The business case for corporate sustainability remains ‘strong’, with sustainability investments leading to ‘measurable gains’ in profitability, resilience, and growth, a new report published in Harvard Business Review has suggested.
This is despite a political and executive pushback against ESG initiatives, Tensie Whelan, distinguished professor of practice emerita and senior adviser at NYU Stern’s Center for Sustainable Business wrote in the article.
Emerging from a slump
‘Corporate sustainability appears to be in a bit of a slump,’ she wrote. ‘ESG has become a political liability, sustainability teams are shrinking, and many executives have shifted their attention to AI, economic uncertainty, and regulatory fragmentation
‘So why are private equity firms – investors with little patience for initiatives that do not pay – still putting money behind sustainability? […] The answer is that many companies still have substantial value to squeeze from sustainability strategies that lower costs, reduce risk, strengthen supply chains, improve productivity, and generate revenue.’
Whelan cited recent research by BCG and the ESG Data Convergence Initiative, which indicated that private equity firms have achieved EBITDA increases of between 4% and 7% over the lifetime of investments through sustainability-related initiatives.
According to the Return on Sustainability Investment (ROSI) methodology from NYU Stern’s Center for Sustainable Business (CSB), the biggest opportunities from sustainability investment fall into four areas: circularity, decarbonisation, sustainable sourcing, and employee well-being.
“From the research behind this instrument, we have found that each offers a distinct route to stronger financial performance,” she added.
On circularity, for example, Whelan cited a ROSI case study involving an automotive manufacturer that achieved an annual net benefit of $100 million from reusing car components, selling materials to recyclers and reducing disposal costs.
Elsewhere, in terms of sustainable sourcing, research cited by Whelan found sustainability-marketed consumer packaged goods in the US grew at a five-year compound annual growth rate of 10.9%. This is around 4.9 times faster than conventionally marketed products, she noted.
Corporate focus
According to Whelan, businesses need to increase their focus on sustainability-related issues that materially affect their businesses, set measurable targets to address these, and connect progress to financial performance.
‘The fundamentals of sustainability strategy remain the same: manage the environmental and social issues that materially affect the business, set outcome-based sustainability targets, and connect progress to financial performance,’ she wrote.
‘To be successful, companies should quantify the value created – or the costs avoided – on the balance sheet, through lower expenses, reduced risk, stronger revenues, and other operational gains, and embed the process in ordinary business decision-making.’ Read more here.
