Positive financial impact of sustainable development - 360impact.ch

Does business benefit from sustainable development?

Leaders often remain reluctant to put sustainable development at the heart of their strategy, mistakenly believing that costs outweigh profits. However, academic research and practical cases indicate the opposite.
Sandra Wirth

We have chosen concrete cases and logical reasoning to show that sustainable development has a positive financial impact, that it is good for business.

For these companies, activities in full agreement with development is an ambition, and therefore also a path, with its successes and failures. Ultimately, it is the benefit to people, the planet and organizations that counts.

1. Unilever already benefits financially from integrating sustainability into its business model

A. At first, a man's ambition

Upon taking up his position as CEO of Unilever in2009, Paul Polman removed the financial results forecast from the quarterly reports. This meant that the British and Dutch consumer goods giant would no longer provide its investors with financial forecasts.

At the same time, Polman, previously at Nestlé, announced the “Sustainable Living Plan“. This plan contained very ambitious targets for 2020 (subsequently moved to 2030, as for the SDGs):

  • double sales,
  • halve Unilever’s environmental footprint,
  • helping a billion people improve their health and well-being, and
  • improving the livelihoods of hundreds of thousands of employees (later extended to millions in the wider supply chain).

Here is how Unilever wants to create value in this context:

 

B. Unilever's social and financial results to date

Not surprisingly, this immense ambition is proving difficult to implement. Nevertheless, Unilever is transparent about its progress by publishing an annual newsletter, the most recent being this.

In particular, a 9% increase in greenhouse gas impact per customer use of its cosmetic line prevents Unilever from halving the negative impact of its products.

However, Unilever has also achieved impressive results: it has been able to move closer to the health and hygiene target of 60%. This was achieved through a handwashing campaign with the Lifebuoy soap,and by reducing the environmental footprint of its own operations. These have led to a reduction of -47% in CO2 and -98% in waste per tonne in the factory, as well as a sustainable supply for 56% of all its agricultural raw materials.

In addition, the new strategy enabled Unilever to trigger 1.7 million applications in 2017. This volume and other factors led him to introduce an innovative recruitment process based on artificial intelligence.

Polman is also far from its target of doubling sales, but they have risen by +33% to €54 billion in 2017. While market capitalisation rose from 47 billion euros to 128 billion euros, the share price rose 172% and the return to shareholders, including dividends, has risen +274% since Polman took over Unilever in 2009. The positive financial impact of Unilever’s strategy is therefore clear.

Sources: Ethical Corp et Unilever

2. Swiss companies have also understood the financial benefits of sustainable development

Among many companies, the family company Firmenich has successfully integrated sustainable development into its strategy for more than a generation. The Geneva-based company, world leader in fine perfumery, reported sales growth of 4.4% to 3.34 billion francs in October 2017. Firmenich also has another bet on the future with already a promising financial impact with the strategic decision that since 2010, all new molecules developed must be biodegradable.

Another traditional family business, Caran d’Ache, not only uses FSC wood from sustainable forests, but has recently launched a Swiss Wood line (see video). This approach is consistent with its integrative sustainability approach. For example, Caran d’Ache uses solvent-free varnishes, heats itself with residual wood chips, has built its own clean water treatment plant and produces solar energy.

Or the Lausanne-based company Vestergaard has even built its business model to serve low-income customers in southern countries. And finally, Migros, the world’s most sustainable retail business, also supports numerous initiatives in this area, such as Collaboratio Helvetica, a sustainability dialogue facilitator.

To date, more than 150 Swiss companies are members of the UN Global Compact and are therefore committed to publicly reporting on their progress in terms of sustainable development. In 2016, 162 Swiss companies also published a Corporate Social Responsibility or CSR report on the Global Reporting Initiative platform.

3. Integrating sustainability into the strategy is profitable, also financially

Today’s leaders face an unprecedented and complex ecosystem of social, environmental, business and technological trends. These require sophisticated management based on sustainability. Yet managers often remain reluctant to put sustainable development at the heart of their business strategy, mistakenly believing that costs outweigh profits. However, academic research and business experience indicate otherwise.

