How sustainability leadership can boost the bottom line
A quick search of news outlets will reveal hundreds of stories about innovative companies, governments, and research organizations using technology to disrupt existing business models and develop new markets for products and services. One of the fastest growing areas of disruption centers on solutions that provide significant environmental or societal benefits along with financial and efficiency gains. For example, the proliferation of solar electricity has resulted in employment opportunities growing 12 times faster than the rest of the U.S. economy, according to an Environmental Defense Fund report. Why is this focus on sustainability so significant, and why should business leaders pay attention to the trend?
Sustainability gets its start
Sustainability was defined in 1987 by the Brundtland Commission as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” In a business context, sustainability is about managing financial, social, and environmental risks, obligations, and opportunities, sometimes referred to as the triple bottom line.
The financial impact of rising energy costs, coupled with the increase in technology use by employees and customers, has led many companies to focus on energy efficiency and utility cost reduction to reduce operating expenses.
Although technology consumes energy, it offers the opportunity to lower energy consumption using smart building technologies, as well as reduce the office space required by enabling employees to work remotely. Lower energy usage results in lower environmental impact, as well as lower costs. PepsiCo, for example, found that its sustainability efforts over five years reduced costs by $375 million, while reducing its energy use by 16 percent and water use by 20 percent. These benefits align the goals of real estate, finance, IT, and sustainability organizations, encouraging them to work together on efficiency improvements.
However, efficiency improvements, while important, are an example of the “doing less bad” mentality that has been prevalent since the earliest days of sustainability.
Sustainability practices attract millennials
In contrast, leadership for the future requires adopting a “doing more good” mentality that offers sustainability leaders new opportunities for innovation. In this sustainable future, leadership must look beyond an individual company, focusing instead on partnerships with other like-minded leaders. One example of this partnership is the Net Positive Project, founded by a consortium of companies including AMD, CapGemini, Hewlett Packard Enterprise, and Kohler. Net Positive participants work toward a world in which companies drive financial success and create "net positive" impacts by putting more into society, the environment, and the global economy than they take out.
Making a net positive impact requires new passion and perspectives. Millennials make up almost one-third of the workforce today and are expected to make up 75 percent of the workforce by 2025, according to a study by the Brookings Institute. Millennials, the most studied generation in history, are passionate about making a positive impact on society and have a strong ethos for environmental protection and social responsibility. They also demonstrate a strong brand affinity for companies that publicly demonstrate strong sustainability engagement.
A 2016 PricewaterhouseCoopers study found that millennials are five times more likely to stay with an employer when they feel a strong connection with their employer’s purpose. HSBC recognizes this passion in its millennial workforce, encouraging employees to volunteer over 255,000 hours on social and environmental causes in 2016. At HPE, employees can volunteer 60 hours of work time each year and participate in a matching gift program. Programs such as these allow leading corporations to attract and retain this generation of employees.
As customers, many millennials expect companies to offer products and services that are cost-competitive and demonstrate benefits to the planet or people. However, this focus extends beyond the millennial generation. Customers want to do business with corporations that have strong track records of sustainability-related products, services, and programs. Accenture found that consumers expect more from their purchases than just the product or service they are buying. They want to do business with responsible companies. HPE responds to thousands of sustainability questionnaires from customers each year, many of which require effective sustainability programs as a condition of doing new business. Yet 42 percent of the consumers Accenture surveyed reported that companies are failing to meet their expectations. The gap suggests companies are missing an opportunity to showcase the positive social and environmental benefit they provide and therefore satisfy a primary customer expectation.
Leadership brands such as SAP, HPE, BASF, and UPS have recognized this gap and are focused on using sustainability leadership as a differentiator with business customers. For example, UPS recently preordered 125 of Tesla’s new fully electric semi-tractors. The new tractors will join its extensive alternative fuel and advanced technology vehicle fleet, comprised of trucks and tractors propelled by electricity, natural gas, propane, and other nontraditional fuels. UPS’s focus on alternative fuel vehicles supports the company’s overall commitment to reduce its absolute greenhouse gas emissions, while driving significant cost savings on fuel and improving highway safety through the use of driver-assistive technologies.
HPE was the first major technology company to publish external sustainability goals designed to drive product energy efficiency improvement and supply chain carbon reductions. HPE’s commitment to improving product energy performance by 30 times and reducing supply chain emissions by 15 percent have resulted in numerous customers requesting information on how its goals will be achieved.
