Return on sustainability

Doing good works. Doing good pays off. In most Hollywood blockbusters that seems to be an irrefutable outcome. Why then should the real world be any different? Are sustainable companies rewarded for trying to be a force for good? Is there such a thing as return on sustainability? 

Being profitable is an essential component of any successful sustainable business. Because sustainability is about being able to remain productive and diverse indefinitely and you need healthy profits to achieve that. Successfully becoming more sustainable should have a positive impact for Planet, People, Profit and Participation. All our clients and cases show that becoming more sustainable really has a positive impact on every element of sustainability, including Profit. Sometimes this is direct and obvious: new revenue streams from additional business models, reducing waste and inefficiencies, or monetizing ‘left-over’ streams economically. Sometimes the effects are real, but indirect: a higher valuation/investor appetite, lower risk profile (no stranded assets), or a resilient supply chain that performs well under crises or stress. 

optie 1 foto 2

Return on Sustainability can be expressed as:

Where impact can be seen on the 4P levels:

For a company to achieve a positive Return on Sustainability, its efforts must have a positive impact on Planet, People, Profit and Participation. In some cases a company’s action may only have a positive impact on one or two of these ‘P’s’. For instance; when a company is focusing on labour conditions in its supply chain, there is a positive impact to be expected for People, but no impact on Planet. But a positive RoS can only be achieved if the following is realised:

  • 1). A positive impact on Planet, People or Participation may not have a structural negative impact on the others
  • 2). There must always be a positive impact on a Profit level, either immediately or within the foreseeable future

Making the ‘right’ trade-offs here can be a challenge. Quantifying these elements, too. Especially if you are trying to predict future success (looking back is always easier). We help you solve this challenge by looking for the right impact drivers. This is particularly helpful in the Profit domain, since most business decisions hinge on this.. We have captured this in the 7R model.

But what is the actual opportunity for your business? Do the self-scan to quickly assess what your Return on Sustainability could be.

Timing is everything. So when should you start to tackle this topic of sustainability? With this quick scan you can easily discover what the urgency of tackling sustainability is within your own context.

How to measure success?

We work with the 7R framework to help identify the profit elements of sustainable themes and initiatives. Some may start from a ‘Planet’, ‘People’ or ‘Participation’ theme (e.g. using wood from sustainably managed forests), but we argue that it always needs to have a Profit impact too (whether it is direct and/or indirect) for it to be a true successful within a business context.

The financial impact of any company successfully becoming more sustainable, can be reflected in 7 R’s:

Modern supply chains are global, and are therefore vulnerable to natural disasters and civil unrest. Climate change, water scarcity, and poor labor conditions in much of the world increase the risk. McKinsey reports that the value at stake from sustainability concerns can be as a high as 70% of earnings before interest, taxes, depreciation, and amortization.
In the largest study on climate change data and corporations, 8,000 supplier companies (selling to 75 multinationals) reported on their level of climate risk. Of the respondents, 72% said that climate change presents risks that could significantly impact their operations, revenue, or expenditures (Harvard Business Review)

Companies that are not operating sustainably face two types of Risks:

  1. Stranded assets – some companies have assets on their balance sheet that are heavily dependent on ecosystem services. This means that these assets can become liabilities if ecosystems are further impacted by for instance climate change or loss of biodiversity. In the Netherlands it is estimated that pension funds have €510 billion euros worth of investments that are currently at risk of becoming stranded assets (in Dutch).
  2. Revenues at risk – the transition towards more sustainable business is a risk for laggards. As more and more companies are adopting sustainability as a core strategic driver for lasting success, the bar is being raised for their competitors. Not acting in time or accurately can lead to revenue losses.

Our cases:

The value of a good reputation is not easy to measure. In a way, a company’s reputation is the intangible asset of brand equity. The value of a reputation is best measured in hard times. For instance, during the 2008 recession, companies with superior environmental performance experienced lower cost of debt by 40-45 basis points. In other words: because these companies operated in a sustainable manner, their financers trusted them more, resulting in a lower cost of debt.

Our cases:

Resilience is a characteristic of healthy companies (and ecosystems, by the way). Sustainable companies have the ability to survive system shocks such as climate events better than ‘normal’ companies. But also financial crises appear to have a milder impact on sustainable companies. This is primarily caused by better value chain and stakeholder management.

During the 2008 recession, companies committed to sustainability practices achieved “above average” performance in the financial markets, translating into an average of $650 million in

incremental market capitalization per company. Additionally, companies with superior environmental performance experienced lower cost of debt by 40-45 basis points.

