Why Is Sustainability Important In Business?

The case for business sustainability

90% of executives believe sustainability is important in business.

Today, it’s incontestable that instituting a sustainability strategy is good business. The benefits of this go beyond environmental and social security. That is, more and more studies indicate business sustainability delivers greater prosperity, and designs organizations to last.

In this Green Business Bureau article, we present the case for business sustainability. We explain how a sustainable business model will:

What is a sustainable business?

Sustainability means to be maintained at a certain rate or level indefinitely. If we apply this definition in a business context, we define a sustainable business as an endlessly operational organization.

Hence, becoming a sustainable business is no small feat, and it’s one we’ve yet to concur. This makes the concept somewhat of an enigma. With no type business for comparison, the term’s meaning has strayed and become diluted over the years. Suddenly business sustainability is about climate change, ending poverty, and achieving gender equality.

In an attempt to remove ambiguity, Environmental, Social, and Governance (ESG) criteria entered the spotlight to address unsustainability in business. The ESG framework was originally drawn for investors, but the language has evolved over the years. Today, ESG acts as a synonym for business sustainability, although the interchangeable use of the two terms is incorrect. Yet, if we bare in mind that true business sustainability has – so far – not been achieved, ESG comes in as a more relevant and applicable concept with a clear set of rules. The specific criteria set by the ESG framework endeavor to define environmental, social, and governance systems as sustainable.

The sustainable business, or ESG model, is a modern approach to business. In the 1970s, the consensus was to apply economist Milton Friedman’s shareholder theory. This theory argued that a company’s only responsibility was to its shareholders. That means profits must be maximized to drive economic growth. However, no thought was given to the consequences of profit above all else, and it’s these consequences that have committed economists, business leaders, and scientists back to the boardroom. Here we redefine the rules of business.

The ESG and sustainable business model give a business case for sustainability

The sustainable business and subsequent ESG frameworks are built around the idea that long-term business success relies on healthy environmental and social systems. Over the years, new models have been put forward in an attempt to describe the interaction between our economy, society, and the environment. One key point to take from these models is this: A healthy economy cannot be sustained without healthy social or environmental systems.

From the small-scale economics of a business to larger-scale global economics, financial facets are at the mercy of social and environmental factors.

The shareholder theory to business risks human stability and security

To continue on a business-as-usual track, that is, to follow Friedman’s shareholder theory, would be to commit economic suicide. Squandering finite resources, creating extravagant amounts of waste, and the excessive release of carbon emissions is causing our planet to belch at the seams. This risks human stability and security, as we explain.

Our reality

• 1937: The world population is 2.3 billion. Carbon in our atmosphere is 280 parts per million (ppm). The remaining wilderness is 66%.
• 1960: The world population is 3.0 billion. Carbon in the atmosphere is 310 ppm. The remaining wilderness is 64%.
• 1997: The world population is 5.9 billion. Carbon in the atmosphere is 360 ppm. The remaining wilderness is 46%.
• 2020: The world population is 7.8 billion. Carbon in the atmosphere is 415 ppm. The remaining wilderness is 35%.

Our future: Scenario 1

• 2030: The Amazon rainforest will be cut down to the point where it will no longer produce enough water to self-sustain. This process is termed dieback. That is, the forest degrades into a savannah-like state, causing catastrophic species loss.
• 2040: The artic will become ice-free in the summer. Many species are already bearing the brunt of these melting ice sheets, as shown in the video below. Without this ice cap, global warming will accelerate as less sun is reflected out into space. Great expanses of permafrost are projected to thaw, again accelerating the rate of climate change.

Trigger warning: The below video is upsetting and hard to watch. This video demonstrates the impact of unsustainable economic activity on our natural world.

• 2050: Coral reefs have gone extinct, and fish populations have crashed.
• 2080: Pollinating insect populations have significantly declined negatively impacting agriculture. The weather becomes increasingly unpredictable and extreme.
• 2100: Global food production enters crisis mode as soils become exhausted. Our planet is 4°C (39.2°F) warmer making large parts of the Earth uninhabitable. A sixth mass extinction event is happening.

Under the current trajectory of human economic activity, within the span of the next lifetime, human security and stability will be lost. Economic success is driven by the exchange of goods and services. Profitable exchanges do not come from fragile, poverty-stricken, and despondent communities.

Coming back to the question “why is sustainability important in business?” – we frankly have no choice.

“We are the first generation to feel the impact of climate change and the last generation that can do something about it.” – Barack Obama, Globalo

Why is sustainability important in business? The benefits of sustainability

Each business has the power to create solutions and drive sustainable change. Yet, each business needs a strong economic backing to support this change. The sustainable business and ESG model do not discount the importance of a healthy bottom line. These models focus on optimizing business strategy for the environment, human society, and economic prosperity. With this in mind, there’s a growing body of evidence indicating an effective sustainability strategy will boost profits and create new opportunities. In this next section, we present this evidence.

