Are there Financial Benefits to Corporate Sustainability Objectives?
Last year, the U.S. economy produced Real GDP growth of 2.5%, up from 1.9% in 2022, growth that was largely propped up by resiliency in consumer spending which represented $18.5 trillion in 2023 or over two-thirds of U.S. gross domestic product.
Consumers hold the power, so it’s no wonder that companies have been aligning their business objectives to shifting consumer demands. No area is this more visible than in the shifting focus to sustainable business practices. Research from IBM shows that 85% of consumers consider sustainability to be an important factor when choosing a brand, with 62% admitting that they were willing to change their purchasing behavior to help reduce negative impacts on the environment. A corporate focus on sustainability and ESG (Environmental, Social & Governance) goals is not only good for the world, but it’s good for business.
Sustainability Gives Customers What They Want
Business success largely hinges on giving the customers what they want — and these days, customers want to shop with businesses that prioritize ESG goals and sustainable business practices. Over the past five years, there has been a 71% increase in sustainability-related online searches relating to global goods and McKinsey & Co. reports three-quarters of millennial survey respondents and two-thirds of all respondents say sustainability is a factor in their purchasing decisions from a particular company.
But are ESG Initiatives Profitable?
There are two ways to answer that question: assessment of downside risk and consideration of upside financial opportunity.
Downside Risk: The Cost of Doing Nothing
Climate scientists agree that the rate of global climate change has been surging at an alarming pace throughout the past decade and that the current response to halt climate change or reverse the damage done is woefully inadequate.
As a result, business leaders have recognized the potentially massive cost of doing nothing to increase global sustainability. The estimated cost of the large-scale impacts of climate change, from worsening hurricanes to the increased frequency and scale of wildfires, to the impact of snowfall and flooding is growing exponentially. The Office of Management and Budget (OMB) estimates that the financial impact of inaction on climate change will cost US consumers in excess of $2 trillion annually. Humanitarian impact aside, the more consumers must spend on clean-up from climate change related disasters, the less they will have to spend to support the rest of the economy and that hurts businesses.
Upside Opportunity: Increase Revenue with Operations Improvements that are Viable
Some immediate gains in both sustainability and increased profitability can be realized by addressing waste and inefficiency in a company’s operations. Focusing on efficiency improvements can help ensure the long-term viability of sustainability practices. Business leaders can start their efforts by focusing on three key areas:
Improving resource management by eliminating waste and reducing operational costs.
Enhancing supply chain management that limits environmental harm throughout the value chain and identifies areas for margin expansion.
Ongoing fostering of innovation to continue to identify sustainability opportunities and fine-tuning current processes to increase cost reduction and expand revenue generation.
Financial Benefits of Adopting Sustainable Business Practices
Increasing Profitability Through Cost Savings
Sustainability strategies like reducing resource consumption, energy usage, and material waste can lead to corporate cost savings.
Photo credit: Packages at an Amazon same-day site
An example of environmental cost savings translating into financial success is Amazon’s recent cost-cutting initiatives. Amazon has publicly committed to aggressive sustainability goals like aiming to use 100% renewable energy in its operations by 2025. Yet in their most recent earnings report, sustainable cost cutting initiatives, such as changing their fulfillment logistics from a National to Regional model not only reduced the distance that packages need to travel to reach customers, but also helped expand operating margin to 7.8%, a near 6% improvement from a year prior when it was 2%. Another strategic cost-cutting and environmentally-friendly component involved filling trucks with more products, reducing the total number of trips they’d have to make. Not only did this decrease Amazon’s environmental impact, but it also saved money on labor, gas, and vehicle maintenance, allowing for margin expansion.
Expanding Opportunities for Revenue Growth
Tangentially, businesses have the opportunity to embrace sustainable practices that can result in revenue growth. The National Institute of Health published research indicating increased customer satisfaction due to green-friendly practices which can directly impact customer adoption and retention. There’s a direct connection between increased customer satisfaction levels with increased word-of-mouth and loyalty, which may drive down a company’s customer acquisition costs. As well, the NIH research indicated a consumer willingness to pay more for sustainable products, which may give sustainable businesses more pricing power.
