The Business Case for Sustainability

Sustainability and ESG (environmental, social, governance) professionals often struggle to get budget support and funding for company-wide initiatives. In 2023, there’s been instability around the state of the economy, recession concerns, layoffs, and most recently, the collapse of Silicon Valley Bank, Signature Bank, and Credit Suisse. This uncertainty has made senior leadership at some companies more hesitant to invest generally, including allocating budget to sustainability and ESG. For companies prioritizing sales and cost savings, building a business case for sustainability and ESG might seem difficult.

However, even in 2023, the business case for sustainability remains strong - stronger than many even recognize. While it’s true sustainability is a long-term path to shareholder value creation (not to mention broader environmental and social well-being), it also delivers tangible and immediate financial, reputation, risk management, employee, and revenue benefits for companies. Now, more than ever, it’s important for companies to weave sustainability into their overall business strategy to maximize the upside.

What are the Financial and Business Benefits of Sustainability?

From a business case perspective, effective, thoughtful, and strategic sustainability creates value for businesses and their shareholders across nine areas:

And all of these business benefits have been demonstrated through empirical data, objective observation, and peer-reviewed academic, government, and corporate research.

The Business Case for Sustainability

Science has proven that rising global temperatures and greenhouse gas (GHG) emissions are a huge environmental and societal risk that also extends to businesses and the broader economy. Nonetheless, there’s often a disconnect between sustainability practitioners and financial value discussions because of a perception that they speak a different language, in a sense. This perception is well worth challenging.

Finance 101 tells us that shareholder value is the present value of a company's future cash flows. As a result, the world’s most valuable companies, ones like Apple and Microsoft, derive much of their market value from their future profit potential. At the time of this article, Telsa's market cap (and price-to-earning ratio) is higher than Walmart's or Exxon Mobil, despite the fact that both of those companies generate more revenue and profit today. It's precisely because the long-term market opportunity for electric vehicles (a sustainable product) looks more favorable and lower risk than the long-term market for oil (an unsustainable product), that the market values things the way it does.

Like shareholder value, sustainability - which contributes to shareholder and stakeholder value - is also a long-term approach to reduce risk and maximize opportunity. Yes, it's the "right thing to do" in moral and ethical terms, but it's also good for business. And since most businesses by default base their decisions, budgets, and priorities on financial outcomes, the business case for sustainability should also be presented in financial terms.

Here's how to do it:

Business Case Point #1: Strong ESG and Sustainability Performance Lower a Company's Cost of Capital

Businesses need outside capital to operate, grow, and invest - capital which typically comes from bank loans (debt) or investors (equity). As we've seen countless times, it's hard to operate a business when a company doesn't have enough cash. In our current economic climate, access to capital and cost of capital matter, and research shows more sustainable companies are more favorably positioned than non-sustainable businesses.

On average, based on research from MSCI, top ESG and sustainability performers have a 0.2% - 0.4% lower cost of capital in the public and private equity and debt markets vs. lower performers and laggards. While that might not seem like much, that could equate to $200,000 to $400,000 a year in annual interest savings on a $100 million loan (or more).

More sustainable companies are, fundamentally, seen by investors and banks as less risky. According to PwC, 80% of institutional investors screen investments using ESG criteria and incorporate ESG risk factors in their investment decisions, while 61% of investors consider strong ESG and sustainability performance a sign of “ethical corporate behavior which reduces investment risk”. We see similar trends and practices in the lending industry.

Business Case Point #2: Sustainability Can Reduce a Company's Financial Operating Costs

Sustainability and circularity operate on two principles:

In practice, from a business perspective, higher efficiency and less resource usage translate to cost savings. In fact, there are many different ways sustainability can help a business save money. For example:

For example, Anheuser-Busch InBev, the world's largest brewer improved its annual operating income by $7.5 million by working with its barley growers to accelerate adoption of sustainable farming practices. By producing healthier, high-quality raw material crops, InBev was able to achieve operating efficiency improvements and less wastage in its brewing operations, saving the company millions.

Business Case Point #3: Sustainability Promotes Pricing Premiums

Research consistently demonstrate that sustainable and sustainability-marketed products outperform conventional products in terms of average selling price, percent of purchases, and overall category growth. Data from the NYU Center for Sustainable Business finds sustainability-marketed products enjoy a price premium of 27.6% compared to their conventional counterparts.

While these premiums are slightly lower for price-sensitive consumer staples and in some B2B segments, broadly, the market for sustainable products (and sustainable byproducts, recycled, and up-cycled materials) is a meaningful revenue opportunity many companies are under-utilizing.

Business Case Point #4: Sustainable Products Achieve more Market Share Growth vs. Non-Sustainable Products

Sales of sustainability-marketed products have grown 2.7x times faster than conventional products since 2015. For example, while sustainability-marketed products represent just 17% of total consumer goods sales, they represented one-third of all CPG sector sales growth in 2021, despite their pricing premium.

Sustainable and sustainability-market products aren't just a consumer goods trend either. We’re also seeing large enterprise and government buyers integrating ESG and sustainability assessment, evaluation, and disclosure requirements into their procurement process and vendor selection, with increasing levels of due diligence and data rigor. Suppliers are now being heavily scrutinized for their ESG and sustainability practices, and may face repercussions from buyers - or even lost revenue - if they don't have strong environmental, social, and governance practices and disclosures in place.

