A business case for sustainability, should I bother ?

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Recently we did an assignment for a client in the telco/ict industry. They established a team to drive the sustainability in the company and asked us to help them to make a team charter and plan for the coming year. At the end of the two day workshop the team presented their results to the CEO, asking him for his feedback, but also for his commitment and support.

One of the questions that came up during the feedback session was the need for a business case. The ambition of the CEO was not only to comply with regulations and reporting requirements for sustainability, but to approach it a more aggressively, by making money from the sustainability efforts of his business.

This article addresses his needs and probably those of many who want to get out of the more “defensive approach” towards sustainability. We see this approach as the reactive mode, working only on sustainability because regulators, clients, competitors and others push you to do so. That reactive mode has typically a high “must-do” component and is often lacking the intrinsic drive to be more sustainable. Companies work on sustainability because other ask them to, not because the really want it.

The intrinsic drive that we mentioned is something that often starts at the top. In our client organization, the CEO was a big supporter of sustainability, in the company but also in his private life and in other organisations he was involved in. We often see that the top of organisations are well aware of their responsibility and als acknowledge there is a strong relation between sustainability and the long term future of the organization they are leading.

This CEO also realises that sustainability is an enormous opportunity in the market his business operates in, his clients being medium sized companies with a low score on the sustainability maturity scale. He strongly believes there is synergy to be gained. By developing and selling sustainable telco and ICT services to his clients he will actually help them to become more sustainable. Side effect is also that this will increase market share and brand recognition, which are two of the pillars of the company’s strategy

So his question to the sustainability team was how to work on sustainability and translate that into a profitable business opportunity

A typical business case sums up the benefits and cost of an opportunity and concludes if is makes sense to invest in it. A business case for sustainability however also includes elements that are more or less mandatory, either from a regulators point of view or from a more idealistic standpoint. Also, opportunity cost needed to be included.

First let’s take a look at cost:

1. Compliance cost

Compliance cost cover the ‘must-do’s’ from regulators, varying from taking concrete measures to reduce emissions to reporting about ESG like CSRD, and the impact of the organization on its environment.
The type and volume of compliance cost depend on the size of the company, the geographies where it operates in and the type of business and impact of the business on the environment. A typical company with high compliance cost is a large company with a high impact on the environment that operates in a number of highly regulated geographies. In our example, our client operates in Europe, has around 500 employees and has a low to medium impact on the environment. Therefore, the emphasis of its compliance cost will lay in reporting activities and system adjustments.

2. Cost of developing sustainable products and services

Depending on the level impact of products on the environment, product development cost can vary from cost of total redesign of products to cost of slight adjustments. More important cost to consider are cost of redesigning the product development process. Usually criteria as reusability, reduction of resources, repairability and reduction of environmental impact are introduced, leading to a totally different approach of the development of products and services. In our clients’ organization the desire is to introduce more reusable and repairable products, which are partly sourced from third parties. Also, the ambition to offer services that help customers improving their sustainability performance implies a thorough knowledge of the needs and business of their customers to be successful.

3. Marketing and branding cost

Being perceived as sustainable is as important as actually being sustainable have many studies shown. This means that marketing and branding are a vital part of building a sustainable organization. Efforts have to be made both externally as internally. Externally to influence and convince customers and other stakeholders of genuine sustainability intentions and efforts. But also internally, to engage and invite employees to actively transform the organization.
Our client is part of a bigger, relatively new organisation, that has invested heavily in brand recognition. Sustainability is not an explicit part of its brand strategy, but the message of a young, modern market player is relatively easy to link to sustainability. Challenge for our client organization is to make the sustainability message resonate with its customers, medium sized business that do not feel a lot of pressure yet to work on sustainability. Without doubt, offering products and services that both reduce cost and environmental impact will play a key role here.

4. Investments in reducing emissions

This category covers the direct cost to reduce impact, from the replacement of energy intensive equipment all the way to building new plants with reduced impact. It safe to assume that the higher the actual environmental impact, the higher the cost of investments in reducing emissions will be, up to a point where it does not make sense to continue the business in its traditional form. An interesting example is the European steel industry, that is already under pressure because of price fluctuations and competition from Asia, and where investments in cleaner and more sustainable production brings companies to the tipping point of continuing their operations. Looking at our clients’ organization, not a lot of emissions are created by the company itself. However, they source datacenter capacity and hardware from third parties and their challenge is to engage with their suppliers, to see how emission can be reduced.

5. Reduction of revenue from products and services that do not meet sustainable criteria

At some point the business has to assess its product and service portfolio against criteria of sustainability with the question in mind to what extend the portfolio needs to change. The direct question is if products and service can stay on the menu but another key question is if “old” products and services not undermine and canibalize new and sustainable ones. A transformation path to phase out old products and introduce new should be carefully crafted. A great example of that is the industry of car manufacturers and their strategies to introduce sustainable (often electrified) models.

6. Write-off cost of inventory, equipment and other assets that do not contribute to sustainability

7. HR transformation cost (training, awareness, recruitment of experience and expertise)

Making your organization more sustainable has impact on people and needs active engagement from everyone in the organization. Generally speaking, people understand the need to become more sustainable, like in all other transformations, people want to know what will be the impact for them and how they can prepare for the new situation. should be the focus of change management, attitudes are often formed by the impact of initiatives on

8. Certification

Many organisations choose to certify their efforts to become more sustainable for various reasons. Complying to customer or regulatory demands is one, but also, more intrinsic, the will to demonstrate sustainability commitments to the outside world. Getting certified and meeting standards can be a major effort for an organization and will almost certainly lead to adjustments in organization, processes, sourcing and products.

Benefits

1. Market share
Despite high inflation, sustainability-marketed products took more market share in 2022. According to a new report from Circana and the New York University Stern Center for Sustainable Business. That’s up 0.3% from 2021. While prices remain higher on sustainable marketed products, some consumers are willing to pay more for the products that suit their values.

2. Value

To investors, sustainable businesses are more attractive to invest in. 75% of investors see sustainability performance as relevant to their investment decisions, according to a study by Bank of America Merill Lynch. Although it is still difficult to quantify in absolute figures, investors use several rankings and scoring methods to determine and compare the sustainability performance of companies . Examples are the Robeco SDG score or the Bloomberg ESG Performance score.

3. Competitive advantage

There are many business owners who already competing for the same customer base, only those who stand out can sustainably grow and expand. If you want consumers coming back to you, you should ensure that you have a better offer than those who you are competing with. Branding can make you irresistible to potential customers and buyers. When customers are convinced, a brand can quickly become sustainable. It is important to invest in the right channels to get your business to a stage customers come to you because you are sustainable.

4. Lower cost of energy

5. Reduced cost of waste

If your business engages in sustainable production practices, wasting resources will reduce as well. Recycling is one of the safest ones to start within your business. Try to encourage employees and let them identify areas where recycling can work within the system and operations. Make sure there is a general emphasis on the recycling process to ensure fewer resources are used at any given point. Provide your employees the right techniques to minimize waste.

6. Reduced supply chain risk

Non tangibles

1. Attractiveness for employees
Most people want to work for businesses who care about society’s positive impact and the environment. This could be an advantage to the company to attract vibrant and talented employees. Having sustainable approaches to solving customers’ issues is one of the elements every organization needs. New competent and well-meaning talent can help you to a next level.

2. Reduction of continuity risk

Opportunity cost

Conclusion: a business case is key when you want to combine sustainability with profitability. If you only do sustainability because you have to, don’t bother, for you it’s just extra cost then

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JESSICA VAN BEEK