What is your personal drive to act more sustainably ? Is it internal motivation like building a better world for your children or idealism ? Or is it more triggered by external factors, like your neighbours’ new Tesla of attractive tax benefits on solar panels ?
The same question can be asked about organisations. Many feel a genuine responsibility to reduce their footprint and embrace sustainability as part of their mission. Others just respond. To regulations, to competition or to customers. They see sustainability as part of their struggle to survive, rather than as a source of inspiration to become better and more profitable.
This article addresses the desire of those who want to get out of the more “defensive approach”, a more reactive mode, working only on sustainability because regulators, clients, competitors and others push them to do so. That reactive mode typically bears a high “must-do” component and is often lacking the intrinsic drive to be more sustainable. In this mode, companies work on sustainability because others ask them to, not because they really want it.
The intrinsic drive that we mentioned is something that often starts at the top. In an organisation we helped with the Sustainability Sprint, 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.
This CEO also realised 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 believed there was synergy to be gained. By developing and selling sustainable telco and ICT services to his clients he could actually help them to achieve their sustainability targets, for example by lowering energy consumption from data usage or by facilitating remote working and reducing travel. The synergy on his side was an increased market share, brand recognition and profitability, which are three of the pillars of the company’s strategy.
So he asked his sustainability team to transform sustainability initiatives in the company into profitable business opportunities. That question included the wish to quantify the costs and benefits of different options. Let’s take a closer look at that question.
A typical business case sums up the benefits and costs of an opportunity and concludes if it makes sense to make an investment. A business case for sustainability also includes costs and benefits but on a broader scale as few elements in an organisation are not affected by true sustainability. First let’s take a look at costs:
1. Compliance costs
Compliance costs cover the ‘must-do’s’ from regulators, varying from taking concrete measures to reduce emissions to ESG compliance cost, ie for reporting about the impact of the organization on its environment.
The type and volume of compliance costs 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. Costs of developing sustainable products and services
Depending on the level of impact of products on the environment, product development costs can vary from cost of total redesign of products to cost of slight adjustments. More important to consider are the costs of redesigning the product development process itself. Usually criteria like reusability, reduction of resources, repairability and reduction of environmental impact are introduced, leading to a totally different approach to 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 improve their sustainability performance implies a thorough knowledge of the needs and business of their customers to be successful.
3. Marketing and branding costs
Sustainable marketing increases customer engagement and grows the intention to buy more sustainable. This means that marketing and branding are a vital part of building a sustainable organization. Efforts have to be made both externally and 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 sustainabiility in marketing efforts Challenge for our client organization is to make the sustainability message resonate with its customers, medium sized businesses that do not feel a lot of pressure yet to work on sustainability. Without doubt, offering products and services that reduce both cost and environmental impact will play a key role here.
4. Investments in improving ESG performance
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 is 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, which 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. It also covers investments in improving the organisation’s social behaviour towards interest groups as employees and local communities, as well as governance. Looking at the E performance of our clients’ organisation, 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 emissions can be reduced. In the Sustainability Sprints we organised for them we invited one of their suppliers to tell about their efforts to reduce energy usage.
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 extent the portfolio needs to change. The direct question is if the current offering of products and services can stay on the menu in combination with the question if “old” products and services do not undermine and cannibalize new and sustainable ones. A transformation path to phase out old products and introduce new should be carefully crafted. Interesting examples of different transformation paths can be found in the car industry, replacing their old fossil fuel fleets by new sustainable models.
6. Write-off cost of inventory, equipment and other assets that do not contribute to sustainability
In the past we have seen industries that had to change so urgently that they were not able to control their own transformation path to a more sustainable future. An example are energy producers who had to phase out high emission plants to meet regulatory standards and therefore had to close and write off almost newly built power plants. This is quite extraordinary but a perfect example of a situation where a business had to comply with a transformation path that is planned by others.
7. HR transformation cost (training, awareness, recruitment of experience and expertise)
Making an organization more sustainable has an 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. This should be the focus of change management. Compared to other change initiatives we see that
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 increase
Research shows that customers are willing to pay more for sustainability-marketed products and that market shares of companies who are able to brand their sustainability initiatives are growing their market shares. This has already taken place in the B2C market but it is something we also expect to grow for the B2B market. Procuring sustainable products and services helps to improve the sustainability performance on the client’s side and that is a major incentive for companies to “outsource” part of sustainability to their suppliers.
2. Value increase
75% of investors see sustainability performance as relevant to their investment decisions, according to a study by McKinsey. 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. According to a study by Harvard Business Review, companies prioritising sustainability have better financial performance and lower cost of capital, attracting more investors. ESG performers also enjoy higher valuations by a margin of 20%. Lastly, banks and financial institutions may offer better financing terms to companies that demonstrate sustainability leadership, reducing the cost of capital.
3. Competitive advantage
There are many businesses competing for the same customer base, and there is definitely an advantage for the companies that are first and most successful in their sustainability achievements and branding. Speed is an important factor, especially in industries that have a traditional mindset and low sustainability maturity. Like in our example organisation, offering telco and ICT services to mid size organisations. In this market there is a lot of potential on both supplier and customer side to improve sustainability performance. Being the first supplier to offer alternative and greener solutions will create a key competitive advantage
4. Lower cost of energy and waste
Sustainable practices often lead to improved efficiency and reduced waste. For example, energy-efficient technologies and waste reduction strategies can lower operational costs. Investing in renewable energy and resource conservation can provide long-term savings on utility bills and materials.
5. Subsidies and tax benefits
There is a plethora of financial incentives, grants, and subsidies available for sustainable practices. It is a vital part of building a business case to do a thorough analysis of these potential benefits. For multinational organisations the dimension of various benefits in various locations should be part of that analysis.
6. Attractiveness for employees
Employees, particularly millennials and Gen Z, are seeking employers whose values align with their own. A commitment to sustainability will attract top talent and improve employee satisfaction and retention.
Sustainable practices foster a positive work environment and enhance employee engagement by providing a sense of purpose and alignment with broader societal goals.
7. Reduction of continuity risk
Being sustainable improves the ability of an organization to maintain its operations, services, and overall viability over the long term despite various disruptions and challenges. There are several methods to quantify the reduction in continuity risk resulting from sustainability efforts, e.g. the ones from the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP). Reduction of continuity risk will result in a higher attractiveness towards investors and customers.
Last but not least, opportunity costs have to be taken into account. These are the costs of the next best alternative foregone when a choice is made. It represents the benefits you could have received by taking a different action. In other words, it’s the cost of what you are giving up when you choose one option over another. Related to sustainability, opportunity cost needs to be broken down to markets or products. It is usually not an option to do nothing but there are of course numerous options to offer product A in a sustainable way while continuing product B in a traditional way, like we see many examples of this in the car industry. So opportunity costs are relevant and should be taken into account, and form a component of the decision of the transformation strategy.
To conclude, for organisations that look at sustainability as a “must-do”, please don’t bother about a business case and save yourself the effort. For you, everything that has to do with sustainability is just extra cost.
For the ones that consider sustainability as an opportunity to become better, more durable and more profitable, building a business case is a good way of exploring different options and making the right decisions. This article will help you with bringing a bit of structure and a checklist to make sure all relevant topics are addressed. If you want more information or assistance in building your case, please contact jessica.vanbeek@qhuba.com or wimlubbersen@gmail.com.