By Verity Hambrook, Industry RE Sustainability, Jan 2012 Tweet
Realigning your company to meet the needs of our society and environment makes business sense

It is entirely fitting that a recent report published by the World Economic Forum (WEF) was titled ‘More with Less’. The report comes four years after the WEF’s Sustainable Consumption initiative started. During this time, an estimated 450 million people have been lifted out of poverty, and the number of households in the emerging and developed world living on an income of more than £1,955 per annum increased by 28%. But, at a global level, this progress has come at the expense of increased resource consumption, continued environmental decline and greater social and health inequalities.

In those four years, we have lost 21 million hectares of forest, generated 9.1 billion tonnes of municipal solid waste and consumed 50 billion tonnes of fossil fuels. It is an inefficient form of economic growth and is not sustainable. The WEF warns there is an imperative for countries and companies to act to reduce the environmental consequences of consumption.

The organisation says, despite some success to date, change was now urgently required at a scale and greater pace than current initiatives, policies or strategies were likely to achieve. The report underlined the powerful role businesses had to play in expediting the world’s sustainable progress.

Economic value creation does not have to correlate with environmental degradation, particularly for businesses in emerging markets. In fact, industry thought believes sustainability is pivotal to future corporate long-term success.

Harvard Business School carried out a study comparing 90 US-based high-sustainability companies with 90 companies considered as low-sustainability. The classification was based on the adoption of environmental, social and governance policies in the 1990s that “reinforced a cultural commitment to sustainability”. This included reducing carbon emissions, green supply-chain policies, energy and water efficiency strategies, diversity and equal opportunity targets, business ethics and human rights.

The high-sustainability companies adopted 40% of these sorts of measures, while the other 90 companies only adopted 10%. And, 18 years later, they performed financially better with an annual average above-market return, that was 4.8% higher than the low-sustainability companies, had lower volatility and a better return on equity and assets. The research team believe they found conclusively that by improving their environmental and social performance, the more sustainable companies created higher long-term value for shareholders and acquired long-term investors.

“Even in times of financial gloom, we are seeing an increasing number of companies creating sustainable value and wealth with new initiatives that add value, not only to the reputation of their products, but their share price too,” says David Beer, director of IndustryRE Sustainability.

But genuine sustainable transformation takes time. Businesses must develop long-term business models. Sustainability strategies must have substance. It is not just about regular reporting or turning out the lights. Companies must focus on communicating long-term goals comprehensively. Investors and stakeholders increasingly understand the implications of these long-term goals and demand a longer term strategy of value creation.

In fact it is these long-term business models that will encourage investors to stick with businesses in the years to come. A company that is seen to be looking to the future and building strategic resilience to the changing climate and global resource shortages is much less of a risky investment. Essentially by mitigating impending risks and evolving towards a sustainable future, businesses can capture profitable opportunities.

A number of industries have driven groundbreaking initiatives forward when it comes to sustainable value creation. By realigning the way they do things to the benefit of both society and the environment, they have come up with some convincing results.

PepsiCo in rural Mexico is a great example. The company faced business constrictions on supplies of corn provided to its factories because regionally supplied products didn’t meet quality standards. The company pinned the problem down to the lack of skills among local providers, inadequate farming infrastructure and poor transportation. PepsiCo opted to help develop the low-income farmers by providing business training, technology and farming contracts. The result? They reduced their costs, improved product quality and raised the standard of living in the community.

It’s a great story to tell your consumers. And today’s consumers are not to be underestimated. They have an immense amount of power. Not providing green products or services endangers cash flow from a critical swathe of consumers who increasingly support sustainable businesses. The internet provides an incredibly fast and far-reaching platform for consumer dissent. With 750 million people on Facebook and 200 million on Twitter, companies are under the spotlight, more than ever. Unethical behaviour or apathetic efforts at sustainability will be picked up on and quickly disseminated.

In the face of the almighty consumer, businesses must understand consumer needs. But this is nothing new. Sustainable value creation doesn’t require a whole set of new capabilities. Leading businesses already have them. All businesses should be investing in innovation, creating markets and managing a complex portfolio of stakeholders. What sustainability does require is a shift in the fundamental ethos of business. “Companies must understand that they don’t have to choose between sustainability and competiveness,” says David Beer. “Competitiveness lies in a solid long-term sustainable strategy.”