Thursday, March 21, 2013

INSIDE THE BUSINESS CASE FOR SUSTAINABILITY

Sustainability makes business sense, with both short
and long-term paybacks. 

Sustainability has rapidly become an important strategic consideration for businesses, particularly large companies and organisations that have to report to shareholders and other stakeholders on their state of governance and level of responsibility. However, if we take the view that sustainability is good for business, then even the smallest organisations should take sustainability very seriously. The wide range of issues that fall under the sustainability umbrella means that few organisations are doing nothing as far as sustainability is concerned. However, in South Africa, my experience is that the number of organisations taking an integrated, practical approach to sustainability issues is still fairly small, particularly for unlisted entities. Is there a genuine business case to be made for sustainability? The question has deep relevance, since a compelling answer in the affirmative would deepen the penetration of sustainable business practice.

In this post I hope to show why I believe sustainability has to be integrated into the strategy of every competitive industrial enterprise, but before we get into that, it has to be said that the issue of sustainability is about far more than profits. In large well-run organisations, once a strategic direction has been chosen, significant resources are deployed whose aim it is to execute the strategy.  In the process, the reasons behind the choice of the strategy are often forgotten. While with most business strategies profit is the ultimate motive, and while sustainability certainly entails aspects of that, we should not lose sight of the fact that there are moral dimensions to incorporating sustainability into business strategy. Sustainability is undoubtedly about “doing the right thing”. Sustainability strategy is about doing so while maximising the long-term economic benefits for your organisation, since we have to recognise that the profit motive is the driving force for all of business. CSR initiatives can include a small element of charity, but in the main have to be directed at business benefit, thereby killing two birds with one stone and ultimately reinforcing business strategy.  The role of business can never be “to save the world”, but business is certainly one of the most important stakeholders to be engaged if the planet is to be placed onto a more sustainable trajectory.

What then are the elements of the sustainability business case? The business benefits I associate with sustainability are broadly as follows:

Organisational Capacity
Sustainable organisations build internal capacity through training, coaching and an-the-job exposure. This investment in human resources is significant, and enables organisations to improve performance continuously. This capability can be easily diluted where key employees leave the organisation. Sustainable organisations counter this risk by providing attractive, challenging work environments. Going forward, expect more and more prospective employees to make sustainability a prerequisite when choosing employers.

Increased Productivity
Sustainable industrial organisations offer workers a safe and healthy environment. This includes reduced exposure to hazards, removal of all negative long-term occupational exposures and the optimisation of ergonomics. This results in fewer absences from the workplace as well as more productive task execution.

Cost Reduction
Resource efficiency, which involves a reduction in the quantities of energy, water and materials consumed in the production of a given output, directly reduces manufacturing costs. These costs tend to be the biggest costs in industrial operations, typically dwarfing costs such as manning, communication and other fixed costs. The real beauty of resource efficiency projects is that many high-impact projects require little to no investment. Often a small process change can deliver results that can be locked in, meaning that the benefits are enjoyed in perpetuity. Where such initiatives are pursued along entire supply chains the benefits multiply rapidly.

Avoided Liability
The prevention of pollution reduces the long-term risks of large remediation costs, which may be imposed on organisations at some point in the future. Sustainable organisations employ sound risk assessment, and through approaches such as Cleaner Production, attack pollution at its source.

Product safety is a further important aspect of liability avoidance. This is well developed in the food processing industry through systems such as HACCP, but applies equally to all products. The issue of lead in the paint used for children’s toys is an example of a non-food product safety issue.  

The safety of employees and local communities is the final piece in the avoided liability puzzle. Robust risk assessment for every job role and for every interface with the local environment is paramount to the avoidance of liability. The issue is more pronounced for some industries than for others, and you should take care to research your industry to identify industry-specific risks.  

Reduced Risk Management Costs
Sound management systems and a history of low or no incidents indicates to insurers that management systems are robust, leading to reduced premiums and lower insurance costs. Risk is typically quantified using relationships between probability and severity, and both of these parameters can be positively influenced by taking a sustainable approach to operations.


Legal Compliance
A failure to comply with regulatory requirements can lead to a business being shut down altogether, and legal compliance is the most basic of starting points for organisations seeking to become more sustainable. The business implications of non-compliance are clearly disastrous.Clearly in some geographies, such as the US and parts of Europe, strict regulations make legal compliance much more onerous than in emerging economies. Provided these regulations are appropriate, they serve to raise the sustainability bar in those regions, driving entire industries towards excellence. 

Sales Growth
While cost reduction and penalty avoidance increases profits, turnover is generally a far stronger driver of profitability, and sustainability helps in this regard in myriad ways:
  • Organisations that publicise their sustainability efforts give themselves the opportunity to tap into a growing market of sustainability-aware consumers. The process can be driven by effective marketing campaigns, eco-labelling or even word of mouth. It is important that any claims made are credible, since a good reputation can evaporate should it be discovered that  a product does not live up to the sustainability benefits promised.
  • Sustainable organisations generally produce products of high-quality, and consistently so. Good quality control is an important way to minimise rework, with crucial accompanying benefits in terms of water, material and energy consumption. Inconsistent quality is a sure way to reduce sales, and hence this focus on quality helps organisations to grow their market penetration.Note that "high quality" in this context refers to meeting the specifications set for the product, based on customer needs. This is different to the notion of premium quality.
  • CSR strategies that are constructed with organisational benefit in mind can actually help to grow the market for an organisation’s products. This can be done by targeting communities of potential prospects with CSR initiatives, as a simple example. This is not a cynical approach to sustainability, but rather precisely how to use sustainability for business advantage. Of course, organisations are also free to use some funding for CSR initiatives that may not be market-facing, but in general the bulk of funding should be deployed in ways that drive the economic sustainability of the business.


The business benefits of integrating sustainability into your business model are many and varied. It is important that these business benefits are front of mind when developing your sustainability strategy and that you have measures in place that allow you to monitor the impacts of implementation