Given the complexity of today’s world, much of the strategic value of sustainability therefore comes from the need to continually discuss with stakeholders in a learning posture. This regular dialogue places companies in a preferential position to anticipate and react to economic, social, environmental and regulatory changes.

In a reference article “The Comprehensive Business Case for Sustainability“, the Harvard Business Review structures its argument in favour of a positive financial impact of sustainable development around four dimensions:

A. Driving innovation and growth

Investing in sustainability is not only a risk management tool, but also a driver of innovation. Indeed, the redesign of products to meet environmental standards or social needs opens new markets.
For example, Nike has integrated sustainable development into its innovation process. It created the Flyknit line worth over $1 billion in 2015. This line of shoes is produced thanks to a system of specialized yarns, requiring a minimum of manpower and generating significant profit margins. In addition, Flyknit reduces waste by 80% compared to sewn shoes and has switched from yarn to recycled polyester. Other brands such as Adidas followed: it hopes to increase sales of the Parley line fivefold between 2017 and 2018.

B. Tools to improve financial performance

In addition to the financial advantages associated with a better competitive position, companies achieve significant savings through increased operational efficiency due to better respect for the environment. In addition, investors can now track the performance of ESG factors (environmental, social and governance factors) and correlate better financial performance with better ESG performance.

C. Better risk assessment and mitigation

Today’s supply chains are global and vulnerable to natural disasters and conflict. Climate change, water scarcity and poor working conditions in much of the world increase the risk. McKinsey reports that the value of sustainability issues can reach 70% of earnings before interest, taxes, depreciation and amortization.

D. A decisive impact on intangible assets

The customer relationship

Businesses are sceptical about consumer interest in sustainable products – especially willingness to pay. Some of this scepticism is self-inflicted: companies were quick to raise the price of “sustainable” products considerably with, in some cases, inferior quality (e.g. natural high-cost cleaning products that did not work).

However, consumers’ minds are changing. Today’s consumers expect more transparency, honesty and tangible impact from business. They want to be able to choose from a range of durable products, at competitive prices and of good quality.

The collaborative relationship

Corporate sustainability initiatives to improve ESG performance and demonstrate value to society can increase employee loyalty, efficiency and productivity and improve HR statistics related to recruitment, retention and motivation.

Research shows that employees today place more importance on the company’s mission, purpose and work-life balance. This is why companies that invest in sustainable development initiatives tend to respond better to these needs. In addition, these companies treat employees as key stakeholders, just as important as shareholders. As a result, employees are proud to work there and feel part of a larger effort.

Summary of the effects of the four dimensions on the company's financial result

Upside

Revenues

Making more $

  • Innovation products/services
  • Market share augmented
  • Sales price increased

Intangibles

Ensuring future $

  • Product/service differentiation
  • Increased customer loyalty
  • Talent attraction and retention

Downside

Costs

Spending less $

  • Eco-efficiency improved
  • Asset efficiency increased
  • Insurance costs lowered

Risks

More reliable $

  • Supply chain reliability
  • Volatility in input prices diminished
  • Business continutiy/resilience improved

More certain

Less certain

4. The impact of intangible assets on business valuation

Until now, the value and development prospects of a company have been based mainly on production capital, financial capital and, to a lesser extent, intellectual capital. Today, intangible assets represent a critical element in stock market valuation, as the Ocean Tomo benchmark study shows:

In addition, results from a Harvard study (2015) show that investments in key sustainability issues, and therefore physical investments, can increase shareholder value. On the other hand, investments in intangible sustainability issues have little or no positive or negative effects on value.

In other words, it is essential to first determine which sustainability dimensions are relevant for your company. The technical term for this approach is the determination of the materiality of the issues. It is therefore a question of identifying which dimensions are impacted by your company’s activity (see sustainable development tools).

Intangible factors require different measurement methods from those used for tangible factors: the aim here is to measure the impact of a given activity, within the framework of a structured process (see impact measurement tools).

5. Conclusion

The ambition of this article is to demonstrate through practical cases, logical reasoning and applied research that integrating sustainable development into a company’s business model has a positive financial impact.

We are confident that soon all businesses, including SMEs, will take this step, as well as other actors, such as the public sector, non-profit organisations and the citizen.

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