In a rapidly changing global landscape, companies can no longer afford to dismiss sustainability as just another trend. The growing focus on ESG (Environmental, Social, Governance), covering all aspects of sustainability, means that businesses must recognize its tangible impact on their bottom line. But how do sustainability and profits interlink? And why is it essential for businesses to invest in environmentally and socially responsible practices, especially in their value chains?
Redefining ROI in the Sustainability Context
The return on investment (ROI) of sustainability is more complex than its traditional calculations. Standard ROI metrics often overlook crucial sources of value that can shape a company’s future growth trajectory. This shortcoming can make them ill-suited to assess the true benefits of sustainability investments, which often accrue over the long term and extend beyond net income.
Harvard Business Review has proposed redefining the tools that organizations use in making financial decisions to incorporate data that underscores the value of long-term strategic initiatives. This shift in focus recognizes the far-reaching benefits of sustainability, including more efficient value chains, healthier communities, and the prevention of potentially catastrophic costs such as the predicted 18% of GDP destruction due to climate inaction by 2050. When analyzed holistically, the value proposition of sustainability becomes much more clear.
Quantifying the ROI of Sustainability
For some, the term ‘sustainability’ still conjures images of additional costs and regulatory burdens. But numerous studies paint a different picture:
- The World Economic Forum’s Beyond Supply Chains report found that companies who implement ethical supply chain practices can boost revenue up to 20% for responsible products, reduce supply chain costs by up to 16%, and enhance brand value by up to 30%.
- McKinsey reports that a solid ESG score can lower capital costs by roughly 10%.
- Another survey by Oxford University and Arabesque Partners revealed that 88% of companies with good sustainability practices saw improved operational performance.
- A recent report from Accenture noted that companies scoring high on ESG factors experienced 2.6x greater shareholder returns than average scorers between 2013-2020.
- Research from Harvard Business School found that companies with strong sustainability practices outperform their counterparts in terms of stock performance.
One might argue: Do successful companies simply have the means to invest in sustainability, or does investment in sustainability drive their success? Research is increasingly showing it’s the latter, with recent studies demonstrating that ESG practices predict financial performance and company value.
These findings underscore a clear message: Embracing sustainability does not mean sacrificing profitability.
Beyond financial returns, the ROI of sustainability includes reputational value, brand loyalty, improved productivity, increased resilience, and enhanced employee satisfaction and morale. These intangible returns can significantly contribute to an organization’s overall value, demonstrating the far-reaching benefits of sustainability investments.
How Does Sustainability Drive ROI?
- Cost Savings: Sustainable companies often have a lower unit-cost structure. Adopting sustainable practices can directly translate to significant cost reductions across various departments, including:
- Waste reduction by emphasizing recyclable materials and waste management.
- Facilities, via energy-efficient buildings and green maintenance practices.
- Manufacturing, through optimized production and logistics processes.
- Adopting green technologies and vendors.
- Reduced business travel by prioritizing virtual meetings and reducing the physical real estate footprint.
- Top-line Growth: Sustainability isn’t just about saving—it’s about earning too. Sustainable brands tend to grow faster because they appeal to consumers’ increasing demand for responsible products, leading to heightened customer loyalty and the attraction of new segments. Championing green initiatives boosts brand reputation, helps win bids that prioritize sustainability, and allows the company to differentiate itself in crowded markets. Large corporations now seek suppliers with solid sustainability credentials, emphasizing the importance of a strong ESG proposition.
3. Risk Mitigation: Addressing ESG concerns proactively can diminish the risk of punitive regulatory outcomes and reputational damage from related incidents. Sustainability serves as a form of risk mitigation, reducing the chances of litigation and providing proactive solutions to future regulatory challenges. Routine sustainability reporting can also reveal otherwise overlooked issues and provide valuable insights for long-term strategic planning, such as enhancing energy security via diversified renewable sources.
4. Talent Attraction and Retention: Sustainability initiatives can have a profound impact on employees. Younger generations crave purpose in their work, emphasizing the importance of a strong ESG proposition – in fact, a survey by KPMG found that one third of 18-24 year olds have turned down a job offer due to the employer’s weak ESG commitments. Companies that offer meaningful roles anchored in sustainability are more attractive to this talent pool, leading to higher productivity, engagement, and morale.
5. Investment Optimization: There are risks of holding onto unsustainable assets, like those related to the fossil fuel sector. While on the other hand, there’s rising potential in ESG-related investments. Gartner predicts that by 2026, sustainability metrics in investment plans will be standard for CFOs. They anticipate that 60% of public companies will incorporate sustainability metrics as a pivotal component of their ROI analysis and forecast that 30% of total debt capital markets funding will be funneled towards ESG initiatives by the same year.
How to Approach the ROI of Your ESG Strategy
Given the broad benefits of sustainability, businesses must develop effective strategies to maximize their return. Here are the key considerations when creating your ESG strategy:
- Focus on managing risk. Anticipate external events that could negatively impact finances.
- Think long term. Sustainability is an investment in the future; immediate returns might not always be evident.
- Measure the impact of specific projects to understand cost savings and efficiency improvements.
- Accept the upfront costs. The return on investments like materiality assessments, target-setting and supplier engagement software might be challenging to quantify initially, but they lay the groundwork for future gains.
- Acknowledge ambiguity. Some benefits, like improved working conditions leading to employee satisfaction, might not have direct numeric value but are still vital.
- Proactively respond to external pressures from consumers and investors by incorporating those factors into your priorities.
The Path Forward
Embracing sustainability is no longer just morally right—it’s a strategic business imperative. From driving top-line growth to optimizing investment, sustainability is reshaping how we perceive ROI. As metrics become more transparent and integrated into mainstream investment evaluations, the business world will undoubtedly see more green, both environmentally and financially.
Businesses looking to thrive in the modern age must recognize this shift and act accordingly. After all, in the words of Larry Fink, CEO of BlackRock Investments, “sustainability is the lens through which we evaluate potential investments.” It’s high time all businesses viewed their operations through the same lens.
Interested in optimizing your company’s sustainability efforts and unlocking tangible value? SupplyShift’s suite of solutions can guide your journey. Get in touch today.
