Exploring the link between sustainability and profitability at corporations
While there are many benefits from implementing ESG programs, including brand reputation, cost efficiencies, increased employee engagement and the ability to attract investors, the costs of ESG programs and disclosures are undeniable. In 2018, Fortune 500 companies collectively spent $20 billion on CSR activities. A recent survey found that on average corporate issuers are spending $533,000 annually on climate-related disclosure.
Achieving the goal of keeping global warming below +1.5 °C requires widespread adoption of sustainability practices. A direct connection illustrating the financial benefits of sustainability programs may help accelerate this adoption.
Is there a way to quantify the impact of sustainability programs on the bottom line?
Is sustainability just an altruistic project with a cost burden that a company undertakes for brand reputation or is there a link between sustainability and profitability that makes the cost an investment in future returns?
To answer these questions, we can study the efforts of corporations that have implemented sustainability programs.
Creating Value from Sustainability Programs
A survey of companies that have successfully created value from their sustainability programs reveals that they make sustainability a strategic priority and a part of company culture. They incorporate sustainability in product development and evaluate suppliers with the same lens. They also manage facilities and transportation networks sustainably.
For example, Nike’s vision and business goals are to build the best running shoes in the world to serve athletes. They have approached their vision and goals with an aggregated view – producing the best running shoe while addressing the threat of climate change. They were able to achieve this goal by innovating – designing products with circularity in mind, giving new life to worn footwear and apparel, and collaborating across the industry to reduce their collective footprint. This required extending their sustainable approach to manufacturing, offices, stores, and distribution centers.
As they state in their FY2021 Impact report:
“ A more sustainable and circular future requires designing waste out of products from the start, optimizing manufacturing processes for maximum material efficiency, and then managing manufacturing material, end-of-life product and packaging via circular systems to preserve, recover, renew and regenerate its physical utility and economic value for society and the planet – now and for future generations. This requires an integrated, holistic approach where internal teams and external suppliers work together to continuously optimize the whole system.”
As demonstrated by the Nike example, being able to capitalize on a strategic sustainability program requires connecting sustainability efforts with issues and activities that are material to the business. Companies need to understand and articulate the impact of sustainability on their organization and create a robust business case that is then integrated throughout the business. In addition, it requires collaboration with value chains to understand the cost model to offer the new product profitably. It requires leadership backing and a mindset where ESG factors are viewed as sources of opportunities rather than issues to be addressed.
Quantifying the Impacts of a Sustainability Program
Sustainability topics affect multiple functions and are integrated into many departments. For example, human resources use social impact initiatives to improve employee productivity, recruiting, and retention, and facilities use green energy and HVAC improvements to lower the costs of energy bills. Innovative new sustainable products and services can lead to new revenue streams, with increased margins, attract new customer segments, and can be used by marketing to increase customer loyalty and brand reputation.
Applying a monetary value is easier for tangible benefits. Monetary values for intangible benefits like improved employee recruiting and retention require capturing data for hiring costs before and after the implementation of a sustainability program.
The ROSI Framework from NYU Stern Center for Sustainable Business lays out a process for quantifying the monetary benefits of sustainability activities. The process involves:
- Identifying the changes in business practice that are a result of a sustainability program.
- Identifying the benefits of the changes.
- Quantifying the benefit so that it can be measured and tracked.
- Applying a monetary value to the quantified benefit.
For example, applying the ROSI Framework helped Reformation, an apparel company, measure the intangible benefits derived from their thredUP partnership. The collaboration helped realize efficient ways to monetize sustainability within their business model, and to structure data collection processes to capture relevant information. The ROSI collaboration uncovered over $1.9 million in financial benefits directly related to the partnership program in 2019.
By quantifying and tracking the benefits and their monetary value corporations can compute returns on sustainability investments.
Connecting Sustainability Performance to Financial Performance
When you have a business case where profits exceed the costs, when trade-offs from doing well and doing good disappear, it is easier to get all stakeholders on board and incorporate the sustainability agenda into the larger business agenda. Investors also prefer sustainability programs that are grounded in strong economics.
A study from BCG showed that sustainability-related announcements included some or all of the seven elements associated with a strong business case created financial value for the corporations. The elements were: material to the company, material to the sector, connected to the core, clear on funding, tangible goals, third-party verified and drives value creation, with the value creation element being the post impactful element.
Today a good number of corporations have a sustainability project in place and disclose performance around their ESG KPIs in sustainability reports. Companies have also always disclosed financial performance in quarterly and annual reports. While there is an anecdotal correlation, a direct connection between sustainability goals and their impact on financial performance based on data is still missing. This is because it is hard to create attribution models between sustainability initiatives and revenue, and companies have yet to collect granular data that will help make that connection. Frameworks like the ROSI Framework are trying to provide these connections.
Most companies realize the importance of sustainability programs and recognize their benefits in cost savings, attracting investors, recruiting employees, mitigating climate risks, and even new revenue opportunities. As these programs get more mature and holistic, hopefully, we will see a more rigorous approach to quantifying the link between sustainability and profitability, solidifying the case that sustainability investments are good for the planet and good for profit.
