Corporate Sustainability ROI and Payback

Highlights

  • Corporate sustainability and company profits are not opposing forces. In fact, when strategically aligned they become synergistic.
  • The ROI from carbon reduction programs is primarily sourced from 4 profit levers that include increased revenue generation, decreased operational costs, improved labor, and lower cost of capital.
  • Data from Accenture, IBM, McKenzie and others show that an increasing volume of customer purchase decisions are significantly influenced by suppliers' environmental efforts. This trend will most certainly increase and thereby give early adopters even more competitive differentiation.
Johnny Grow Revenue Growth Consulting

The Link Between Sustainability and Profits

Most executives understand that the company’s performance and environmental efforts are increasingly important to a growing share of employees, customers, partners and shareholders.

However, too many believe these imperatives are at odds. They assume a false choice between profit and sustainability. The reality is that these goals are not mutually exclusive.

Here's how these two business imperatives create a symbiotic relationship. And how you can make sustainability a company value creator.

Corporate Sustainability

The Big 4 Sustainability ROI Profit Levers

Sustainability ROI is achieved by adopting environmental programs that lower operational costs and increase revenue generation. Below are the top four climate-related growth drivers that reduce carbon emissions and accelerate company growth.

1

Increase Top Line Revenue Growth

Purchases are no longer just transactional. A large and growing percentage of consumers and B2B buyers are directing their purchases toward purpose-driven suppliers.

According to an IBM survey, 57% of consumers are willing to pay a premium to brands that are environmentally responsible (source: Meet the Consumers Driving Changes by IBM Institute of Business Value.)

According to sales research performed by NYU, products marked as sustainable grew 5.6 times faster than products not marked over a five-year period. The report found, "Products marketed as sustainable are driving not only product but also total category and market growth."

The data also found that "Despite the fact that Sustainable-Marketed Products are 16% of the market, they delivered more than half of the market growth" (source: NYU research report titled, Sustainable Share Index, Research on IRI Purchasing Data.)

And it's not just consumers, B2B companies are imposing measured purchase preferences for suppliers that show environmental progress with annual carbon emissions reporting.

The data is clear. Companies that demonstrate real importance in this area are growing faster than those who do not. They are appealing to an increased demand for responsible products. They are attracting new customers outside their traditional target markets. They are improving their brand and earning customer loyalty. And they are creating differentiation and competitive advantage.

2

Reduce Operational Costs

It's not uncommon for company climate initiatives to be associated with increased costs and regulatory headaches. However, industry data shows a different association.

Carbon reduction programs often include business process improvement (BPI) or business process reengineering (BPR) exercises.

These efforts create cost savings from things like more efficient supply chains, streamlined production processes, energy reduction and reduced waste. Many times, business process redesign yields innovation that dramatically shifts a company's cost basis.

And almost every time, these efforts result in a lower unit-cost structure.

Based on our experience in working with clients for more than a decade, we find company investments to reduce carbon emissions range from .04 to .06 percent of company revenues.

We also find that when pursued with formal business process design or improvement, cost takeout is between 1.1 and 1.4 percent, on average.

3

Improve Employee Engagement, Productivity and Tenure

Employees are drawn to purpose driven companies. According to Gallup, 84% of Gen Zers review a company's purpose when evaluating a job opportunity. And this cohort is not alone. Virtually every age group shows a double digit increase from just five years ago in making the same evaluation.

And here's your opportunity for differentiation. Research shows that fewer than one-third of the Fortune 1000 workforce is satisfied with the environmental actions their employers. Many believe their employers' claims of green are unsubstantiated and little more than marketing propaganda. A rising trend called greenwashing.

But those companies that demonstrate real progress will stand out. They will improve their corporate culture. They will increase employee engagement. They will realize improved productivity. And they will lower voluntary churn. Each of these benefits can be measured to show a meaningful impact on the company's bottom line.

An increasing number of staff deeply care about the environment and want to be part of a company that also cares. Companies that support these people and their causes will attract broader talent pools and realize more productive workforces.

4

Lower Cost of Capital

Green companies are tapping into more attractive financing and lower cost of capital.

McKinsey reports that a green program backed with a solid score can lower capital costs by about 10%.

A research study published in Corporate Social Responsibility and Environmental Management tracked the cost of capital for 2,100 public companies. The data demonstrated companies that lower carbon intensity and disclose more climate-related information reduced their capital costs by an average of .055% in the first 12 months. On the flip side, companies with mere pledges to climate change without actionable measures did not impact their cost structure.

Another research project by Morgan Stanley found green companies have more access to financing options. The report titled, "Sustainable Signals: Understanding Corporates' Priorities and Challenges," found that 77% of green companies reported more access and lower cost of equity than their non-green counterparts.

Sustainability-linked loans (SLL) are also on the rise. These loans tie financing costs to a company's environmental ratings. The concept first emerged in 2017 and today accounts for more than $240 billion. And unlike green bonds that designate funds for renewable energy investments, SLLs can be used for general business purposes.

Mounting evidence shows that companies with a focus on financially measured sustainable business practices offer a lower credit risk and gain more attractive financing options. That's in part why analyst firm Gartner advises that 30% of total debt capital markets funding will be funneled towards green initiatives next year.

The ROI of a Sustainability Program

Going green sounds like a good idea. However, good ideas are a dime a dozen. Unless your good idea is financially justified it may not survive among competing priorities or a future budget contraction.

Fortunately, the previously discussed revenue gains and cost reductions can deliver a compelling return on investment.

Based on our experience in deploying corporate sustainability programs and measurement systems for more than a decade, we have calculated the following financial measures.

Average cost take-out: 1.6%

Average incremental revenue generation: 1.9%

Average sustainability ROI: 87%

These results are measured over an 18 month period from the time of activation.

Sustainability ROI

The financial return is only the beginning. Our clients routinely realize additional payback from enhanced brand loyalty, increased labor productivity, and improved company resilience. These benefits are generally far-reaching and long-standing.

If you are interested in adopting a standardized framework for calculating your own financial return, consider the Sustainable return on investment methodology. It can be used to quantify environmental, societal, and financial impacts.

The point here is that to ensure program longevity, most companies are well advised to shift their program value from additional expenses justified with altruistic purposes to a compelling financial impact that elevates the program from 'nice to have' to business essential.

Turning Good Intentions into Profitable Outcomes

Don't be tempted with the false choice of choosing between a profit-driven business model and an environmentally friendly one.

The findings shared in this post underscore a clear message: Lowering carbon emissions does not mean lowering profits.

It's simple logic really. An increasing number of employees want to work for purpose-driven companies that share their values. And an increasing number of customers want to buy from values-driven companies.

Businesses that take an active role in leading this transformation will capitalize on emerging market opportunities, mitigate risks, and build more resilient companies.

If you would like some expert help in seeing more green, both environmentally and financially, contact our Net Zero consultants. These professionals can show what's good for the planet is good for business. Even better, they can show how to create synergy for environmental and financial impact.