Making the leap to a more sustainable way of operating can deliver benefits to companies’ reputations, business plans and finances.
Just like individuals, companies’ motivations are complex. Many genuinely want to address ethical issues and engage with a wider range of stakeholders. They recognise that power brings responsibility.
However, corporates are also aware that addressing environmental, social and governance (ESG) issues offers multiple benefits. So what are the advantages of embracing sustainability?
1. Meeting public expectations
One of the main drivers for companies to improve sustainability is a desire to align themselves with customers and the public. Consumers once expected companies to focus purely on profit. Now there is a broad belief that companies should behave responsibly; 56% of 2018 Edelman Trust Barometer respondents believe that companies that only think about themselves and their profits are bound to fail.
A recent example of how pressure from the public can drive change is plastic pollution in the world’s oceans. While this problem has steadily worsened for years – a report by the World Economic Forum (WEF) and the Ellen MacArthur Foundation claims that there will be more plastic than fish in the sea by 2050 if current trends aren’t reversed – it recently gained momentum.
In response, leading companies including L’Oréal, Mars, Coca-Cola, Unilever and Nestlé announced they are working towards using 100% reusable, recyclable or compostable packaging by 2025. “As a consumer goods industry, we need to go much further, much faster, in addressing the challenge of single-use plastics by leading a transition away from the linear take-make-dispose model of consumption, to one which is truly circular by design,” explains Paul Polman, CEO of Unilever.
2. Avoiding bad news
Companies’ eagerness to keep the public onside can lead to rapid shifts in corporates’ strategies. A number of major consumer-focused companies, such as Coca-Cola, Procter & Gamble and Unilever withdrew from platforms such as Facebook, Twitter and YouTube because of concerns that their ads were appearing alongside offensive content and fake news. Facebook's communications and public policy chief, Elliot Schrage immediately pledged to do more, recognising that the company has "under-invested in preventing abuses".
Corporates’ fear of alienating the public is also being successfully exploited by canny pressure groups eager to nudge companies to up their sustainability game. For example, China Labor Watch has helped to highlight the mistreatment of workers at companies that supply leading tech firms such as Apple and more recently exposed alleged mistreatment of workers at a factory in China that manufactures Amazon Kindle e-readers and Echo Dot smart speakers.
3. Boosting the business
There are sound business benefits to embracing sustainability; it can be a powerful driver for efficiency savings, for example.
German chemicals giant BASF has adopted a Verbund system that enables it to add value through efficient use of resources. Applied to energy, it has spurred BASF to use surplus heat from production processes in other production plants, for example. Thanks to Verbund, BASF saved around 19.2 million MWh of energy in 2017, giving it a competitive advantage. Of course, the policy also had a positive impact on the environment: the energy saved was equivalent of 3.9 million metric tons of CO2 emissions.
By encouraging companies to think creatively, sustainability has the potential to unlock new strategic opportunities. The WEF and Ellen MacArthur Foundation report calculates that 95% of the value of plastic packaging material, worth $80-120 billion annually, is lost to the economy because most plastic packaging is used only once.
“After-use plastics could – with circular economy thinking – be turned into valuable feedstock,” says Martin Stuchtey at the McKinsey Center for Business and Environment, which provided analytical support for the report. “Our research confirms that applying those circular principles could spark a major wave of innovation with benefits for the entire supply chain.”
4. Recruiting and motivating employees
Organisations with robust corporate social performance (CSP) are more attractive as employers, which should boost long-term performance. David Jones, professor of management at the University of Vermont suggests that CSP informs “three signal-based mechanisms that ultimately affect organisational attractiveness: job seekers’ anticipated pride from being affiliated with the organisation, their perceived value fit with the organisation, and their expectations about how the organisation treats its employees.”
That view is confirmed by ING’s experience, according to Mark Milders, head of ING investor relations. “Our sustainability standpoint is crucial to recruiting people to the firm,” he says. “Millennials in particular don’t want to join companies associated with pollution or low ethical standards: they care about social and environmental issues; it is a real theme in job interviews and how they select whom they’d like to work for”
A strong commitment to reducing inequality, through employee ownership for example, can be a powerful motivator for existing employees. Studies have shown that employee ownership helps companies focus on long-term objectives rather than short-term targets. Moreover, companies with some employee ownership are more resilient and productive while employees are more satisfied and customers trust them more.
