Why your business needs to be sustainable - now!
Maximizing shareholder return is the focus of many companies, but what about their role in society and how they impact the environment? We examine why a sustainable business is good for profit – and the world.
“An organization should care about sustainability – environmental, social and economic – because it can drive competitive advantage, license to operate, employee engagement, risk reduction, and a variety of other things, as well as add value to society,” said Tensie Whelan, Director of the Center for Sustainable Business at New York University’s Stern School of Business.
There’s a clear business case for sustainability. The societal benefits of a product or service, business processes and environmental impact, for example, or the total societal impact (TSI), has increasingly become entwined with business models. But it’s not without benefit, since embracing sustainability often results in higher valuations and margin premiums.
Sustainability is not ‘one size fits all’ and needs to be tailored for every company, no matter the industry.
Some consumers are very educated and look for products with certain requirements and green labelling standards.
“The drivers for why companies start to look into [sustainability] are sometimes regulations that they need to comply with and demonstrate that their practices are compliant.
“Sometimes it’s because of market pressure – there are many segments where consumers are very educated and look for products with certain requirements and green labelling standards – and sometimes, it’s driven based on financials,” said Dr. Nabil Nasr, Associate Provost and Director of the Golisano Institute for Sustainability at the Rochester Institute of Technology.
While drivers of financial performance are different for every company, the results of operational efficiencies are the same, and that’s a boost to the bottom line when you quantify the impact.
Explore business models
Sustainability leads to innovation, and accountants are the enablers.
Recycling and remanufacturing, for example, are big opportunities for many companies. Single-use products, like toner cartridges and disposable cameras, or complex machinery, such as copiers, automobile parts and aircraft engines, can be refurbished, upgraded and resold multiple times.
“A lot of companies realize that it’s really smart to [remanufacture] because when you have total visibility of your products throughout the lifecycle, you bring a lot of value that companies didn’t think of before, either through reclamation of the material, remanufacturing or refurbishing work,” said Nabil.
Every time you bring a product back, you should expect to make margins on that product.
“To make the business case, when you sell a product that you know is coming back for a few years, you’re making your profit multiple times instead of waiting for your machine to meet end of life – that’s a change of paradigm."
Accountants are a major part of building this business case because of how costs are calculated, and the business model reflects reused and refreshed equipment or products.
While the conventional model is to build a product and assess how many units of that product will sell, this new model incorporates future profits from that same product being sold many times. “Every time you bring a product back, you should expect to make margins on that product,” said Nabil. “That might require doing some design changes to make it easier to remanufacture that product when it comes back, which might cost more in the beginning.”
Know the issues
Materiality matrices look at key environmental, social and governance (ESG) issues for an industry and stakeholders and map those to areas requiring management. For example, in the case of a manufacturing company, once you identify that “you have factories that consume a lot of water, and are based in regions with high water risk, you can start to manage for that financially by looking at how you reduce water consumption and the financial argument for that,” said Tensie.
The analysis goes beyond the cost of water though. If a company has new water-saving technology, there can be an effect on the cost of buying and treating water at the end of a process. Also, if water is cooled and heated while moved around a factory, which requires energy, then reducing water consumption also reduces energy costs.
Since companies come last in a water crisis, investing in water saving technology mitigates this risk.
Sometimes, companies are shut down because of water scarcity issues. Days of lost production from no water need to be included in the plan, said Tensie, and there’s a dollar amount associated with this potential risk from lost sales, staff wages but no production, etc. Since companies come last in a water crisis, investing in water saving technology mitigates this risk.
Be proactively sustainable
In terms of return on investment (ROI), both tangible and intangible factors can justify a sustainability investment. Engaging employees through specialized volunteer programs that utilize specific skillsets, for example, help maintain retention rates. Employees also like working for companies that are conscious about the environment.
Those companies that are proactive often see the biggest benefit.
Many sustainable investments have upfront costs, whether that’s investing in new processes or having the right experts and the proper metrics in place. “As soon as the company gets into a steady state, there’s always a significant or reasonable ROI that’s easy for people to track if everything is done proactively,” said Nabil. Whatever the driver for that investment, having a good ROI is challenging for companies that rush to make changes.
Every company can figure out how to do something in a more sustainable way, and those companies that are proactive often see the biggest benefit. “If you do this proactively, you can do this on your own time and make sure you’re planning and understanding where you can get the biggest value,” said Nabil.
About the author
Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Consumers Digest, Entrepreneur.com, FOXBusiness.com, Global Finance and InstitutionalInvestor.com.