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The economics behind environmental sustainability

Posted by | February 25, 2020 | Unplugged February 2020 | No Comments

Sustainability can mean different things to different people.  It can be used to suggest something is financially viable or environmentally friendly where it can be continued indefinitely without harm or consequence.

The United Nations World Commission on Environment and Development’s Bruntland Commission in 1987 defined sustainability as:

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Sustainability is important for a very simple and straightforward reason: we cannot maintain our quality of life as human beings, the diversity of life on Earth, or Earth’s ecosystems unless we embrace it.

Image: 3M

Fostering innovation

Investing in sustainability has been shown to drive innovation.  Redesigning products to meet environmental standards or social requirements creates new business opportunities.

Take 3M for example. This multi-national integrated sustainability into its innovation pipeline 45 years ago through its Pollution Prevention Pays program, which aims to minimise waste and avoid pollution through product reformulation, equipment redesign, process modification, and waste recycling. As a result, 3M’s fire suppression fluids were the first sustainable alternative to Hydrofluorocarbons.

Nike recently embedded sustainability into its innovation process and created its US$1 billion-plus Flyknit line, which reduces waste by 80% compared with regular cut and sew footwear. Since its launch in 2012, Flyknit has removed more than 1.58 million kilograms of waste from its manufacturing process, and fully transitioned from yarn to recycled polyester, helping divert the plastic from 182 million bottles from landfills to its footwear.

Proctor & Gamble conducted a life cycle assessment of its product lines and found that U.S. households spend 3% of their annual electricity budgets on heating water to wash clothes. They subsequently launched a U.S. and European line of cold-water detergents that require 50% less energy than warm water washing. Not only did these detergents greatly enhance their market size but provided households with an ecologically sustainable solution to an age-old problem.

Improving financial performance

Significant cost reductions can also be achieved from improving operational efficiencies through the better management of natural resources like water and energy, and minimising waste.

Since 1994, Dow Industries has invested US$2 billion on improving resource efficiency. To date this has saved the corporation in excess of US$9.8 billion in reduced energy and wastewater consumption.  Additionally, in 2013 General Electric reduced its greenhouse gas emissions by 32% and its water use by 45% compared to 2004 and 2006 baselines. The net benefit of this was US$300 million in savings that went directly to the bottom line.

Sustainability need not solely focus on material goods that can be reduced or improved. It can also be applied to help unlock process and logistics flows to generate greater efficiencies. For example, US retail giant Wal-Mart aimed to double fleet efficiency between 2005 and 2015 through better routing, truck loading, and the deployment of advanced technologies such as GPRS. By the end of 2014, Wal-Mart improved its fleet’s fuel efficiency by 87% compared to its 2005 baseline. Aside from the financial benefits, this also avoided the generation of 15,000 metric tons of CO2 emissions as the vehicles were used in a more efficient manner.

The case for sustainability

You cannot argue that sustainable companies deliver significant positive financial performance. Aside from these cases, University of Oxford recently reviewed 200 pieces of academic literature on sustainability and corporate performance and found:

  • 90% concluded that good environmental, social and governance (ESG) management lowers the cost of capital;
  • 88% show that good ESG practices result in better operational performance; and
  • 80% show that stock price performance is positively correlated with good sustainability practices.

Here are some other data points to consider: Between 2006 and 2010, the top 100 sustainable global companies experienced significantly higher mean sales growth, return on assets, profit before taxation, and cash flows from operations in some sectors compared to control companies. During the 2008 recession, companies committed to sustainability practices achieved “above average” performance in the financial markets, translating to an average net benefit of US $650 million in incremental market capitalisation per company.

The evidence is clear. Companies that proactively make sustainability core to business strategy will drive innovation and engender enthusiasm and loyalty from employees, customers, suppliers, communities and investors.

If you are sitting on the fence, it’s time to get off and get moving.