Why Corporations Need Sustainability to Succeed
BY AVANTIKA GOYAL
For as long as we can remember, the conventional wisdom surrounding sustainability and capitalism has always been that the two cannot coexist. Every businessman must choose between profit or protecting the planet because there isn't any money in caring about the environment. But what if I told you that this view is short-sighted and that sustainable business practices are one of the best things you can do to boost your bottom line?
A popular 'Carbon Majors' study released in 2017 found that only 100 companies (i.e., ExxonMobil, Saudi Aramco, etc) around the world are responsible for 71% of global emissions. Given this statistic, it's undeniable that big corporations carry much of the responsibility in determining the future of our planet's climate. If this is the case, why haven't companies been more environmentally conscious in their decision-making?
The answer lies in the strongly held belief that financial gain is at odds with sustainable practices, and, when given the option, most chief executives choose to prioritize the former. Fortunately, many large-scale corporations have experimented with sustainability and their results appear to contradict this notion. With the proven efficiency of environmentally-friendly operations and the growing consumer concern around sustainability, increasing profit and protecting the planet may not only be reconcilable but in fact dependent on one another.
Maximize Returns On Capital
When first considering the reasons to integrate environmentally-conscious practices, most businesses will commonly think in terms of increasing ROI (Return on Investment) and reducing waste. Luckily, there are many proposed methods worth looking into, but, for the sake of simplicity, we’ll delve into one example that’s often cited by many climate change journalists.
A modern solution, actively promoted by the Ellen MacArthur Foundation (A UK-based charity centered on designing a regenerative economy), is the circular economy model, a more cost-effective approach to managing waste and resource use. Generally, businesses follow a linear process where inputs go into the product and waste goes out, once the consumer discards it. Instead, with a circular model, businesses would be reusing resources and regenerating natural capital.
This shift begins with a change in design. First, a business must differentiate between its consumable and durable components. All consumable parts would need to be produced using biodegradable materials so the part can be "cascaded" through different products until it's finally returned to the natural environment. For example, the apparel retailer, H&M collects old clothes and sorts them based on material. Some are sold to secondhand retailers or incorporated into new products while others become fuel to produce electricity.
On the other hand, durable components, such as metals found in power tools and mobile phones, can be bought back from consumers for remanufacturing. Not only does this radically shrink a company's dependency for new resources but it also strengthens customer relationships, since they're often given rewards or rebates in return.
This circular economy model is a goldmine in terms of benefits, especially when measuring the returns on natural resources and capital. In a study conducted by McKinsey, there was new evidence that with the savings acquired through the circular model, the EU could reap economic benefits reaching an annual total of €1.8 trillion. This would be reflected in GDP growth by an additional 7 percentage points. It's difficult to dismiss such enticing numbers, no matter how much of a climate-change skeptic a business may be.
To successfully introduce programs that allow for greater returns on investments with hefty cost reductions, it's crucial that businesses begin to rethink their resource management and value chains. By eliminating unnecessary and wasteful practices and substituting them with recycling solutions, bigger profits and a cleaner planet is within our reach.
Manage Climate-Induced Risks
Climate change isn’t only destructive to animal habitats and rural communities, as many business leaders may like to believe, but can also negatively impact company production and manufacturing if they aren’t quick to address these risks.
Supply chains today extend around the world and are vulnerable to natural disasters and civil conflict. Moreover, with many countries becoming concerned with climate change and deciding to partake in the Paris Agreement, companies face reputation and regulation risks as they look to enter new markets or even keep the ones they currently have.
The growing climate risks plaguing major supply chains is no secret; a study conducted by CDP showed that 72% of 4,005 surveyed global suppliers admitted to recognizing the regulatory, physical, and/or other climate-based risks that could hurt their operations and revenue. However, knowledge doesn't guarantee action. Only a mere quarter of these suppliers shared any measure of climate risk management in their public reports. This is worrisome because, without any form of documentation, these suppliers can easily evade responsibility.
Luckily, it's not all grim and some major corporations have begun to carefully assess their supply chains and implement sustainable practices. A great example is the international food and beverage company, Nestle, which began an initiative in 2009 to promote responsible cocoa procurement. Some of their goals included a commitment to planting 12 million new cocoa trees (completed in 2018), improving productivity by training farmers in sustainable practices, and distributing shade trees to help make cocoa farms more climate-resistant.
Over the last 10 years, these projects, in conjunction with others, have boosted overall yield and farmer income. So not only has Nestle managed to tackle the potential risks in their cocoa supply chain, but also drastically improved the lives of their workers and environmental impact of their plantations. And now many other companies have followed in Nestle's footsteps, by investing in new strategies and partnering with reforestation groups, to manage potential threats.
Unlike most other forms of business risks, environmental risks aren't as salient in the short-term, resulting in many companies underestimating the dangers of climate-based impacts. But these risks are no less severe and they require business leaders who are willing to plan long-term and make the necessary changes today before it's too late.
Introduce Innovation and Growth
Sustainable practices aren't limited to managing and deterring risks, they can also be a channel for innovative growth. By acknowledging harmful products and services on the market, climate-conscious businesses can demonstrate competitive strength by marketing to customers as a more green alternative.
Especially as consumers become increasingly selective with the companies they support, it’s crucial that businesses reassess their portfolios to keep up with shifting priorities. In fact, some studies have shown that a customer is willing to pay up to a 10% premium on products sold by socially responsible firms - suggesting a lucrative business opportunity to boost revenue.
As companies become more mindful of their environmental impact, they'll be forced to evaluate their practices closer and make structural changes where resources - such as energy, carbon, water, materials, and waste - are being inefficiently used. Not only is this cost-effective, but will also inspire innovative products that are far more sustainable than their counterparts. Executives are always looking to cut costs, and prioritizing a healthy planet simply shines a spotlight on which costs are best to consider.
A prime example of a company experiencing considerable growth from sustainable practices is the multinational corporation, Unilever. In 2010, they developed their "Sustainable Living Brands" category, consisting of 28 brands on a journey to reducing their environmental footprint and driving a positive social impact. Near the end of last year, Unilever announced that these brands contributed to 75% of the company's total growth and as a group, they've outperformed their other brands by 69%.
It's quite clear that more businesses need to act on the opportunities sustainability has to offer, if they want a shot at beating their competition.
Ultimately, capitalism is a system made by people to meet the needs of people and it’s vital that we, as a global community, leverage this tool effectively to meet our changing needs before it slips out of our hands.
In order to succeed, organizations need to band together and confront the problems they’ve been so conveniently brushing aside for the past 30 years. At the end of the day, the sustenance of a company is contingent on the sustenance of the planet it inhabits.