytics.
- Actively engaging with the climate science community to remain current about the latest data.
- Include climate risk assessment consistently in the companies’ risk management framework.
- Collaborate with public administration to develop climate-resilient public policies.
When it comes to the insurance companies’ investing business, responsible investing (impact investing, “greening” investments and divesting from fossil and carbon) can be cited as actions of fiduciary duty to reduce the risk of value loss, due also to increasingly strict regulations to mitigate carbon emissions and global warming.
Important note: When engaging in Sustainability a company should have an honest, transparent approach, integrating key stakeholders into the process and avoid greenwashing: actions should follow promises throughout the organization to avoid damage to the company’s image and reputation on the long term.
Frameworks to work on your Business Case for Sustainability
- Whiteboard Session: The Business Case for Sustainability, Andrew Winston, Harvard Business Review (https://hbr.org/video/5415413929001), framework described above.
- Profits with purpose: How organizing for sustainability can benefit the bottom line.
McKinsey. Framework based on their own research, it includes an introduction to the circular economy.
- Sustainability Advantage by Bob Willard. Free workbook available online.
What is your company doing to engage in sustainability and what benefits is it getting?
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