The market demands more and more environmental accountability, and no industry is an exception. For companies, what is the cost of ignoring this demand? What can brands lose by not committing to ESG targets or sustainability initiatives in business in the next decade? Furthermore, as talk is cheap when it comes to environmental impact, what is the fallout of making commitments and failing to fulfill them or setting goals that aren’t tied to meaningful impact?
On the flip side, profitability matters. What can business owners gain by setting and achieving sustainability improvement goals? As Harvard Business Insights posits, can companies really “do well by doing good?”
First, What Can Be Gained from a Sustainability Initiative?
It’s important not to expect environmental investments to look like a tit-for-tat economic gain. In business, sustainability investments are a wise financial investment as part of a greater picture. This investment and return is sometimes calculated as the triple bottom line of sustainability, in which increasing financial returns aren’t the only gain. The triple bottom line refers to a business concept that measures social and environmental benefits as well bottom line in terms of three factors: people, planet, and profits.
Simply put, the working theory is that businesses that are socially responsible and operate sustainably will profit. But companies are still faced with hard questions like “How can I reach my sustainability targets in 10 years but still attract investors and consumers today?” The answer isn’t simple, but some things are known:
Sustainability Efforts Increase Brand Trust, Loyalty, and Appreciation
Forbes references a 2017 study that found:
- 87% of consumers will have a more positive image of a company that supports social or environmental issues.
- 88% will be more loyal to a company that supports social or environmental issues.
- 92% will be more likely to trust a company that supports social or environmental issues.
Consumers Will Pay More
- An Inc. article reports that 66% of consumers will pay extra for sustainable products.
- When consumers are segmented by generation, it was found that 77% of Millennials will pay more.
Investors are Directing Dollars Toward Sustainability
- As indicated by the letter from the CEO of Blackrock, the world’s largest asset manager, “evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” As a result, reallocation of capital should be expected.
Cautionary Tale of Mindset Regarding Sustainability Initiatives
Once, companies responded to pressure from social sector leaders by rushing to improve social conditions without weighing the cost of such initiatives to the bottom line. Social and environmental conditions improved, but investor confidence plummeted when social performance tactics harmed or threatened to harm profits.
However, a better balance is possible for many companies. Going green and other impactful environmental initiatives shouldn’t be seen as an immediate financial sacrifice that only results in long-term gain. Instead, companies can seek to create “shared value” now.
Social impact with a driving factor of profits may be called shared value. Shared value indicates that companies can retain shareholder returns while implementing sustainability strategies.
An Institutional Investor article suggests that one way to realize shareholder gains now while implementing sustainable initiatives is not to solely rely on typical measurements like ESG rankings. ESG factors and similar scales may not truly reflect the social and environmental impact of specific endeavors or may weigh factors too heavily that are immaterial for certain businesses or industries. This is especially prevalent because sustainability reports are voluntary and may present the Pollyanna version of events. Movement toward new, unified ESG standards may prevent companies from window dressing sustainable efforts as much, or they may further fail to take into account the social impact of certain efforts. Time will tell.
The Cost of Not Investing in Sustainability Initiatives in Business
By not making material sustainability and social changes, businesses risk harming consumer demand in the near term (five years) as well as the long term. The long-term implications of not committing to material ESG targets will make a company less competitive in 10 years.
But what about now?
Asset owners and managers have already pledged $80 trillion in investable assets to those that follow United Nations Principles of Responsible Investing. Companies that are currently ineligible for those funds would be wise to consider remedying that.
Furthermore, business leaders who identify and harness important social and environmental issues relevant to the business gain a large positive economic impact over time. For instance, the Institutional Investor reports that we are already seeing unprecedented consumer behavior in line with findings of 3% to 6% alpha collected by some companies who have made material changes to their business strategy over the past few years.
They say the best time to plant a tree (or to plant the seed of understanding that sustainability will affect investment performance) is 20 years ago. The second best time is today. The worst time is years from now when competitors have already gained the advantage.
Improvements in the accuracy and availability of ESG data will continue to enable the Sustainability Accounting Standards Board to work identify the specific metrics that are material to a particular industry. As measurement systems improve, greater clarity and insight will be available into the definitive impact of company’s social and environmental efforts.
In short, there will be no place to hide.
Brand image can be tarnished in a matter of months depending on one’s position in a specific market. Leaders should take notice now and do internal research on the riskiness of their current position on sustainability targets.
It’s possible to have a comprehensive understanding of consumer purchasing trends in the market by outlining key competitors and the performance of their material social and sustainable changes. Brands that lag in understanding the risk involved today will experience stagnancy in the market in less than 10 years and may even face significant harm in the short term (five years).
Consumer and investor behavior is trending in support of businesses that make meaningful sustainable and social investments. As both groups grow more savvy, the actual value, rather than the spun story, of initiatives will weigh more heavily. Business leadership should be wary of jumping into sustainability initiatives “because they have to.” Instead, they should work to shift their own and organizational mindset to believe the opportunity exists to truly do well by doing good.
The Sustainability Initiative Series
If you’ve been following VECKTA’s Sustainability Initiative Series, it’s our hope that you’re fully equipped to guide your organization through the entire process of successfully executing and optimizing an emissions reduction goal. Our team wrote this series to support sustainability directors, business owners, and other leadership who otherwise have to invest in expensive, time consuming consulting – even to find out important early stage information.
Nothing beats experience as a teacher. Our goal of this series is to use our team’s combined decades (and decades!) of experience to sidestep pitfalls, examine misconceptions, and illuminate solutions for our readers.
Don’t miss the other blogs in this series: