By Bethan Goodwin
Sustainability strategy should no longer be considered a necessary ‘box to tick’ by business leaders, but rather a driving force for profit by ensuring a successful and sustainable future for a business. In 2020, make transforming sustainability into profit your New Year’s resolution.
Using advanced technology systems and data collection to monitor a business’s operational sustainability – including environmental, social and governance (ESG) factors – has become a vital part of driving profit and minimising risk. The purpose is to create business and supply chains that perform well, improve operational efficiency and appeal to investors, all whilst driving profit both in the present and the future.
Collection of data relating to environmental impact – including CO2 emissions, waste and water usage – can be used to pinpoint specific issues and areas requiring improvement within a business’ supply chain, enabling cost-saving solutions to be formulated. Whilst climate change may appear to be the popular ‘buzz word’ at the moment, businesses have a very real incentive to care about their environmental impact, namely to limit the use of resources, save money and drive profit. Leading companies have recognised this and made public pledges signifying their commitment to sustainability issues; Adidas, for example, has vowed to use only recycled plastic in its products by 2024.
It is important to note that there are other factors which this data reports on, aside from environmental. Social and governance issues from every stage of the supply chain can be monitored; data collection regarding staff, for example, can report on issues from break length and staff turnover to the number of women employed in management or on the board of Directors. Companies should be aware of social issues such as equality and representation not only as a social responsibility, but to minimise their risk of exposure to litigation.
Evidence suggests that better compliance with ESG factors results in less financial risk for a business. Recent studies have found that companies with robust ESG practices displayed “a lower cost of capital, lower volatility, and fewer instances of bribery, corruption and fraud.” Conversely, companies that performed poorly on ESG have had a “higher cost of capital, higher volatility due to controversies and other incidences such as spills, labour strikes and fraud, and accounting and other governance irregularities.”1
Since supply chain risk is a factor that can be controlled, and much of a business’s success is down to external factors, businesses should be optimising every possible facet under their control. Obtaining this information differentiates a business from others, offering something unique and attractive to investors. It could mean the difference between an investor choosing your business over one which offers a very similar product, but lacks such detailed and accurate information. This also allows businesses to execute marketing campaigns targeted towards their demographic in a world of the environmentally-conscious customer. Businesses that take a stand on sustainability and climate resiliency are better fit to serve and retain customers in the long run. To win over customers, businesses are realising they must access and act on risk; from Coca-Cola’s fear of water scarcity to IKEA’s dread of deforestation.2
There has been debate about whether good ESG practice does, in fact, drive profit; however, studies are in agreement that there is financial benefit. A study conducted in 2015 which collated evidence from 2000 studies regarding ESG and financial performance found that the business case for ESG investing is empirically very well-founded. Roughly 90% of the studies found a nonnegative ESG–CFP relation.3 Importantly, the majority of studies reported positive findings, and the positive ESG impact on CFP appeared stable over time. This proves that there is longevity in operational sustainability and profit.
It is therefore in a company’s interest to invest in the use of advanced data analytics to monitor all aspects of ESG and sustainability. Whilst this is highly beneficial in regards to pleasing investors and customers, it should ultimately be seen as a financial incentive to drive profit, as proven by the conclusive evidence from multiple recent studies. Operational sustainability is important to investors, and it should be important to you. This New Year, make a resolution for your business and be confident in the knowledge it will produce excellent results, for this year and years to come.
- Chava, 2011; 20+ studies, both academic and industry; Lansilahti, 2012; Credit Suisse; Deutsche Bank; MSCI ESG Research, et al.; Huang, 2010; Bhagat and Bolton, 2008; Cremers et al., 2005; Deutsche Bank, 2012; ISS, 2011; et al. As quoted by MSCI.com. Date accessed 10/11/2019
- “Climate Change is Transforming Business” Salvatore Schiano, 8/10/2018, Forbes.com
- ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Gunnar Friede, Timo Busch&Alexander Bassen, Pages 210-233, Published online: 15 Dec 2015
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