Business Case Point #5: Sustainable Businesses are More Adaptive and Resilient to Risk

In business, sustainability is both an operational set of practices and a mindset. While it can be challenging (if not impossible) to re-invent a legacy business and transform it overnight into a sustainable one, thoughtful sustainability and ESG implementation over time can transform not just a company's business model but its culture as well.

Doing so, as we've already outlined, carries a number of financial and shareholder benefits. Yet another one is adaptability and resilience to risk, which we've seen plenty of in the past few years. For example, sustainable businesses exemplify:

Business Case Point #6: Sustainable Businesses Have Better Employee Recruiting, Retention, and Productivity

While a business' hiring practices will vary from company to company (not to mention economic cycle), every company wants to attract, grow, and retain the best talent possible. Similarly, every company strives to reduce its voluntary turnover (i.e., "quitting"), particularly among its top performing employees.

Here again, sustainability delivers meaningful value and cost savings. Research from Babson College, Starbucks, Campbell's, and Glassdoor find that effective, transparent social responsibility and sustainability programs can reduce voluntary employee turnover by as much as 50%. When it comes to younger workers, 66-75% of employees age 34 and under say they want to work at companies that match their personal values and do good in the world, according to surveys by Linkedin and YouGov, and are increasingly willing to quit jobs that don't live up to those commitments.

To put that in financial perspective, consider a company with 1,000 employees that has 10% annual voluntary employee turnover, consistent with U.S. national averages according to the U.S. Bureau of Labor Statistics. While there are different methods for estimating the cost of a departing employee - which can vary based on their tenure, seniority, skill level, and industry - it can easily cost thousands of dollars in HR and recruiting efforts - and months of lost productivity - to find a replacement for a skilled employee, particularly in a tight labor market. Amazon, one of the world's largest employers, estimated its average cost per departing employee in 2021 was around $60,000. Gallup also estimates the cost of replacing an individual employee can range from one-half to two times that employee's annual salary. If we assume sustainabile business practices and value commitments decrease our hypothetical 1,000 employee company's voluntary turnover rate by 25%, that would save the company $1.5 million per year in recruiting costs and lost productivity.

Regardless of today's accounting treatment (which the IFRS' new ISSB standards are working to change), employees are an asset, not a fixed cost. Sustainable businesses recognize that, and are well-positioned to outcompete their competitors on talent.

Business Case Point #7: Sustainable Companies Have Stronger Brand Reputation and Improved Media Exposure

Sustainable companies have consistently stronger brand reputation and improved media exposure. According to a study by Nielsen, 81% of global consumers feel strongly that companies should help improve the environment. Moreover, 73% of consumers would change their consumption habits to reduce their environmental impact. This shows that sustainability has become a key driver of consumer behavior and decision-making. Companies that adopt sustainable practices are seen as responsible and ethical, and this reputation translates into better brand exposure and media coverage.

For example, Patagonia, the outdoor clothing and gear company that promotes sustainable practices, has built a strong brand reputation for environmental activism. The company's "Don't Buy This Jacket" campaign, which encouraged customers to buy only what they need and avoid wasteful consumption, was widely covered in the media and earned the company widespread praise.

What CMO or CFO doesn't love free, amplified media?

Business Case Point #8: Sustainable Companies Have Higher Customer Loyalty

Sustainable brands also have higher customer loyalty. According to a survey by Accenture, 62% of consumers want companies to take a stand on current and broadly relevant issues, such as sustainability. Moreover, 65% of consumers say they are more likely to buy from a brand that is purpose-driven, and 66% are willing to pay more for sustainable products. Study after study show that sustainability is not just a nice-to-have feature but a crucial factor in building customer loyalty.

For example, Unilever's Sustainable Living Plan, which aims to promote sustainable practices throughout the company's operations and supply chain, has helped the company build strong relationships with its customers. According to the company's 2020 annual report, 70% of consumers now associate Unilever's brands with sustainability, and these brands are growing 69% faster than the rest of the business.

Business Case Point #9: Sustainable Businesses Have Higher Market Valuations

Finally, sustainable businesses achieve higher market valuations, as well as lower public market volatility. A 2022 study by MSCI Sustainalytics of 6,000 listed companies finds that a high to severe ESG risk incident for a publicly-traded company typically has a -6% impact on a company's total market capitalization. Other research studies from Harvard, Lazard, and BCG find companies with higher ESG ratings and lower greenhouse gas emissions have higher public market valuations and lower stock market volatility.

Logically, this makes sense. Sustainability is perceived by investors as value-additive, and lowers corporate risk.

And, with existing, new, and anticipated ESG regulatory compliance requirements on companies operating in the United States, Canada, U.K., European Union, Singapore, Hong Kong, Australia, and other regions, sound ESG governance, controls, systems, practices, risk management, and reporting are increasingly seen as critical corporate attributes by the majority of institutional investors and analysts.

Concluding Thoughts on the Business Case for Sustainability

While the global economy certainly isn't at its best in 2023, investing in sustainability is essential for companies to maintain a competitive advantage in a rapidly changing environment. Sustainability is no longer just social responsibility, but a business imperative around innovation, shareholder value, and risk reduction. Companies that prioritize sustainability can differentiate themselves from their competitors, attract and retain customers better, reduce costs, increase efficiency, improve sales, and enhance their reputation. Additionally, sustainability presents opportunities for companies to tap into new markets, develop new products and services, and reduce supply chain risks. Sustainability is fundamentally strategic, delivering considerable financial benefits, while also positioning companies for long-term success.