The ROI of Sustainability

In today's rapidly evolving business landscape, the concept of sustainability has transcended from being a "buzzword" to a strategic imperative. Authentic implementation of Environmental, Social, and Governance (ESG) strategies is no longer a checkbox exercise, but a crucial pathway to long-term profitability and resilience.

Many leaders I speak with share that they believe that improving their environmental sustainability record is important due to the climate crisis. There is also concern and conversation about supply chain issues and employee engagement. Some leaders truly understand how a strategically aligned ESG program can improve all key metrics desired by their spectrum of stakeholders, but don’t know where or how to start. There are still some leaders I speak with that are solely focused on sales and profitability and do so at any cost. I don’t work with these folks, but I stay in touch to try to help them develop a growth mindset.

But at the outset of a sustainability conversation with all leaders, I’m inevitably asked “Please share specifics on how implementing a sustainability program can provide a significant ROI.” So today I’ll delve deeper into this, demonstrating how integrating sustainable practices into your business can enhance financial performance, increase innovation, mitigate risks, empower employees and foster stakeholder trust.

Financial Performance and Cost Savings

One of the most compelling arguments for sustainability is its positive impact on financial performance. Companies that embrace sustainable practices often experience significant cost savings through improved operational efficiencies. For instance, energy-efficient technologies, waste reduction programs, and water conservation initiatives can lead to substantial savings on utility bills and waste management costs. Implementing sustainable practices can also gradually reduce your operational expenses, especially when it comes to utilities usage, travel, and commercial leases. Resource efficiency is strongly correlated with financial performance across diverse sectors, and no matter the industry, companies that performed best had strict sustainability plans in place. According to Ernst & Young, companies that adopt sustainable practices can achieve substantial cost reductions, directly contributing to the bottom line.

Between 2006 and 2013, General Electric cut down on their freshwater usage by 45%, ultimately saving $300M in the process. Lockheed Martin began taking steps to reduce wood waste from their packing crates, which spawned other improvements in the production process to shrink overhead. The company spent $240,000 on these initiatives up front, which led to $7.5M in savings. When the German health and agriculture company Bayer implemented a resource-efficiency check to cut wastewater usage and utilize byproducts, they anticipated savings of more than $10M per year.

Technology also plays a role in implementing sustainable practices that reduce expenses. This can include cutting down on business travel by hosting virtual conferences and events, allowing employees to work from home to eliminate commuting and save money on office rent, and going paperless to reduce office supply waste. While these are all welcome changes, it’s crucial that companies turning to technical solutions to reach sustainability goals don’t overlook the emissions created by internet usage or digital media production.

Circularity and Innovation

Redesigning products and services using sustainability concepts and circular models can drastically increase profits and reduce costs.

Unilever, for example, changed the shape of a deodorant to use less plastic and created a concentrated laundry product that sharply reduces the use of water—innovations they might not have created had they not been thinking about sustainability. DuPont, a diversified science company, began its sustainability operations more than 20 years ago as a matter of risk reduction, but these have turned into a major profit center. Since 2011, the company has invested $879 million in R&D for products with quantifiable environmental benefits. DuPont has recorded $2 billion in annual revenue from products that reduce GHG emissions and an additional $11.8 billion in revenues from non-depletable resources

For all organizations at the outset of their sustainability journey, there are “quick wins” that can bring tangible results and create momentum to do more of this good work,

An emphasis on sustainability can also reveal opportunities for process innovations. It is not uncommon for companies to complain that different units do not collaborate well. By its cross-functional nature, sustainability brings different divisions together and provides a common motivation; the result can be new, profitable ideas.

Lockheed Martin, for example, wanted to reduce wood waste from packing crates. But as it started on this one modest initiative, it found other production improvements that reduced overhead and resulted in more than $7.5 million in savings from a $240,000 investment. Once you begin to look systematically “under the hood” its likely you’ll find lots of opportunities to increase your efficiency and productivity.

Risk Mitigation and Investment Opportunities

Sustainability is intrinsically linked to risk management. Environmental and social risks, such as climate change, resource scarcity, and social unrest, pose significant threats to business operations. By proactively addressing these risks through sustainable practices, companies can enhance their resilience. The World Economic Forum's Global Risk Report (2023) highlights that extreme weather events, biodiversity loss, and natural resource shortages are among the top risks facing businesses today.

Furthermore, sustainable supply chain management can significantly reduce operational risks. According to a survey by Ernst & Young, 75% of supply chain executives have seen or expect to see improved risk management within 1-3 years of implementing sustainability measures. This proactive approach to risk management not only protects the company but also ensures long-term viability.

Investors are increasingly considering these factors in their decision-making processes, favoring companies with robust sustainability strategies.

Investors are increasingly prioritizing sustainability in their investment decisions. The trend towards sustainable investing is evident from the significant influx of capital into ESG funds. In 2021 alone, over $500 billion flowed into sustainability-related funds, contributing to a 55% growth in assets under management in sustainability-integrated products. This shift is driven by the recognition that sustainable companies are better positioned to navigate future challenges and deliver long-term value.

Sustainability initiatives can be challenging to measure because savings or returns may be divided across different parts of the business, and some benefits, such as an improved reputation, are indirect.

It is important, then, not only to quantify what can be quantified but also to communicate other kinds of value for all stakeholders.

Consumer Preferences and Market Opportunities

Consumer preferences are shifting towards sustainability. A growing number of consumers are willing to pay a premium for products and services that are environmentally friendly and ethically sourced. The 2023 Business of Sustainability Index found that 66% of US consumers and 80% of young adults are willing to pay more for sustainable products. This trend is not limited to the United States; it is a global phenomenon, reflecting a broader societal shift towards sustainability.

Businesses that align their practices with these consumer preferences can tap into new market opportunities and build stronger customer loyalty. Also third-party certifications help companies demonstrate their sustainability credentials, thereby enhancing their credibility and attractiveness to conscious consumers. This can directly improve a business’s bottom line by driving sales growth.

Employee Engagement and Talent Attraction

Sustainability also plays a crucial role in attracting and retaining top talent. Today's workforce, particularly the younger generations, value employers that are committed to social and environmental responsibility. A KPMG study revealed that 46% of employees want their employers to demonstrate a commitment to sustainability. Companies that offer meaningful roles in a sustainable work environment are more attractive to potential employees and tend to have higher levels of productivity and engagement.

Moreover, fostering a culture of sustainability can lead to increased employee satisfaction. Employees take pride in working for companies that contribute positively to society and the environment, leading to higher morale and lower turnover rates. This, in turn, translates into cost savings related to recruitment and training.

The ROI of sustainability extends far beyond immediate financial gains. It encompasses enhanced risk management, increased innovation and consumer loyalty, improved employee engagement, and greater access to capital. For global business leaders, the path to sustainable success lies in authentic, integrated ESG strategies that go beyond ticking boxes. By embedding sustainability into the core of their strategy and operations, businesses can not only contribute to a better world but also secure their long-term profitability and resilience.

The case for sustainability is clear: it is not just good for the planet and society but also a powerful driver of business success.