As a result, HPE now shares its sustainability and IT efficiency expertise with customers, resulting in opportunities to partner on innovation, increase customer satisfaction, and boost revenue. In fact, customers representing over $2 billion in revenue request briefings on HPE sustainability leadership each year. By leveraging sustainability as a point of differentiation, HPE is developing more robust customer relationships and identifying new revenue opportunities.
HPE’s experience matches those of other sustainability leaders. Nike used public concern over plastic waste in oceans as an opportunity to innovate a new yarn system, used in its Flyknit shoe line, that reduced manufacturing waste by 60 percent and diverted 182 million plastic bottles from landfills, while growing into a $1 billion product line. IKEA focused on reducing food waste, beginning with a pilot project at 84 of its stores. According to a company statement, the program has already resulted in a reduction of 79.2 kg of food waste and 341 kg of CO2, and saved €880,000 ($981,508).
Companies with strong sustainability engagement generally find business success follows as well. For example, a review of 200 academic and market studies conducted by Arabesque and the University of Oxford found that positive stock price performance is correlated with good sustainability practices. The same review found that solid sustainability performance resulted in better operational performance, which ultimately translated into better cash flow. IKEA developed sustainable products like solar panels for its "Products for a More Sustainable Life at Home" line, generating over a billion dollars in new revenue.
These positive financial results have prompted the financial investment community to begin to evaluate companies on the strength of their sustainability programs, which the financial community often refers to as environmental and social governance (ESG). Beyond this scrutiny, financial investment instruments, known as socially responsible investment (SRI) funds, have been developed, consisting of companies that have leading sustainability programs and commit to certain standards of ESG conduct. Over the past two years, more than $2 trillion dollars have been invested in SRI funds, according to CNBC.
How can corporations improve their sustainability performance and leverage sustainability as a differentiator with their customers?
1. Identify and evaluate the most material environmental and social drivers that impact the company and its customers, shareholders, and stakeholders. Many companies publish sustainability or corporate citizenship reports, but far fewer publish an assessment of key risks and opportunities. Without a strong grasp of the most material issues, corporate programs often are unfocused and therefore have minimal significant financial or customer success. Leadership companies often publish the top social and environmental material drivers in locations more accessible to investors, such as in their annual 10-K disclosure filed with the U.S. Securities and Exchange Commission.
2. Develop clear plans to address the most significant of these drivers, including public goals and disclosure of progress toward those goals. Customers, stakeholders, and investors assess leadership by looking for aggressive goals for material issues and transparent progress toward those goals. Communicating both successes and challenges lends credibility to sustainability progress.
3. Integrate sustainability initiatives with key business functions. Sustainability programs should support and enhance the key business activities of the company. The integration with key products, services, and business functions should be apparent to customers, stakeholders, and shareholders. Sustainability initiatives should enhance and project the key reputational aspects of a company’s brand.
4. Establish stakeholder feedback mechanisms, such as an external advisory group. Customers and stakeholders are willing to provide feedback, particularly if they can see the feedback being incorporated into program improvements. An external advisory group can be particularly useful for annual reviews of goals, programs, and strategic direction. The group insights often reveal gaps or identify nuances that had not been considered previously. Groups representing customers, shareholders, and stakeholders provide the most value.
5. Provide clear summaries of sustainability success to customers, stakeholders, and shareholders. Sustainability leadership depends on clear articulation and quantification of value. Marketing, communications, investor relations, and sales teams can all contribute to sharing the strength of sustainability programs. When developing messaging, use business metrics such as CapEx, OpEx, and return on investment, in addition to sustainability metrics such as carbon reduction. Do not use terms that cannot be substantiated, such as “green” or “eco” in marketing or sales literature. "Greenwashing" is harmful to reputations and is increasingly investigated by regulators.
6. Partner with other sustainability leaders to extend and enhance programs. Partnership is leadership. Sustainability leaders are increasingly looking to partner with customers, vendors, and thought leaders to solve business challenges. Like-minded partners provide new insights and capabilities that often lead to innovation and new revenue opportunities. Leadership organizations, like Sustainable Brands and Business for Social Responsibility, foster collaboration across their member organizations and shepherd key initiatives that help find solutions to global challenges.
Sustainability can be an important differentiator for companies looking to distinguish themselves in a crowded global marketplace. However, sustainability leaders have learned that their programs must be material, aggressive, credible, and transparent to meet the expectations of customers, stakeholders, and shareholders. Business leaders are beginning to recognize that strong sustainability programs, tightly integrated into their company’s key businesses, provide additional value by driving differentiation, employee retention, lower costs, customer preference, and new revenue, while protecting people and the planet.
This article/content was written by the individual writer identified and does not necessarily reflect the view of Hewlett Packard Enterprise Company.