A study of companies with employee stock ownership plans (ESOP) by US organisation the National Center for Employee Ownership shows that they grow faster than regular companies. Indeed, ESOP companies grow fastest when ownership is combined with worker participation in decision-making. “Most people work better when they enjoy what they’re doing,” say Corey Rosen and Michael Quarrey, authors of the study. “Our data suggest that employees enjoy their work most when they feel they have some say about the conditions of their workday.”
5. Rewards for good behaviour
Ethical investment is now big business. More than 1,700 investment managers have signed up to the UN’s Principles for Responsible Investment, representing almost $70 trillion in asset under management. By meeting the investment criteria for such a large and growing pool of investors a company can broaden its potential shareholder base.
A progressive approach to ESG issues also has proven financial benefits. An analysis of more than 300 of the world’s largest pharmaceutical, consumer goods, oil and gas, banking and tech companies by the Boston Consulting Group found that those with more ethical operations are more profitable and valued more highly than competitors.
“There is no shortage of evidence that shows a relationship between ESG risk and financial outcomes,” notes Audra Stundziaite, senior credit analyst at investment manager Hermes. “Indeed, a plethora of academic and financial studies attest [that] well-governed companies with minimal or positive impacts on society and the environment tend to have lower costs of capital than their less-sustainable peers.”
ING has made that relationship explicit with its sustainability loans, which require borrowers to meet specific sustainability rating criteria and reward them for rating improvements during the lifetime of the loan.
One of the most sizeable sustainability loans extended by ING was a €1 billion revolving credit facility for health technology firm Philips in April 2018, which is linked to a Sustainalytics rating (see Sustainalytics Q&A). In March this year, ING acted as the sustainability coordinator of agri-business company Olam’s $500m sustainability-linked revolving credit facility – the first sustainability-linked club loan deal in Asia and ING’s eleventh sustainability improvement loan.
“We believe that companies that deliver on sustainability today are the winners of tomorrow, that’s why sustainability is a part of every conversation we have with clients,” explains Leonie Schreve, head of ING Sustainable Finance
6. Complying with regulation
While many corporates are taking a proactive approach to sustainability, government pressure and regulation can be an important spur for change. For example, in April the UK became one of the first countries in the world to implement mandatory gender pay gap reporting (in this instance for companies with 250 or more employees). Given the media and public attention given to companies with the greatest gender pay gaps, it seems likely that companies will now prioritise the issue.
As importantly, regulation has raised the profile of gender inequality within companies and helped them to appreciate related issues, such horizontal and vertical segregation where women can’t progress in their career and are over-represented in low paid, low prospect jobs. “Publishing our gender pay gap has allowed us to understand the reasons for the gap and hold ourselves accountable,” says Laura Hinton, executive board member and head of people at PwC. “For example, we know that a sizeable part of our pay gap is a result of having fewer women in senior positions, so this is an area where we continue to focus our efforts. We’re also challenging our recruitment processes, making more senior jobs available on a flexible or part-time basis, and have introduced a return to work programme.”
Regulation can also play an important role in elevating the importance of CR itself. KPMG’s Survey of Corporate Responsibility Reporting 2017 shows significant increases in CR reporting since 2015 in countries such as Mexico (+32 percentage points), New Zealand (+17 percentage points) and Taiwan (+11 percentage points) where new reporting regulation has been introduced.
However, companies should not rely primarily on regulation as a driver for sustainability; other factors described in this article such as reputational or financial benefits are equally important. Fortunately, many corporates recognise this. While the Trump Administration has withdrawn the US from the Paris Agreement on climate change, corporate America remains largely committed to measures aimed at reducing global warming as a result of greenhouse emissions. Almost 1,900 US corporates (ranging from Apple and Adidas to Campbell Soup and Volvo) alongside hundreds of elected officials, investors and other leaders have signed up to the We Are Still In campaign, which supports climate action to meet the Paris Agreement.