How to make the business case for a sustainability strategy

SUSTAINABILITY TOOLKIT no. 1

In the first of a series of practical guides for organizations on sustainability, Knut Haanaes, Frédéric Dalsace, and Jules Wurlod explain why any successful sustainability strategy needs to be underpinned by a solid business case.

The vast majority of companies see sustainability as mission-critical, with climate change at the core of priorities, but far fewer have actually implemented sustainability strategies.

The thing that is holding them back is that they have not developed a business case for sustainability. The business case is the “holy grail” that enables sustainability strategies to be scaled up.

Why you need a business case

A clear business case for sustainability is vital. Companies engage in sustainability when they see a positive business case for action – when the increased profits from an investment outweigh the costs. These mechanics are deeply rooted in the corporate DNA and help companies to meet their fiduciary duties to shareholders.

When sustainability initiatives yield extra profits, the trade-off between doing well and doing good disappears, and companies’ management, stakeholders, and shareholders join forces to push the sustainability agenda.

When sustainability yields profits and societal objectives are aligned with market objectives, the formidable forces of capitalism can be unleashed and sustainability can scale. This vision is at the core of Michael Porter and Mark Kramer’s Creating Shared Value concept, where companies generate positive economic value by addressing societal problems that intersect with their business.

A paradigm shift is already under way as ESG is becoming a more standardized and objective measure of sustainability

With a positive business case, sustainability is not just corporate social responsibility but enlightened self-interest. The business case for sustainability is also helpful for investors as it provides a quantitative and objective picture of what a company does on sustainability rather than what it says.

How to build the business case

So, how do you make the business case for a sustainability strategy? There are some key arguments that can be deployed, based on three pillars:

Cost reduction and operational efficiencies. Reductions in waste and the use of energy and costly natural resources directly impact the bottom line. For example, Wal-Mart set out to double its logistics efficiency between 2005 and 2015 through better routing, truck loading, driver training, and advanced technologies. By the end of 2014, it had improved fuel efficiency by approximately 87% compared with the 2005 baseline, resulting in 15,000 metric tons of CO2 emissions avoided – and savings of nearly $11m.
Revenue uplift through premium pricing and new customer segments. The segment of environmentally and socially aware consumers is large and growing. Recent evidence shows they are not only willing to spend 6% more on products from companies with sustainability commitments and programs in place, but are 64% more likely to recommend companies with sustainable practices to friends and 63% more likely to try new products from these companies. Unilever discovered in 2019 that its purpose-led Sustainable Living Brands were growing 69% faster than the rest of the business and delivering 75% of the company’s growth.
Lower capital costs and better access to financing. An increasing number of investors intentionally target companies with a strong sustainability performance, not only because they care but also because they have a fundamentally better risk-adjusted profile that makes them more “future-proof”. A recent study by McKinsey showed that 83% of C-suite executives and investment professionals would be willing to pay a median premium of around 10% to acquire a company with a favorable ESG profile over a negative one. And companies with better sustainability performance (as measured by their ESG score) face a 10% lower cost of capital on average.

Beyond the business case: the sustainable transformation opportunity

If anyone remains unconvinced by these business case arguments, in the long run the choice will be made for them by external forces. Sustainability will no longer be a “soft” concept and companies will no longer be able to cherry-pick impacts.

A paradigm shift is already under way as ESG is becoming a more standardized and objective measure of sustainability. Financial analysts are increasingly equipped with the tools and metrics to compare sustainability performance against peers, and over time, and can now reward or punish sustainability performance immediately. We are moving away from self-reporting. Technology advances enable the use of sophisticated algorithms to collect, track, and analyze complex ESG data that will paint a more accurate, less voluntary picture of a company’s true performance.

This transformation offers both opportunities and risks. In this new normal, companies need to properly account for all material impacts, and previously unpriced dimensions such as CO2 emissions or water pollution must be fully accounted for when making business decisions, so these costs are becoming part of the business case for sustainability.

Implementing the new approach

Understanding and pricing those impacts may be tedious and costly, requiring new risk management approaches and tools. A case in point is climate change: the Taskforce on Climate-related Financial Disclosures (TCFD) recommends that companies should measure, price, and manage both physical risks – e.g., risks from more extreme weather patterns – and transition risks – e.g., risks from changes in consumer preferences or climate regulation.

Many tools and approaches have been developed to meet this need. The Capitals Coalition, for example, proposes a valuation approach and a decision-making framework to identify, measure, and value impacts on natural, social, and human capital.

But the consequences of inaction are severe, and many have already paid the price. In 2019, California’s largest utility, PG&E, was forced to file for bankruptcy after dramatically underestimating the increased risk of wildfire due to climate change.

You need to ensure that your company avoids being next.

Authors

Knut Haanaes

Lundin Chair Professor of Sustainability at IMD

Knut Haanaes is a former Dean of the Global Leadership Institute at the World Economic Forum. He was previously a Senior Partner at the Boston Consulting Group and founded their first sustainability practice. At IMD he teaches in many of the key programs, including the MBA, and is Co-Director of the Leading Sustainable Business Transformation program (LSBT) and the Driving Sustainability from the Boardroom (DSB) program. His research interests are related to strategy, digital transformation, and sustainability.

Frédéric Dalsace

Professor of Marketing and Strategy at IMD

Frédéric Dalsace focuses on B2B issues sustainability, inclusive business models, and alleviating poverty. Prior to IMD, he spent 16 years as a Professor at HEC Paris where he held the Social Business / Enterprise and Poverty Chair presided by Nobel Laureate Professor Muhammad Yunus. Prior to his academic life, Frédéric accumulated more than 10 years of experience in the business world, both with industrial companies (Michelin and CarnaudMetalbox) and as a strategy consultant with McKinsey & Company. At IMD, he is Director of the Integrating Sustainability into Strategy program.

Jules Wurlod

Director for ESG and Sustainability at Houlihan Lokey

Jules Wurlod is Director of ESG and Sustainability at Houlihan Lokey, a global investment bank highly active in M&A for sustainable companies. Prior to this, he worked as management consultant at the Boston Consulting Group for four years. He also holds a PhD in environmental economics from the Graduate Institute in Geneva, where he published leading thought leadership pieces in top-tier scientific peer-reviewed journals.