Do Sustainability Efforts Make Companies Attractive to Everyone?

Comapnies are coming to realize the financial benefits of sustainability and see it as an investment, not a cost.

Updated14 Dec 2019, 11:34 AM IST
Books
6 min read

In 2015, MIT Sloan Management Review and Boston Consulting Group (BCG) polled 3,000 managers and investors from all over the world. They found that three-quarters of senior executives at investment houses said a company’s sustainability performance was something they considered when making investment decisions. Interestingly, only 60 percent of company executives said investors thought that way, showing a marked and unsettling disconnect between the worlds of investment and corporations.

In 2017, a stunning 90 percent of executives said they saw sustainability as important, but only 60 percent of companies had a sustainability strategy. Moreover, 86 percent of respondents agreed that boards should play a strong role in their company’s sustainability efforts, but only 48 percent said their CEOs were engaged, and fewer (30 percent) agreed that their sustainability efforts had strong board-level oversight. And while 60 percent of companies had a sustainability strategy, only 25 percent had developed a clear business case for their sustainability efforts.

CB Bhattacharya’s book Small Actions, Big Difference
CB Bhattacharya’s book Small Actions, Big Difference
(Photo: CB Bhattacharya)

Financial Benefits of Sustainability

Stakeholders are waking up to the problems of short-term profits and the possible benefits of long-term value. There are many examples of the differences this is beginning to make. Unilever, for example, stopped reporting quarterly profits shortly after Paul Polman took over as CEO in 2009. And in 2016, the insurance company AXA Group sold all its tobacco-industry assets in a deliberate attempt to burnish its image as a “responsible health insurer and investor.” Step by step, financially driven short-termism is being pushed into retreat.

One reason for this is that more and more executives are coming to realize the financial benefits of sustainability – companies are coming to see it as an investment, not a cost. In fact, sustainability drives profits in two ways, directly and indirectly. Direct bottom-line effects are usually seen quickly through savings, be it in the form of lower electricity consumption, fewer raw material purchases, or less waste accumulation. These are often low-hanging fruits that can’t be picked forever. But the savings they produce are real and ongoing, and their effect is an important encouragement to any employee still skeptical about sustainability.

The indirect effects are no less real. Done right, sustainability can increase brand value – and brand value, in consequence, can drive sales.

Employees and other stakeholder groups reward sustainability with increased loyalty. My research with Daniel Korschun and Scott Swain has also shown tangible effects on sales if both frontline salespeople and customers believe in sustainability, allowing them to connect over the company’s efforts. This bonding with customers drives sales – especially if customers and salespeople also know management is behind and fully committed to sustainability.

Better Share-Market Performance

As Andrew Savitz and Karl Weber noted in 2014, the companies in the Dow Jones Sustainability Index and the FTSE4Good indexes saw better share-price performance than their counterparts in broader indexes; and the companies that had signed up as members to the World Business Council for Sustainable Development outperformed the stock exchanges on which they were listed by 15–25 percent over the previous three years.

Moreover, a recent survey of business leaders by The Economist found that less than four percent of managers surveyed considered being socially and environmentally responsible to be a “waste of time and money.”

You better believe it – sustainability helps the bottom line.

Similarly, in 2016, The Guardian reported about the sustainability efforts of the retailer Marks & Spencer. The article said that at the time of the plan’s launch in 2007, the company expected it to cost £40m. “Five years later, the company published a report detailing the key lessons from executing that plan and found that, instead of suffering losses, the changes it made, such as reducing packaging materials and food waste, resulted in a GBP 105 million net business benefit in 2012, which climbed to GBP 160 million in 2015.”

How ‘Impact Investing’ is Entering Mainstream

Investors too are beginning to take note of long-term value creation. Pension funds, sovereign wealth funds, and other asset owners with longer-term horizons have for a number of years been pressing companies to better manage environmental and social issues. And the shorter-term investors recently started to join in. Blackrock, with over $6 trillion in asset management, has pushed the investment community to get serious about climate change. Larry Fink, Blackrock’s CEO, in April 2018 sent a letter to S&P 500 CEOs suggesting they invest more for the long term and stop put- ting so much money into stock buybacks and dividends – a $1 trillion payout for investors that year.

Blackrock also created a new mutual fund that takes companies’ environ- mental, social, and governance criteria – so-called ESG-criteria – into view. And there is other evidence from other organizations in the financial services arena. At Morgan Stanley, an analyst raised the stock price target for companies – in this case of three apparel giants, Nike, Hanesbrands, and VF Corporation – based on how well they were managing ESG issues. Around the same time, the fossil fuel divestment movement started growing quickly, bringing together universities, cities, and other institutions. Lastly, Bill Gates persuaded some friends to create the largest clean energy fund in history to invest in R&D. So-called “impact investing” is moving out of the niche world and into the mainstream.

The Era of ‘Clean Label’

Signs of social and environmental awareness are also becoming apparent among consumers who finally seem to be showing interest in sustainable products. Blackrock’s new fund was specifically aimed at millennials, the group of workers and consumers who are demanding more environmental and socially sound products. A Morgan Stanley report found that millennials are twice as likely as other consumers to buy from brands with good management of environmental and social issues, and twice as likely to check product packaging for sustainability performance. For packaged goods and food in particular, it’s the era of what many call the “clean label.”

More and more people want to know how the things they buy are sourced, made, and delivered. There’s real money to be made by companies who respond to this craving for value.

Mega retailer Target, for example, assesses thousands of products it sells and scores them on sustainability performance. For a segment of Target’s highest-ranked products, sold under the “Made to Matter” banner, sales are growing much faster than regular products – they are expected to have totaled $1 billion in sales in 2018. And Walmart took a fascinating step, trying to help choosy online customers by labeling thousands of its more sustainable products “Made by a Sustainability Leader.”

Business Are Appreciating Financial Benefits of Sustainability

“I think that many of the investments that we do make, or we have made, also make good business sense,” an executive at a large drinks manufacturer told me. “If you were using less electricity, if you are using less water, if you are managing to send less waste to landfill, if you are lightweight in your bottles – there is a strong economic business case for doing that.” But even big investments in things like renewable energy could pay off remarkably quickly, he added.

“Certainly we’ve had investments that have had longer pay back periods, that have had lower rates of return. Traditionally we may have not even got them through the first hurdle of the investment process. But because we’ve added reputation on, we’ve been able to look at them slightly differently – investments in solar panels for example. We know that they’re the right thing to do reputationally.”

There are more details about the financial upsides of sustainability throughout this book and particularly in Chapter 7. For the moment, I just want to underline that there is a discernible shift in business toward appreciating these financial benefits, be it through cost reduction, sales boosts, reputation boosts, risk reduction, sustainable innovation, or employee retention or attraction.

(This is an excerpt from Prof. CB Bhattacharya’s book Small Actions, Big Difference. The author is the H. J. Zoffer Chair in Sustainability and Ethics at the Katz Graduate School of Business, University of Pittsburgh, Pennsylvania. He is a world-renowned expert in business strategy innovation aimed at increasing both business and social value. He is co-author of Leveraging Corporate Responsibility: The Stakeholder Route to Maximizing Business and Social Value and co-editor of Global Challenges in Responsible Business.)

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Published: 14 Dec 2019, 11:31 AM IST
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