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Uzņēmējiem - 2021 01 04
corporate sustainability

Corporate sustainability – a trend or an opportunity to outperform the competition?

Corporate sustainability – a trend or an opportunity to outperform the competition?

In an age where sustainability is a buzzword, one can get the impression that each of us is pursuing the best sustainability practices in our lives and those of our businesses, striving to be more responsible, more environmentally conscious, and more concerned about our future. 

However, the reality is that only a small percentage of companies have initiated a real and serious change process and are thinking beyond the written corporate social responsibility policies. You could even say that the current trend is to think and talk about it, but less so - to practice it.

Companies that are serious about integrating sustainability into their operations will be light years ahead of their competition in the long run. Why is sustainability attractive to companies and does it pay off at all?

Act as if we had planned to stay here

Sustainability has become more important especially in times of Covid-19, when there is a lot of talk about how the global economy will recover from the crisis and how the crisis can be a great opportunity to base growth precisely on sustainability. However, the understanding of what exactly is meant by it is quite different. The concept of sustainability goes far beyond eco-friendly lifestyles and nature-friendly green eco-shops. One of the simplest definitions of sustainability is “acting as if we had planned to stay here”.

Sustainability also has a lot to do with how a business is managed. It must be incorporated into human resource management, i.e., into the way the company takes care of the employee professional development and engagement aspects. It also must feed into the production processes, demonstrating care for the working environment, the health and safety of employees, the equipment used in production and the by-products that are produced. It is also important how we evaluate our suppliers – whether we look only at the lowest price or whether we also consider the supplier’s reputation and concern for the working conditions and salaries of its employees.

The results of the studies increasingly show that it pays to be a sustainable company. In general, the benefits of being a sustainable company fall into three main categories: higher return on investment, growth opportunities, and risk mitigation.

Companies with a positive sustainability strategy have a higher return on investment

90% of sustainability studies conclude that good sustainability standards lower the cost of capital, while 80% of studies show that the share prices of companies correlate positively with sustainable corporate governance, according to the analysis carried out by asset manager Arabesque Partners and Oxford University, which has analysed nearly 200 sustainability studies.

The focus of investors on the securities issued by sustainable companies is therefore logical. According to the data by the Forum for Sustainable and Responsible Investment, the total amount of the securities of sustainable companies managed in the U.S. market went up from USD 12 trillion to USD 17.1 trillion between 2018 and 2020, representing a total of one-third of professionally managed investment portfolios.

McKinsey & Company, an international management consulting firm, points to the positive impact of sustainability on corporate ratings. According to their data, investors would be willing to pay up to 10% more for a company with a positive sustainability strategy compared to a company that does not pay much attention to sustainability.

The focus on sustainability is not only crucial for companies that are present in the financial markets. Gradually, the way banks in the Baltics evaluate companies and for what purposes loans are granted is changing, and sustainability issues have become part of credit risk assessment. As the banking sector plays an important role in economic development, it can make a particularly important contribution to achieving sustainability goals. We expect that there will soon be differences in banking terms and conditions for companies with different approaches to sustainability issues.

Growth opportunities – people are willing to buy sustainable goods

Within a few years, the idea of corporate sustainability has become a reality, which was especially driven by a change in mindset and generations. Younger generations are increasingly paying attention to sustainability issues and see it as their responsibility to buy goods and services that are good for the environment and the community. This is additional motivation for companies to work on creating sustainable products and services to meet the growing demand in this product category.

Although there is considerable disagreement about whether sustainable products can be sold at a higher price, several studies have shown that 70% of buyers in different product categories would be willing to pay 5% more for sustainable goods compared to normal goods, provided that the quality of the products is comparable.

Developing a new product is often not necessary. It is sufficient to make small changes to the existing product, such as just replacing a component or differentiating the pricing model.  For example, the international pharmaceutical company GlaxoSmithKline focuses its business model not only on developed countries but also on developing countries, where purchasing power is lower than in developed countries, and applies flexible product pricing models. The company’s goal is to bring developed medicines to a wider audience and new markets, which is not only a sustainable approach but also increases the company's revenue.

Ambitious goals in this area have also been set by international furniture retailer IKEA, which has pledged to inspire and give a chance to at least one billion people to live better by 2030, given the planet's limited resources.  One billion is an ambitious number in any industry, driving the need to find the most efficient way of working, cutting costs and making products accessible to more customers. This inevitably leads to the innovations that today’s consumers want to buy, i.e., goods that use less power, take up less space, are lighter and more efficient, and ensure that overall resource consumption is reduced during the product's life cycle.

Minimising risks – fines and reputational risk

As for the historical aspect of sustainability, it has been around for some time – when legislation was still in its infancy in many areas and there were conflicts between regulators and businesses in regulated areas. The limits of how far you could go to get the most benefit for yourself were tested, often resulting in significant fines.

This problem persists today. According to a McKinsey & Company study, about one-third of corporate profitability (EBITDA) is at risk from regulatory fines. In some industries, such as automotive, aerospace and defence, this risk can be as high as 60% of corporate profitability. In some industries, such as automotive, aerospace and defence, this risk can be as high as 60% of corporate profitability.

Practical examples are not far away – one of the most striking cases is the famous “Dieselgate”, in which automotive giant Volkswagen was accused of falsifying emissions data in 2015. The German company was fined one billion euros. At the time, it was the largest fine ever imposed on a German company. Among the most important risks is the threat to the company’s reputation. Just recently, the media reported on a local confectionery company accused of human trafficking. Major food retailers immediately reacted to this news and stopped buying from the company. This will undoubtedly have significant consequences for the company and its viability.

Sustainability may seem like something costly that only applies to large, multinational companies, but it is not. Fortunately, positive signs can be observed in Latvia as well. It is not necessary to immediately build a new multi-million euro worth production facility or publish a sizeable sustainability report. Figuratively speaking, it is enough to harvest the fruit from the lower branches of the apple tree, i.e., to make easy-to-implement investments with a short payback period, such as switching to LED light bulbs, using more energy-efficient equipment, or training our customers and employees on the subject. Rome was not built in a day. Integrating sustainability into everyday business would follow the same path – purposeful and gradual practice of good things will surely yield results.

Jānis Ozoliņš
Head of SEB Large Corporates Department

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