62% of executives consider a sustainability strategy necessary to be competitive today, and another 22% think it will be in the future. The broader societal concern about sustainability has grown from almost nothing in the early 1990’s to a dominant theme today. Leaders of multi-national corporations faced an ongoing dilemma of trying to impress everyone involved in the business from the stakeholders to the shareholders. As a result, sustainability is now said to be more a ‘requirement’ rather than an option as it creates a ‘win-win’ situation for both shareholders and customers.
This article will focus on why businesses should care about sustainability, dominantly emphasising on profitability, new customer buying habits and the impact it has on their brand.
Sustainability was once regarded as a cost to multiple businesses however in recent times, the focus has changed and is now primarily used as a tool for businesses to cut costs and improve efficiency. In 2007, P&G set a target to reduce road kilometres travelled by trucks by 30%. Across all Western Europe they have already achieved this target through a new approach of intermodal transport. By redesigning network and establishing green corridors between P&G major logistics locations, they are now delivering fewer and friendlier distribution miles in Western Europe. Their model represents 80,000 less journeys by road per year. As a result, P&G has more than halved the impact it has on the environment across energy usage, CO2 emission, waste disposal and water usage. These operational results have led to nearly $1bn in cost savings, representing an important contribution to their bottom line, evidently emphasising the advantages of sustainability on a business.
In addition, to outline the effectiveness of sustainability; a case study was carried out in the US. 180 US-based companies, 90 of which are classified as high-sustainability and another 90 as low sustainability. The classification was based on the adoption of environmental, social and governance policies in the 1990s that reinforced a cultural commitment to sustainability. Example of environmental policies included carbon emissions reduction. Some policies include diversity and equal opportunity targets, work-life balance, health and safety improvement, and favouring internal promotion.
The high-sustainability companies had adopted an average of 40% of these policies early on, while their counterparts had adopted only 10%.
We selected these two sets of companies to be identical in terms of financial performance in the early 1990s, in order to examine the long-term performance effects of a culture of sustainability.
One of the key findings of this study was that high-sustainability organisations were characterised by a governance structure that explicitly and directly took into account the environmental and social performance of the company.
The differences in behaviour were reflected in differences in financial performance. Over an 18-year period, the high sustainability companies drastically outperformed the low sustainability companies in terms of both stock market and account measures.
The annual above-market average return for the high-sustainability sample was 4.8% higher than for their counterparts and with lower volatility. The high-sustainability companies also performed much better as measured by return on equity and return on assets. This study provides convincing evidence that sustainability pays off. Critics of sustainability argue that it destroys shareholder value however the exact opposite was found in this study. Companies that manage their environmental and social performance have superior financial performance and actually create more value for their shareholders. They do this by attracting and keeping better and more committed employees and have more loyal customers.
Consequently, is it clear that sustainability leads to efficiency and an increase in bottom line and top line performance for companies however it has also resulted in a revolutionary change in customer buying habits in reaction to a change in business strategies. This new market segment entails of changes such as; making products meat free, making the production process more efficient and finding an alternative to scarce resources. Latest trends such as veganism have seen a rapid growth in recent years. For example, the rapid explosion of ‘annual veganuary campaign , in which curious omnivores and vegetarians sign up to try out veganism for month and are then piled with recipes and other advice. It was first launched in 2014, with 3,300 people signing up; by 2016, there were 23,000 participants, then 59,500 in 2017, and a staggering 168,000 in 2018. Notably, 84% of this year’s registered participants were females, while 60% were aged under 35. Furthermore, 2017 saw a lot more households go ‘gluten-free’ or reducing their gluten content because of the perceived health risks associated with it.
Evidently, it can be induced that the latest trends in sustainability have had a big influence on those of a younger age, more precisely on university students as they able to understand the consequences of an unsustainable environment. As a result of these dynamic trends, companies have now adopted strategies to be sustainable in order to attract a similar target audience. For example, Essento, a Swiss start-up are leading the way in changing western cultural indignation towards insect consumption. The insect question stems from the need for diversity in our crops and our livestock. Consumers in the modern age are relying far too much on a very narrow range of species to fill our global food intake, some 30-species account for 95% of our human food needs. Switzerland’s second largest supermarket chain, Coop, announced it would begin selling an insect burger, and insect balls, based on protein rich meal-worm. This new release of insect based foods in Swiss supermarkets represents a shift in law and cultural perceptions. The sustainable benefits of accepting insects as a protein source are plain and obvious to even the most committed carnivore. This clearly outlines that brands have evolved to cater for the new age through innovation.
In conclusion, evidence has strongly emphasised the necessity of sustainability for both customers and businesses. Dynamic trends have forced businesses to adopt new strategies as customers tend to be loyal towards businesses that are seen to be sustainable. Social media is seen to be one of the dominant factors in dictating consumer choice. Social media has changed the way we eat our food. Consumer choice of food now depends largely on whether they can ‘Instagram’ or ‘Snapchat’ it, causing manufacturers and restaurants to be innovative in their design. In regards to business sustainability, there is clear evidence of improved profitability and improve efficiency however the government needs to lead the way and promote sustainability. Taking a collaborative approach will help to solve the ongoing dilemma and create the perfect ‘win-win’ situation and keep both shareholders and customers happy.
Reference: Robert G. Eccles is professor of management practice at Harvard Business School. Ioannis Ioannou is assistant professor of strategy and entrepreneurship at London Business School. George Serafeim is assistant professor of business administration at Harvard Business School.