Tuesday, 28 February 2012

A Business Case for Sustainability

Businesses of all sizes around the world are increasingly beginning to appreciate the urgent challenge for the need to operate in an economically, environmentally and socially friendly manner. As 2012 begins in the shadow of the just ended COP17, many companies should be wondering what implications lie ahead in the events of implementation of COP17 Agreement and the Kyoto Protocol.

Notwithstanding this, some businesses that had already embraced sustainability and climate change mitigations could see emerging business opportunities and competitive advantages. These are companies that started realizing the need to cut carbon emissions, save energy, reduce waste, manage environmental impacts and save water. From these practices, some companies had noticed that responding to sustainability and climatic change imperatives will be the defining factors for business performance in the future.

The concept of sustainability as defined by the Global Reporting Initiative Framework requires companies to manage a process of identifying, acting upon and disclosing opportunities and impacts relating to Economic, Environmental and Social Cohesion performance indicators.

Economic indicators cover economic performance, market presence and indirect economic impacts. Environmental indicators cover materials, energy, water, biodiversity, emissions, effluents and waste. Social indicators cover products responsibility, labour practices and decent work, human rights, gender and society. However, underpinning these is the process of stakeholder engagement and responsiveness.

This article shares some of the motivations, drivers and benefits for sustainable business practices. Certainly, the business case for sustainable development is not without debate. Schools of thought like those of Karl Marx and Milton Friedman, which dwell on neo-capitalistic business ideologies, certainly continue to justify for a narrow business focus of being profit-centric.

The shift in business thinking toward sustainable development observed by AT Kearney (2009) shows that share prices of companies that are committed to sustainability outperformed their respective industry average by 15%. Locally, companies that have continued to perform well on the Zimbabwe Stock Exchange (ZSE) have also continued to be actively involved in and supporting social activities under corporate social responsibility. Companies such as Econet, Delta, Mimosa, Zimplats and others come to mind.  

Business Efficiency

It is important to understand that sustainable development is defined in simple terms as meeting today’s needs while ensuring the next generation enjoys the same benefits of meeting their needs from the same resources. Some companies are motivated to improve their business efficiency to reduce their impact on the environment and climate.

For example, some companies run on low production costs by using recycled material, low energy use, recycling waste and water. Such companies have enjoyed good profits and have reached points of being recognized as market leaders. For such performance, Ernst & Young (2010) notes that the process of sustainability practices can create pressure on the company to continually improve its performance to a point of reputation. 

Reputation and Risk Management

For those in business, they fully understand that the long term success of a company depends on its long term reputation. Some companies have built a reputation of being environmentally responsible and continue to support environment initiatives, while others have built their reputation as largest tax contributor to government, setting their pace on economic sustainability. Some continue to support the society on other issues. However, once a reputation has been built, continued participation and safeguarding becomes a key driver. Risk management and reputation have significant interrelations. An established brand in sustainable development and sustainability requires risk management to avoid damaging the brand.  

Market Position, Financial Performance

For many managers, maintaining a good market position is fundamental. Therefore, some companies have continued to keep up to date with development in the climate change debate to ensure they come out with products and innovations that will support their market position. For example, Cell Insurance and Tristar Insurance have come out to offer environmental insurance products to mining companies, helping them maintain a market position. Others like Econet have also innovated with solar lanterns. Maintaining a market position has potential financial returns.

A United Nations Environment Programme Financial Initiative research (2006) showed that some investors were already convinced that the Environmental, Social and Governance performance of companies is integral to their financial performance.  The report also notes that there is an impact on share price and company value which is driving business to participate in sustainability issues. In fact, global leading companies have also associated their long term financial success to sustainability business processes and practices.

While the concept of sustainability may be undertaken in the guise of corporate social responsibility, following clear frameworks allows companies to assess performance from one period to the other.

For many local companies, it has been difficult to convince them on the business case for sustainable business processes in Zimbabwe. Small companies like Impahla Clothing (South Africa) have been able compete effectively due to their sustainability processes that have allowed them to win the hearts of their suppliers and consumers.

Of course, managing risk associated with climate change has returns. A report by Ernst & Young showed that 60% of leading companies have now established board or senior management responsible for climate change and sustainability matters.

In summary, businesses can be motivated by other factors such as brand, image and culture. Companies such as Toyota, Ford Motor, TATA and others pride themselves in their prioritization of environment in their business approach. An easier business approach to sustainability is to ensure that the company’s strategy is integrated with sustainability, and decisions are considered on their impacts and opportunities in consideration of economic, environmental and social factors.

Leading SMEs around the world have succeeded on the basis of sustainability, which drove their competitive advantage. For many investors, assessing company performance on profit alone is no longer good enough. Lastly, competing on the basis of sustainability in business is becoming a norm as well as a market barrier.

Rodney Ndamba is Founding Director of the Centre for Environmental Accountability (CENAC) Zimbabwe, member of ACCA and holds an M.A. in Accounting & Finance (Huddersfield, UK), B.Sc. (Hons) in Applied Accounting (Oxford Brookes University, UK) and has attended training in Sustainability Assurance and Sustainability Reporting. He is a Stakeholder Council member of the Global Reporting Initiative (GRI) from Africa and is currently reading for a Ph.D.

This article appeared in Zimbabwe Independent on January 19, 2012.
Republished with permission from author.

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