In this article we look closer at:
- What does research say about sustainability and profitability?
- 3 easy steps to help you integrate sustainability efforts into your core business strategy:
- Identify your material sustainability problems
- Map your stakeholders
- Find ways to assign resources to sustainability efforts valued by stakeholders
What does research say?
A study conducted by a group of Researcher (Khan, M., Serafeim, G., & Yoon, A. (2016). Corporate sustainability: First evidence on materiality. Accounting Review) showed that they key was to allocate resources strictly to sustainable efforts that relate to material sustainability. As a reminder, material topics are topics that represent the organization’s most significant impacts on the economy, environment, and people (Global Reporting Initiative).
So here comes a very important notion: 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.
This has two aspects:
- First, it shows that solving the actual problems that influence stakeholder interests is what is rewarded in the market.
- Second, it shows that the amount of resources allocated to sustainability efforts is not the key. Rather, what matters is how these funds are actually used. There are many good intentions in dealing with social and environmental issues, but to solve the actual problems, resources must be used in a focused and smart manner on the material issues.
3 steps to align sustainability and profitability
We have listed 3 important steps on the road to aligning sustainability and profitability.
- First, to identify material sustainability problems in your current business model: What are your positive and negative externalities?
- Second, to map the stakeholders in the company’s surroundings on which it depends. Which interests are at stake and which of them must be taken into account in the design of the new sustainble business model?
- And finally, to find ways of assigning resources to sustainability efforts that are valued by stakeholders in such a way that they either directly or indirectly affect the company’s revenue, costs, intangible resources or risk in a desirable manner.
1. What are your positive & negative externalities?
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.
So to mention some example of negative externalities: we have programmed obsolescence, carbon emissions, exploitation of workers, tax evasion, pollution, corruption, human rights’ abuses, harm on customers’ and employees’ health…
On the contrary, 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,…
You can see on the graph below (Figure 1), 2 trajectories, which reflect contributions to more sustainable businesses.
- Companies can increase their positives externalities when they solve problems that are caused by others
- they increase their negative externalities when they cause problems for others through their operations
A practical way of defining your externalities and finding inspiration to develop the positive ones, is actually to use the list of Sustainable Development Goals (SDG) developed by the UN.
Figure 1. Positive and negative externalities in a graph
The second step is to map your stakeholders.
We like the definition provide by Social Value International: “Stakeholders are those people or organizations that experience change as a result of your activity. These can be individuals, groups communities, or the planet, directly or indirectly affected, with intended or unintended consequences.”
And here again, we touch a very important point. In order for a company to determine topics that are relevant, it is very important that the company engages in dialogues with its stakeholders
One way to identify stakeholders, is to go back to the value chain and make a list of who is most materially affected by actions in each step of the chain. Potential direct stakeholders include, management, workers, owners and investors, suppliers, community members, environment, distributors, partners, and customers. One you have identified them, try to answer these questions below (Figure 2) by engaging in dialogues with them. These dialogues can come in different forms: Private-Public initiatives or platforms on reporting guidelines, One-to-one meetings and community panels to dialogue with local community, Investor roadshows or dialogue with investor groups Monitoring competition, industry media.
Now that you have identified your stakeholders, how to find ways of assigning resources to sustainability efforts that are valued by them?
To answer this question, one tool is essential: materiality.
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 1.
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. As mentioned before in the study, 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).
Figure 3. Example of a materiality matrix
- 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
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