More recently, during the first months of the corona crisis, the top quartile most sustainable companies were hit less violently than the bottom quartile (least sustainable companies). In the period February 17th 2020 to 23rd March of the same year, the most sustainable companies lost 29% in share value. The least sustainable companies lost 38% in share value. And when the markets started to bounce back (period 23rd March till April 17th) the most sustainable companies grew their share value with 19% versus the 17% of the least sustainable companies.

Our cases:

How Verstegen managed to mitigate supply chain issues during the Corona crisis, by building partnerships throughout the chain (and found win-win solutions for their production challenges)

A more sustainable business model can help boost a company’s financial performance. Whether the revenues come from adapting to changing customer demands in existing markets, entering new growth markets, or by adopting new (circular / regenerative) business models– sustainability pays off. Companies can also charge higher price premiums based on positive corporate responsibility performance. These premiums can structurally reach 20%, depending on the sector.

A focus on sustainability can also unlock opportunities for process and logistics savings. WalMart, for example, aimed to double fleet efficiency between 2005 and 2015 through better routing, truck loading, driver training, and advanced technologies. By the end of 2014, they had improved fuel efficiency approximately 87% compared to the 2005 baseline. In that year, these improvements resulted in 15,000 metric tons of CO2 emissions avoided and savings of nearly $11 million.

Our cases:

  • How Ørsted Accelerated its market capitalization,with stable EBIT, by 250%
  • How the Pure Goat Company managed to create a new product category by using only sustainable ingredients for their infant formula
  • How Van Straten Medical is growing their business by re-inventing themselves to offer a circular solution model

These is tremendous impact to be made on the cost side of the business. Significant cost reductions can result from improving operational efficiency through better management of natural resources like water and energy, as well as minimizing waste. One study estimated that companies experience an average internal rate of return of 27% to 80% on their low carbon investments. In 2013, GE had reduced greenhouse gas emissions by 32% and water use by 45% compared to 2004 and 2006 baselines, respectively, resulting in $300 million in savings.

In a fully circular model, waste is not present – just like in nature. This triggers an incredible resource efficiency that is beneficial to both customer and producer. In a circular model all material is re-used, repaired, or recycled. In that order, as this makes full use of the materials at hand.

Our cases:

  • How Van Straten Medical managed to cut the costs for their clients with up to 75%, whilst improving their own margin and market share
  • How Lono Côte d’Ivoire is using the greatest freely available waste stream as a valuable resource for an entire country (link).

Much of the strategic value of sustainability comes from the need to continually talk with and learn from key stakeholders. Through regular dialogue with stakeholders and continual iteration, a company with a sustainability agenda is better positioned to anticipate and react to economic, social, environmental, and regulatory changes as they arise. More importantly: the frontrunners in integrating sustainability into their business models will find increased efficiency in adapting new regulations and avoiding fines and penalties, as they tent to be ahead of the curve. In some cases, the frontrunners will determine the new industry norm of are asked to help create the new legislation.

Our cases:

  • How Van Straten Medical is creating the blueprint for legislation due to it’s frontrunner role in circularity.
  • How Yoni raised the bar on open and honest communication in a very traditional market.

A company’s performance on sustainability impacts it’s recruitment efficiency. Both in hiring new talents and retaining inhouse talents. Studies show that firms with greater corporate responsibility performance can reduce average turnover over time by 25-50%. It can also reduce annual quit rates by 3-3.5%, saving replacement costs up to 90%-200% of an employee’s annual salary for each retained position.

But more importantly, firms that moved towards a more sustainable business model (sometimes even by ‘merely’ adopting environmental standards) have seen a 16% increase in productivity over firms that did not adopt sustainability practices. Effectively this gives you a free day of work per week, per employee.

Our cases:

How Verstegen moved from a traditional family business, struggling to attract new talent, to a preferred employer brand as a result of their sustainability progression.

What’s in it for me?

We’ve seen time and time again that companies that tackle sustainability as a strategic business driver reap the benefits of their efforts. Companies that follow these four steps have all experienced that ‘doing good’ by definition equals doing good for business:

  • Identify what sustainability means within your context, understand why that matters and what results you expect to see
  • Take clear steps based upon the themes you’ve identified, make traction, measure the impact and communicate candidly about your efforts and results
  • Tackle any strategic or operational challenges that occur during your efforts
  • Apply an integral approach, stretching beyond the themes you’ve identified at the start and make it ‘business as usual’