For those who argue that investing in efforts to fight climate change interferes with a company’s duty to shareholders, a recent study by EY has some disappointing news. The study reports that “companies that take decisive action to combat climate concerns are benefiting from unexpected financial value in areas like revenue growth and earnings.” EY says that close to seventy percent of survey participants report seeing financial benefits that exceed their expectations. Of course, that’s good news for the rest of us.
It’s one thing to make a theoretical argument that investing resources to fight climate change is good for business; it’s another thing to have C-level executives say this is actually true in practice. Here we take a look at both the theory and the EY findings.
Why sustainability efforts help businesses – the theory
Way back in 2016, an article in the Harvard Business Review (HBR) stated that “executives are often reluctant to place sustainability [at the core of] their company’s business strategy in the mistaken belief that the costs outweigh the benefits. On the contrary, academic research and business experience point to quite the opposite.” In other words, embedding sustainability in a company’s strategy has a positive impact on the business.
Details: sustainable practices are defined as those that (1) at minimum do not harm people or the planet and at best create value for stakeholders, and (2) focus on improving environmental, social, and governance (ESG) performance in the areas in which the company or brand has a material environmental or social impact. Companies that rely solely on a traditional Corporate Social Responsibility program whereby employees are encouraged to volunteer in the community are excluded.
That 2016 HBR article says that much of the value of pursuing sustainability initiatives stems from the fact that doing so requires ongoing interaction with key stakeholders. These interactions make companies better able to anticipate and react to changes – economic, social, environmental, and regulatory – as they arise. In contrast, firms that do not have those ongoing interactions are more likely to have more conflicts and less cooperation with their stakeholders. At a minimum, that can interfere with a firm’s ability to operate on schedule and budget.
This is real, practical stuff that is clearly related to helping businesses deliver quality products and services, win customers, and retain good employees – all bottom-line things.
The HBR article cites the gold mining industry as an example. In mining, stakeholder relations can have a huge influence on land permitting, taxation, and the regulatory environment. That, in turn, makes a big difference in terms of when (and even whether) the mining company will be able to extract gold from the ground and turn it into cash flow for shareholders. The authors of that study wrote that stakeholder engagement “is not just corporate social responsibility but enlightened self-interest.”
The article goes on to talk about sustainability and supply chains, threats of resource depletion, and fostering innovation. We could go on, but we think the point has been made – there is substantial theoretical support for the argument that pursuing sustainable practices help businesses to reduce risk and improve financial performance.
Initiatives to fight climate change help businesses – the real world
The EY study mentioned above focuses specifically on climate change initiatives. Here is some information about the kinds of companies that participated: EY surveyed 506 corporate sustainability leaders within companies with over USD $1 billion in annual revenue, in the financial, energy, technology/media/telecommunications, consumer, manufacturing, health care, and real estate sectors. This covered 21 countries in the Americas, Asia-Pacific and EMEIA (Europe, the Middle East, India, and Africa).
EY hastens to note that “the companies surveyed were not a representative sample of global businesses.” Each one can be considered a “pacesetter” in terms of having a sustainability strategy or major climate change initiative that puts them ahead of most companies around the world. Most are committed to reducing greenhouse gas emissions excluding carbon offsets by an average of 41% (not enough, but getting close), and many are over halfway to meeting their goals. Eleven percent have made a net-zero commitment.
The study identifies these five sources of value for companies that are leading the way in addressing climate change
- Financial value (revenue growth, earnings)
- Employee value (recruitment, retention, satisfaction)
- Customer value (quality, brand perception, purchasing behavior, etc.)
- Societal value (helping communities, public health, boosting economic opportunity)
- Planetary value (reducing greenhouse gas emissions, among other goals)
One could argue that only the first three contribute directly to increasing shareholder value. One could also argue that the last two can also make a critical contribution because a rising tide lifts all boats, and lifts the most buoyant boats the most. Conversely, if societies and economic opportunities are suffering, climate change is wreaking havoc, and the planet’s resources are being depleted, it’s not good for business. So, let’s agree that all five belong on the list.
Some practical examples: Cement maker CEMEX sees both short-term and long-term benefits from curbing emissions by using alternative fuels with high biomass content. This will deliver almost immediate cost savings, and in the long run it expects investors will favor climate action leaders. Many companies see opportunities to create new products and services. For example, Unilever is aiming to sell €1b worth of plant-based meat and dairy alternatives by 2027. EY says that the pacesetter companies in its survey are three times as likely to have established new business lines to capture climate-related market opportunities than companies categorized as “observers”.
We have written about ESG and supply chains more than once (here and here), so this next item really stood out: EY cites research suggesting that supply chains account for an average of 75 percent of companies’ emissions, and close to 100 percent in some sectors. To help reduce those emissions, 52 percent of EY’s pacesetter companies have partnered with one or more suppliers. This was due to a realization that for most companies, the vast majority of emissions are Scope 3. While there has been much hand-wringing about how difficult it is to measure Scope 3 emissions, that doesn’t mean companies shouldn’t do anything to reduce them.
The pacesetter companies EY surveyed said they benefit from strategic partnerships and joint ventures to help reduce carbon emissions, and 57% have already partnered with a competitor (compared to 22% of observer companies). Pacesetters are more likely to see benefits from these collaborations, reporting that “partnerships lower costs and increase the likelihood of success for their climate change initiatives.”
To conclude our brief discussion of the theory and practice of why pursuing sustainability makes good business sense, we restate the eye-popping statistic mentioned at the beginning: close to seventy percent of the participants in EY’s survey report seeing financial benefits that exceed their expectations. It’s not a secret, and it doesn’t really require a leap of faith – just an open mind and good business sense.
Contact us to find out how OWL’s data and analytics can help you to understand companies’ efforts to improve sustainability and address climate risk exposures.
