Sustainability as Economic Game Changer
In founding a new long-term, visionary world economy, there is no more apposite topic than sustainability — where we develop and establish a durable, value-generating business model delivering long-term protection of the global economy, society and natural capital.
And in order to establish sustainability as a business model, organizations need to understand the interdependence between its various capitals – such as human capital, manufactured capital, etc. – and their impacts on energy, water, bio-diversity, green house gas emissions. They must also understand the wider societal impacts of sustainability, and define all of these into one coherent policy and reporting framework.
In developing the framework, companies will see the effects of multiple environmental and social stressors upon one another, understanding how they can work against one another, causing a destruction of value.
Yet evidence would suggest that while many managers believe that the only responsibility of the firm is to engage in profitable activities, they maintain that this does not include environmental and social impacts. However, sustainability bridges the gap between environmental and social concerns and the need to make a profit. In doing so, it reduces environmental and social risk, optimizes resource use and drives innovation to more efficient products and services.
“What you measure badly, you will manage badly.”
Therefore, to drive value through sustainability, buttressed by eco-efficiency, it is important to understand that the purity of data capture and how the data is used, measured and verified are equal, because the information gleaned from sustainability foot-printing helps create economic models. These, in turn, assist in understanding the organization’s impact in terms of environmental, social and economic behavior, and thus value.
Indeed, it is important to understand that eco-efficiency spans energy intensity and energy efficiency, as well as the durability and recyclability of a product life cycle, which further illustrates the extent to which companies are exposed to changes in consumer values. Furthermore, sustainability deals with the ability of a company to manage environmental and social risks successfully, evidenced through the quality of supply chain management, integrated sustainability and accounting audit, implementation of environmental management systems, training, and the ability to reap future competitive advantages from environmentally driven market trends and profit opportunities.
Additionally, proactive “event” prevention processes embedded into a company’s sustainability policy will aid operating efficiency and profitability because, for example, waiting to understand the financial impact after a negative event is like a company burying its head in the sand and hoping prayer that nothing will happen. This view is supported by studies dating from as early as the 1970’s, which have shown consistently that, while the stock price of companies is stronger following positive environmental information, the price decline in response to negative news is even larger. This means that the biggest cost is to do nothing.
Sustainability supports an organization’s ability to look forward and be mindful of vulnerabilities it may face. It also helps companies see the degree to which economic effectiveness, and so, competitiveness, is susceptible to negative consequences through adverse environmental, social or economic shocks. Indeed, through this vision, an organization can avoid sudden realization of vulnerability with the creation of mitigation processes to prevent vulnerability occurrence.
While recent reports by the Carbon Disclosure Project and Economist Intelligence Unit indicate higher valuations for sustainability engaged organizations, this is underpinned by recent empirical studies showing that the negative impact on value for low eco-efficiency is larger in magnitude to the positive effect on the high eco-efficiency company. Additionally, the valuation differential between the most eco-efficient companies and the least eco-efficient companies increases over time. Therefore, managers have no reason to worry that an environmental and social sustainability policy conflicts with the company’s primary financial objectives.
Moreover, poor environmental performance could suggest a sign of operational inefficiency, which ultimately leads to competitive disadvantages.
So the process of understanding value creation and destruction — as well as the implications it has for both businesses and the financial institutions that support them — needs to be understood . Inevitably, to develop a robust policy towards eco-efficiency, support needs to be garnered from the CFO, who has a unique vantage of operations by seeing it from a purely financial paradigm. Therefore, CFOs are having to become more strategic as they become used to the balancing act of profit and the credo of sustainability being connected. They also need to make environmental considerations accountable, treating them with the same level of transparency as the financial metrics. As such, sustainability bridges the gap between consideration of the capital that has been consumed, such as the depreciation of capital equipment, vehicles, office equipment etc., and the cost, additional to their purchase, in running and maintaining them. This makes the process of tracking environmental, social and economic costs and benefits across the organization — its assets and operational activities — easier, thus avoiding poorly measured random environmental projects. It also creates a sustained process of intended actions, clear outcomes and business benefits. Sustainability also offers risk mitigation against the failure to disclose environmental risk, leading to protection against reputation damage and poor peer rankings in investor research.
However, CFOs must connect with energy management and sustainability teams, moving from isolated teams to pervasive aspects of all critical business functions and maintaining robustness in verification and substantiation of developed Key Performance Indicators and associated metrics. This in turn will create visibility and inclusion of sustainability into core business practices and accountability processes. For example, elements such as capital requests would now include energy and resource consumption, enabling the ability to apply whole-life cost analysis of asset ownership, and initiate post-project measurement and verification, critical to delivering confidence in current and future energy and resource project savings claims.
Likewise, with innovative technology being looked upon as a key to eco-efficiency, it is not a panacea for all the ills on its own. Why? Because, while investment in low-carbon technologies will help reduce energy consumption and greenhouse gas emissions, to optimize such investments, the procurement of such technologies must be linked to the company wide sustainability strategy; holistically linking organizational processes to these new technologies.
This is part one of a three-part series. Look for part two next week.
Christopher Gleadle is author of Sustainable Growth Through Sustainable Business and, senior partner at the sustainability performance agency The CMG Consultancy.
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