Sustainable Business is Good Business
The overwhelming majority of large companies around the world incorporate sustainable business practices, whether they call if sustainability, corporate social responsibility (CSR) or environmental, social, and governance (ESG) performance. They tend to be motivated by a range of business benefits:
- Improved financial performance;
- Improved risk management, from cybersecurity to the supply chain;
- Cost reductions due to efficiency improvements;
- Pathway to innovation in new products/services;
- Improved ability to attract and retain customers;
- Better ability to attract and engage employees; and
- Enhanced goodwill as a positive corporate citizen.
Likewise, the communities in which sustainable businesses operate benefit from good local jobs and workforce training, business development for local suppliers, healthier air and water supplies, improved social equity for all citizens, and so on. When Southwestern Pennsylvania businesses prosper, our people do, too.
“The results are very consistent: firms making investments on material ESG [environmental, social, and governance] issues outperform their peers in the future in terms of risk-adjusted stock price performance, sales growth, and profitability margin growth.”
— George Serafeim, Harvard Business Review
5 Macro Trends Driving Business Sustainability
1) Stakeholders demand it
- Consumers: More than a third of consumers around the world said they preferred to buy from brands viewed as doing social or environmental good in a January 2017 study
- Employees: Nearly two-thirds of employees responding to a Bain & Co. survey said sustainable business was extremely important to them
- Investors: More than 70 percent of investors responding to a 2016 survey said that sustainability was central to their investment decisions
- Activist investors: Shareholder engagement continued to be an active force in 2016, with 758 companies worldwide receiving public demands — a 13% increase from 2015.
2) Indices and raters track it
Raters and rankers like Bloomberg, MSCI, Thompson Reuters, Morningstar, Dow Jones, Sustainalytics, and CDP (formerly known as the Climate Disclosure Project) are responding to shareholder interest with reams of ESG data.
3) Raters increasingly assess risk exposure
For example, in November 2015, Moody’s scored 86 industry sectors for credit exposures to environmental risks. It deemed 11 sectors, representing $2 trillion in rated debt and including unregulated power generation, coal mining and coal terminals, as having elevated credit exposure to environmental risks. Another 18 sectors scored as “emerging, moderate risk.”
In 2016, Moody’s began using the national climate action commitments established as part of the 2015 Paris climate accord in its analysis of the credit implications of carbon transition risk.
4) Pressure grows to address global challenges
The global COP21 climate agreement reached in December 2015 reflects high ambitions to speed the shift to a low-carbon economy. The Paris climate pledges have helped shift investment to low-carbon energy and technology, and global businesses and institutional investors have urged heads of state to uphold their commitments. Responding to stakeholder expectations and the business opportunities therein, more companies are integrating the United Nations Sustainable Development Goals and the Science Based Targets into corporate strategies. More than 250 companies had committed to Science Based Targets by mid-2017.
5) More companies demonstrate it’s good business
- Improved financial performance: In an analysis of 200 scholarly studies on sustainability and corporate performance, 90% concluded that ESG standards lower the cost of capital; 80% found that good ESG practices result in better operational performance; and 80% found that stock price performance is positively correlated with good sustainability practices.
- Improved risk management: As much as 70% of EBITDA is at stake from sustainability issues in the supply chain, according to McKinsey. To help ensure the long-term supply of their agricultural products, companies like Unilever, Mars and Nespresso have invested in Rainforest Alliance certification. As reported in the Harvard Business Review, Rainforest Alliance certified cocoa farms produced significantly more cocoa and net income per hectare than non-certified farms.
- Cost savings due to efficiency improvements: U.S. companies investing in process energy efficiency measures, for instance, realize an average internal rate of return of 81%, according to one report. For example, GE achieved $300 million in savings by the end of 2013 by reducing its greenhouse gas emissions by 32% and water use by 45% compared to 2004 and 2006 baselines, respectively.
- Pathway to innovation: In the four years after launching its $1 billion-plus Flyknit line, Nike avoided 3.5 million pounds of waste and diverted 182 million bottles from landfills.
- Improved ability to attract customers: Unilever’s “brands with purpose,” for example, are growing 50% faster than the rest of the business. They delivered more than 60% of Unilever’s growth in 2016.
- Better ability to attract and engage employees: Companies with strong sustainability programs reported 55% better morale and 38% loyalty among employees than firms with poor programs, according to one study.