A sustainable business creates business value

The UN Global Compact-Accenture CEO Study on Sustainability found that 84% – of the 1,000 global CEOs surveyed – thought businesses should lead efforts to address global priority issues, such as environmental damage and poverty alleviation. 30% of businesses, at the time, rose to this challenge.

And of the ones that did, they reaped the returns from having a strong purpose. For instance, research by Deutsche Bank revealed that companies with high ESG ratings outperformed the market in the medium (5 years) and the long term (5-10 years). Supporting these findings, a 2021 Morningstar U.S. Sustainability Leaders Index report found companies with the best ESG scores returned a 33.3% higher return over one year, beating the broader US market by more than 8%. A 2020 study by Accenture gives an update on these findings, concluding that companies with high ratings for ESG performance enjoyed average operating margins that were 3.7x higher than those of lower ESG performers. This meant such companies outpaced poorer ESG performers by 2.6 times. On top of this, reports show companies in the Carbon Disclosure Leadership substantially outperformed the FTSE Global 500 companies.

The picture is clear. Sustainability creates business value for long-term prosperity. And that’s because the sustainable business is built to last – strategies are implemented for longevity. The dependencies between our environmental, social, and economic systems are leveraged. Each system is supported, which in turn, creates a self-sustaining and robust unit.

A sustainable business meets the needs of your customers

According to a report by Cone Communications, 63% of Americans want corporations to drive positive environmental and social change. In addition:

• 87% of American consumers support brands that advocate for the issues they care about.
• 76% of Americans expect companies to take action against climate change.
• 73% of Americans would stop purchasing from a company that shows disinterest in taking positive steps that tackle our climate crisis.

Millennials are the largest generation of our population. With this in mind, a study by Nielson indicates that millennials are x2 more likely, compared to baby boomers, to change their consumer habits such that their environmental impact is reduced. Another study indicated that Generation Z consumers share similar values to millennials, with 74% willing to spend more to support sustainable brands.

66% of consumers overall would spend more for a product if it had improved sustainability credentials. And – supporting the findings given by Cone Communications – 81% of consumers across the world want companies to step up to safeguard the environment.

Hence, creating a sustainable business meets the values and demands of a consumer majority.

A sustainable business meets investor demand

In 2020, 85% of investors considered ESG factors in their decisions, that’s according to Gartner Research. Plus 91% of banks monitor the ESG performance of investments. Supporting these results, according to a 2021 EY Global Institutional Investor Survey, 74% of institutional investors are more likely to divest from companies with poor sustainability performance. In this study, 90% stated they would pay more attention to a business’s sustainability performance when making investment decisions.

Major institutional investors such as BlackRock, State Street, and Vanguard have introduced their guidelines in support of ESG frameworks and standards:

1. BlackRock: BlackRock has requested that the companies they invest in publish disclosures in line with ESG frameworks. These changes come as BlackRock seeks to effectively manage ESG risk in their investment portfolio.
2. State Street: State Street have developed an evaluation system called the R-Factor score, which is based on ESG frameworks.
3. Vanguard: Vanguard publicly discusses their support for making ESG investments.

Larry Fink, CEO of the largest asset manager, BlackRock, even spoke out proclaiming sustainability is not just about doing the right thing, but also leads to long-term profits.

Hence, embedding a sustainability strategy into your business is essential if you’re to meet this evolving investor pressure.

A sustainable business attracts and engages top talent

~40% of millennials have taken a job because of a company’s sustainability credentials and would take a pay cut to work at an environmentally responsible business. As millennials make up the largest proportion of the workforce, not delivering on important sustainability credentials could mean you fail to attract top talent.

On top of this, devising a purpose-driven strategy gives employees meaning to their work, which in turn, engages your employees, keeps your team motivated, and bolsters productivity. For instance, 89% of executives believe that an organization with a shared purpose will deliver superior employee satisfaction.

On top of this, the social element of a sustainable business model seeks to support the well-being of employees. Providing fair wages, meeting health and safety requirements, and offering a steady work-life balance – to name a few – are initiatives that can lead to increased resilience, better employee engagement, reduced sickness absence, and higher performing and productive teams.

A sustainable business has reduced costs

33% of businesses are integrating a sustainability strategy to improve operational efficiency and drive down costs. With this in mind, efficiency improvements can in turn boost operational profits by as much as 60% according to McKinsey.

Demonstrating these percentages in real life, over 10 years, clients of the managed service provider Elytus saved $11 million through sustainable waste management and transparency. In another example, the sports clothing retailer Nike managed to weave efficiency into the shoe-making process, reducing the amount of raw material and labor time needed to make each shoe. Not only have these developments diverted millions of pounds of waste from reaching landfill sites, but the company is also spending less on transportation, materials, and waste disposal.