The challenge for each business is understanding how to tap into their target market’s specific preferences as they implement sustainability practices.
The footwear giant Adidas partnered with Certified B Corporation Allbirds to design and launch their first shoe designed with one material, called FUTURECRAFT. By investigating reusable materials, Adidas and Allbirds are poised to launch an athletic shoe with only one material – that would make it more easily recycled after use. By tapping into their consumer’s preferences, Adidas and Allbirds innovated a new product segment that will drive revenue growth.
With projections show the global sustainable footwear market reaching $13.0 billion by 2030, driven in large part by consumer demand, Adidas and Allbirds are responding to these forecasts insightfully.
Steps For Developing a Sustainable Growth Strategy
To get started developing a sustainable growth strategy, we’ll break down the steps that are crucial in identifying and implementing sustainability practices into your business:
Conduct A Sustainability Audit: A sustainability audit assesses a business’s environmental impact and creates a baseline from which improvements can be measured. The key areas to audit include:
Waste systems, materials purchasing, and recycling efforts
Energy usage and energy efficiency
Water usage
Measuring your business’s carbon footprint
Identifying inventory waste
One a baseline is established in these areas, focus on reducing energy-based inefficiencies, reducing waste and surplus purchasing, increase recycling efforts, and implement commitments to optimize resources in an effort to reduce the company’s carbon footprint. These improvements in operational efficiency will not only reduce your business’s environmental burden, but will also improve profitability as costs decrease.
Set Clear and Attainable Goals: When setting goals, make them measurable, time-bound, and highly specific. Record your baseline, as measured across several impact areas above, then set aspirational yet achievable targets for your company to achieve. Consider the differences between ‘upstream’ impacts (i.e., purchased goods or services) and ‘downstream’ impacts (e.g., the end of a product’s useful life or what the products are used for) and look to find synergies to achieve multiple impact goals simultaneously.
For example, suppose your company found has set a measurable goal to reduce waste by 10% in 1-year and decrease surplus purchasing by 15%. These are both aspects of “upstream” impacts that could be combined into the same operational efficiency tactic that will be implemented across your organization.
Invest In Sustainable Technologies: Technology plays an integral role in enabling and maintaining sustainable business practices. From implementation of digital marketing and remote work policies, to investing in energy-efficient data centers and developing sustainable building designs, there are multifaceted ways that companies can leverage technology productively. Include a sustainability impact analysis in your technology purchasing decisions. By including measurable sustainability goals, the return on investment (ROI) of your technology purchasing decisions may increase.
Engage Stakeholders: Communication and feedback from your key constituencies will be key to ensuring that your sustainability goals are in-line with stakeholder objectives, and will increase accountability across the organization. Buy-in into a company’s sustainability journey from investors, employees, customers, suppliers, and surrounding communities ensures that the influential stakeholders are on the same page and improve the chance of long-term success. Essential steps include understanding what key constituencies expect, defining desired outcomes and objectives, and clear/consistent communication.
Monitor, Report, and Adjust: Set up systems to monitor progress, provide transparent sustainability reports, and course correct/pivot when necessary. Include defining key performance indicators (KPIs), gathering and analyzing data on sustainability metrics, creating progress reports, soliciting stakeholder feedback, implementing technology, and seeking third-party verification in your reporting process.
Learn by Example: There are many great case studies and examples of companies implementing sustainable and profitable business practices to glean inspiration:
Consumer goods manufacturer and supplier Unilever has committed to switching 100% of their energy to renewable sources by 2030. They detail their successes and challenges in doing so.
International furniture retailer IKEA is planning to eliminate plastic packaging by 2028.
Hundreds more companies have overhauled traditional marketing practices to accelerate the transition to digital and reduce waste.
Many more inspiring examples and tactics can be found here.
Ultimately, investing the time and resources to develop sustainable business practices are not only good for the world, but can improve a company’s long-term financial performance.
Whether you’re a startup or a Fortune 500 company, Keene Advisors offers a trusted partner to companies looking to increase sustainability while bolstering their bottom line. Contact us today with your inquiries.
Disclaimer: This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.