Directors thrive at the intersection of strategic planning and risk management, and sustainability should be frequently discussed in both contexts. For directors who are just starting their journey with sustainability, it is important to learn how sustainability drives real business value, beyond the marketing fluff that has long been associated with this topic.
A company is not required to immediately attain “perfection” with respect to Sustainability, but every company needs to be actively managing sustainability risks and opportunities.
Sustainability is an important topic that is growing in importance across the supply chain and consumer base. The compound annual growth rate (CAGR) of sustainability-marketed products is two times compared to conventional products over the last five years according to the 2022 Sustainable Market Share Index, published by NYU Stern Center for Sustainable Business.
The same NYU report found that sustainability-marketed products achieved a 28% price premium over conventional products. The market data clearly shows that sustainable products offer a higher growth rate and a higher price. In your role as a director, it is critical to the company strategy and risk mitigation that the company implements sustainability strategies.
A long-held belief is that sustainability will only increase expenses; however, this belief is a falsehood. Many sustainability strategies boost financial returns to the company. Here are three specific opportunities to consider.
Three Ways Sustainability Drives Profitability
Risk management is attractive to investors. To generate the most value for a business, directors must consider what investors are seeking in a business. Investors are increasingly evaluating ESG factors as part of their due diligence process, and results from ESG due diligence can make or break a deal. KPMG’s 2023 ESG Due Diligence Study found that 53% of investors have had deals canceled due to material findings on ESG due diligence.
The same KPMG report found that 62% of investors are willing to pay a premium for companies that align with their ESG priorities.
Now, not every business is seeking outside investment in the near term, but there are other ways to generate value from sustainability. Banks are beginning to offer sustainability-linked loans, which offer a discounted interest rate for businesses with proactive sustainability programs. This type of loan pairs nicely with a business that is seeking purposeful growth.
Reduce inputs. When applying sustainability to a company that produces goods, such as a manufacturer or food and beverage producer, the goal is to reduce the inputs required to create the widget with comparable quality cost. This manifests itself in approaches, such as reducing the volume of materials in over-engineered parts and reducing waste through the production process. Energy efficiency of building and manufacturing equipment should be considered too. By improving the efficiency of the building and equipment, a business can achieve the sustainability goal of producing comparable goods with less inputs. Less materials and less energy cause a reduction to the carbon footprint, while also lowering direct expenses.
A good example of reducing inputs is the single-use plastic water bottle. The modern plastic bottle is almost paper-thin and crinkles with the slightest touch by a human hand. This wasn’t always the case: plastic water bottles used to be much thicker and sturdier. But as businesses contemplated that plastic bottles serve a specific purpose — to transport water to be consumed in a portable and cost-effective package — people realized that less material was needed to successfully serve the same purpose. Packaging designers redesigned the bottle to have different patterns to enable the bottle to be easily opened by giving it rigidity in only the most important areas. The bottling and packaging companies reduced the plastic in the previously overengineered water bottle, resulting in a reduction of input materials, waste and costs.
By using less material and energy, a business reduces input costs and boosts profitability.
Employee recruitment and retention. Employees make or break whether a business is successful. For small and medium-sized businesses, recruiting top talent and retaining employees is a frequently cited challenge. Recruiting, interviewing, hiring and training new employees can be a costly endeavor depending on the role and expertise needed. The cost can be $5,000 to $50,000 (or more) to hire and train a new employee, depending on the role and industry.
A strong sustainability program helps a business minimize the cost and effort of recruiting. Seventy percent of employees are more loyal to a company that contributes to sustainability and social matters according to the Cone Communications Employee Engagement Survey.
The employee demographic is shifting toward a greater share of Gen Z and Millennials making up the workforce, estimated to be 72% by 2029, according to the Marsh McLennan ESG As a Workforce Strategy report. As the demographics shift toward Gen Z and Millennials being the dominant part of the workforce, it is imperative for board members to ensure the company is doing its part to recruit the best employees.
Deloitte’s 2023 Gen Z and Millennial Survey found that 54% of Gen Z and Millennials research a company’s environmental policy before accepting a job. Directors should ensure the company has a publicly available policy on environment and sustainability.
Sustainability programs ensure the company has the best opportunity to recruit and retain top talent, as this has become an increasingly common part of prospective employee’s decision-criteria when seeking a job. Investments in sustainability ensure the best opportunity to retain existing employees and minimize hiring and training costs of new employees.
Directors should consider the following checklist when determining if their company is doing enough to capitalize on the opportunities offered by sustainability strategies.
- Does the business have an environmental policy? Is it shared publicly?
- Does the business have a carbon footprint report or materiality assessment?
- What initiatives have been completed to improve energy efficiency of the company’s building(s)?
- What is the age of the existing equipment and what efficiencies does modern equipment offer?
- How does the capital plan consider sustainability and efficiency?
- Is there a policy, process and training for how to manage waste, recycling and compost?
- Which customers are asking for environmental data about our company or products?
- What materials are sourced from overseas and can they be sourced locally instead (to reduce shipping emissions and transportation costs)?
- If the company set an internal price on carbon, what decisions would be made differently?
- Has the company established a sustainability committee of cross-departmental stakeholders?