On top of this, a sustainability strategy addresses legislation pressure, helping businesses stay ahead of the compliance curve. Talks during the COP26 made it clear that governments need to be stricter when it comes to driving sustainable change. Countries such as Sweden and Germany have signed legally binding net zero targets for 2045. The UK, Canada, Japan, and others have net zero commitments for 2050. In the US, the Biden administration presented a 2030 goal to reduce emissions by 50-52%. It, therefore, comes with little surprise to learn that climate and energy regulations are expected to have a significant effect on a company’s profitability (according to a report by the Investment Leaders Group).

Proactive companies that are addressing climate impact legislation – plus other environmental and social standards – are better placed to deal with a tightening of the rules and the associated time and effort involved in data collection and submission. Plus, having a well-planned climate strategy to lower emissions will expand business value and reduce the costs from increasing carbon taxes. In addition, the federal government is offering tax credits, rebates, and savings for businesses adopting sustainable practices. On top of this, the US Securities Exchange Commission (SEC) has released two proposals this year that would increase government oversight and make information more transparent in matters relating to publicly traded companies and the environment.

A sustainable business has an improved reputation

As we have seen, people view sustainability as a plus. That is, companies that demonstrate noble green and social values establish a popular and positive brand reputation. For example, among the most reputable companies for corporate social responsibility is Lego. Lego switched up their strategy to create their core products and packaging from sustainable materials, such as leaves and sugarcane. This strategic vision saw the company’s reputation skyrocket.

At the contrasting end of the spectrum, not abiding by proper social and environmental practices poses a significant business risk. Any public relations disaster will cost a business money, and ruin an organization’s image. Such disasters will divert money and attention away from the core business offering.

Take the 2010 BP Deepwater Horizon Disaster for example. This was caused by an extreme deviation from the standard of care and a conscious disregard for known risks. The BP brand was tarnished, stripping billions of dollars of value from the brand. With a lack of care for the environment and workers, BP bore a disastrous financial, political, and PR fallout.

A sustainable business leverages new opportunity

A strong sustainability proposition will help businesses tap into new markets, while also expanding into existing ones. Creating innovative, sustainable solutions to solve global environmental and social problems is pushing entrepreneurs and business leaders to rethink their operations, evolve, adapt, and develop new products and services.

For instance, China’s initiatives to fight air pollution have created investment opportunities worth more than $3 trillion through 2030. Vancouver city, voted the 3rd greenest city in the world, boasts a 35% increase in green jobs since 2030, showcasing an expanding world of new opportunity.

We’re seeing a surge of startups operating in the green tech and sustainability space. For instance, the beauty brand Ethique has designed shampoo bars to remove the need for plastic packaging. EcoCart, another example, is a browser extension startup that allows users to offset the carbon emissions from their purchase. Both these businesses exemplify how sustainability is used as a unique selling point and a core business offering. Hence, the sustainable business is in the best position to reap the benefits of these current market changes.

Creating a sustainable business starts with green business certification

A study by BCG/MIT found that although 90% of executives find sustainability to be important, only 60% of companies incorporate sustainability into their business strategy, with a mere 25% having sustainability incorporated into the business model. 75% of corporate sustainability professionals say that businesses need to get better at strategizing for sustainability to meet the global mega-trends we’re seeing. Hence, there’s a clear attitude-behavior gap. Overcoming that gap demands a detailed and thorough sustainability program, which starts with green business certification.

At the Green Business Bureau, we have this program ready-made via our EcoPlanner. Our EcoPlanner lists initiatives that work to guide your business in creating sustainable operations. Once more, you can filter initiatives by both cost and impact. This allows you to start small and drive momentum as you work towards your larger sustainability goals.

The Green Business Bureau is here to support you. Our platform is your online assistant that guides you towards true business sustainability while you also meet the requirements of the ESG framework. We connect with innovators, entrepreneurs, and progressive thinkers, to build a collaborative network of businesses with a purpose.

Our EcoAssessment will help you gauge where you’re at regarding sustainable progression. You can record and measure your sustainability triumphs and keep track of your progress. Then, showcase this. Celebrate the positive changes you’re making using the Green Business Bureau’s Green Seal of Approval. When your stakeholders click on this seal they’re directed to your EcoProfile. Here, an accurate picture of your company’s sustainable progression is given. Plus our Bronze, Silver, Gold, and Platinum certificates give an easy-to-understand interpretation of your business’s achievements.

Creating a sustainable business starts with green business certification, as this is a formal measure and reflection of your commitment to safeguarding our environmental and social systems. In this article, we hope we’ve demonstrated that sustainable development will also benefit your bottom line. What do you stand to lose?