How to align Sustainability and Profitability

Companies are doing what they are designed to do: they are problem solvers. It means that they aim to identify business opportunities in customers’ problems and offer services or products capable of removing obstacles. The natural way of doing so is to focus on problems that matter to them. The question is then: Which consumer problem is important enough that they are willing to pay to solve it? Today, it appears clearly that many societal problems are related to environmental and social sustainability.

In this article we look closer at:

  • The Sustainability Problem
  • Positive impact
  • Sustainable innovative business models
  • Sustainability can be profitable
  • Alignment between sustainability and profitability

 

The Sustainability Problem

The sustainability problem can be broken down into two branches: environmental and social sustainability.

 

Figure 1: Nine planetary boundaries Author:

 

 

  1. Nine planetary boundaries have been identified by a group of 28 internationally renowned scientists from the Stockholm Resilience Centre in 2009, in which humanity can continue to develop and prosper for generations to come. All together they capture the planet’s carrying capacity (see Figure 1).
  2. The societal boundaries are, on the contrary, much less tangible and therefore more difficult to address: they  include social phenomena such as poverty, gender equality, diversity, health, social justice, social inclusion, and so on. However, there is a clear correlation between social and environmental problems and they may be mutually self-reinforcing. Environmental consequences of climate change are for instance disproportionately borne by the poorest people in the world. The benefit of this is that businesses may in fact solve environmental problems by solving social problems and vice versa.

 

 

Environmental and social sustainability are not only an issue for society but it is also an issue for companies simply because it affects the conditions for their economic activities.

An unsustainable society makes it harder and harder to run a business: for instance, when trust breaks down, when corruption exists, when there are no educational, political and legal institutions to operate the company’s operations and so on. Not only does the economic system exist within societal boundaries but both of these two systems are reliant on nature (see Figure 2).

Figure 2. Environment, society and businesses are interrelated, Author:

 

Figure 2 shows that the environment, society and businesses are interrelated and when we talk about sustainability problems, we refer to a discord between these three systems (Jørgensen, S. and Pedersen, L.J.T. 2018). The challenge therefore consists in finding an harmonious interplay between the three in order to reach sustainability.

Sustainability is a problem that companies should try to solve not only because it is an urgent problem for society and is becoming increasingly important for tomorrow’s consumers, but also because this is a problem that concerns them directly.

 

 

Create a positive impact

That being said, it is impossible to deny that companies have played and still play a major role in creating these sustainability problems. We can mention programmed obsolescence, carbon emissions, exploitation of workers, tax evasion, pollution, corruption, human rights’ abuses, harm on customers’ and employees’ health… All this can actually be referred to as the negative externalities of a company, i.e. the negative impact of a company’s activities on society and the environment that would not have existed without the company.

More generally, we can define externalities as the positive or negative side-effects of the company’s activities, which directly or indirectly affect stakeholders within and without the company. Positive externalities refer for example to paying taxes, creating jobs and delivering products and services that improve social/environmental outcomes, contribution to local NGOs’ work, building roads,…

Sustainable innovative business models

The key here is to understand that, while sustainability problems can be a great concern for businesses, it can also be the source of many profitable business opportunities and sources of competitive advantages for companies that manage to embrace them.

Sustainability issues should be considered as drivers of innovation.

There are actually 2 approaches for companies to embrace sustainability problems (Jørgensen, S., & Pedersen, L. J. T. 2017):

  1. First way is to take responsibility for their environmental and social footprints and act to reduce their negative externalities.
  2. Second approach is to see it as an opportunity and address others’ negative externalities.

 

 

The way sustainability can be profitable

While sustainability efforts must help companies reduce their negative externalities toward zero footprint, they can also support the company’s financial performance by directly or indirectly. Indeed, well-designed sustainability efforts can lead to profitability in 4 ways (Jørgensen, S. and Pedersen, L.J.T. 2018):

 

  • By increasing revenues: If companies offer to customers enhanced value with respect to sustainability, it could lead them to choose their products or services over other brands.
  • By reducing costs: Companies could reduce costs when they avoid paying to dispose of resources and use them instead. For instance, sell ugly vegetable instead of throwing them away
  • By increasing access to intellectual resources or immaterial resources: If sustainability efforts can help improve corporate reputation and trust, companies could benefit from this if they attract resources such as new partners or new workforce, who would not have been interested without their sustainability efforts.
  • By reducing risks: Companies’ risks could be reduced thanks to sustainability efforts, e.g. secure supply of resources through a circular model, and as a result attract new fundings or benefit from better financing conditions.

 

Alignment  between sustainability and profitability 

To find an alignment between sustainability and profitability, one tool is essential: materiality. As sustainability efforts can be very costly, it is critical that companies prioritize their efforts on relevant sustainability issues and allocate resources to the ones that are valued by stakeholders (Jørgensen, S. and Pedersen, L.J.T. 2018).

Materiality assessment  refers to this process of identifying economic, social and environmental issues that the company faces (i.e. their externalities) and prioritizing them according to the relevance they have for the different stakeholders now and in the future.

The outcome of this process is a materiality matrix, which is a snapshot of an ongoing materiality assessment, as you can  see on Figure 3.

By ranking issues from moderately important to highly or very highly important on a matrix for every type of stakeholders, companies       can better decide where to put their efforts. A study by Harvard researchers shows in fact that it is not the amount of resources allocated to effort that is important, but how those resources are allocated and spent (Khan et al. 2016).

 

Summary

What is essential to understand in order to align profitability and sustainability is that sustainability efforts  must be taken as ground for innovation. We have seen that there are two ways to do this, either to take responsibility and reduce one’s own externality, i.e. negative side-effects of the company’s activities, or to see it as an opportunity to address others’ externalities.

 

 

References

  • Jørgensen, S., & Pedersen, L. J. T. (2017). Designing sustainable business mod- els. In T. W. Andreassen, S. Clatworthy, M. Lüders, & T. Hillestad (Eds.), Innovating for trust. Cheltenham, UK: Edward Elgar Publishing.
  • Jørgensen, S. and Pedersen, L.J.T. (2018). RESTART Sustainable Business Model Innovation. London: Palgrave Macmillan.
  • Khan, Mozaffar and Khan, Mozaffar and Serafeim, George and Yoon, Aaron, Corporate Sustainability: First Evidence on Materiality (November 9, 2016). The Accounting Review, Vol. 91, No. 6, pp. 1697-1724., Available at SSRN: https://ssrn.com/abstract=2575912 or http://dx.doi.org/10.2139/ssrn.2575912
  • Stockholm Resilience Centre (2015). What is resilience? An introduction to social-ecological research. Stockholm, Sweden: Stockholm Resilience Centre