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In today’s rapidly changing business landscape, sustainability has moved from a buzzword to a key component of strategic planning. With increasing consumer awareness, regulatory pressures, and the undeniable impacts of climate change, companies are recognizing the importance of pursuing sustainable strategies and integrating sustainable practices into their operations. But beyond the moral and ethical motivations, does going green actually create financial benefits?
One of the most significant factors that determines whether a particular sustainable measure has a positive financial impact on a company is the potential cost savings and the operational efficiency that result from its implementation.
However, the problem that the majority of sustainability measures here face is their cost intensity, especially in the short-term, compared to cheaper non-sustainable alternatives. This leads to a popular perception of a conflict between profitable and sustainable practices. In the long run however, multiple examples show that established sustainable practices can outperform non-sustainable practices significantly in terms of cost savings as well as operational efficiency and end up being profitable.
A prime example of this long-term payoff is Unilever, the globally leading everyday consumer goods conglomerate, which broke with popular strategic trends at the time and committed to sustainable practices through strategies like the Unilever Sustainable Living Plan (USLP). Between 2008 and 2023, Unilever avoided approximately €1.5 billion in costs through energy and water efficiency measures. (Link).
Other examples are IKEA’s roll-out of renewable energy with €130 million cost savings in five years, or Coca Cola’s 16% reduction of the packaging weight ratio which led to about $600 million in cost savings over six years (Link; p.15).
Furthermore, an analysis from BCG on decarbonization projects in all major industry sectors showed that firms can realize significant Scope 1 & 2 emission reduction through measures that save costs. Additionally, the firms could finance further emission reduction measures with these savings, depending on the sector, up to 90% (for the Fast Moving Consumer Goods – FMCG) of their Scope 1 & 2 Emission at net-zero costs (Figure 1 – Link; p.15).
Source: World Economic Forum: Winning the Race to Net Zero; p.15; Link
Another important factor that can drastically impact the financial performance of companies are risks from regulatory changes. Especially in the European Union, companies have been exposed to new environmental regulatory requirements in the past, already negatively impacting their profitability. But with even stricter regulatory requirements like the CSRD (Corporate Sustainability Reporting Directive) and the CBAM (Carbon Border Adjustment Mechanism) just getting started, companies with a certain size or operating sector, find themselves exposed to even greater regulatory risks, that might impact their profitability significantly.
In this risky environment, companies that pursue an exemplary and intrinsically motivated sustainability strategy experience a more favourable exposure to these regulatory requirements, even when operating in heavily targeted sectors. Another analysis by BCG, on the impact through the CBAM in five emission intensive industries, shows that these sustainable sector leaders could obtain a higher EBIT-margin up to 12 percentage points, compared to the industry laggards when assuming a 55% vs. 0% decarbonization until 2030 (Figure 2 – Link; p. 16).
Source: World Economic Forum: Winning the Race to Net Zero; p.16; Link
In times of increasing marketing and brand importance, accompanied by a stronger perception and demand for sustainable products and brands. Pursuing of a sustainable strategy not only enables cost savings, operational efficiency and risk mitigation.
When included in marketing efforts, it additionally can alter the brands’ or the products’ perception, possibly resulting in higher sales from specific customer groups. These specific purpose-driven customers often are also willing to pay a certain premium for those brands and products they perceive as sustainable. A market research survey conducted by IBM showed for example, that purpose-driven customers are willing to pay an average premium for sustainable products of 67% more (Link; p.13).
These potential higher profits can also make up for higher costs that may arise from the sustainable production of a product or process.
To analyse in conclusion, whether the pursuing of a sustainable strategy does actually or only theoretically improve the profitability of firms, it makes sense to take a look at key financial performance indicators. We have already seen the projection of the impacts of the CBAM regulation on the EBIT-margins by BCG, but are there actual measurable impacts of sustainable strategy that already occurred? The answer is yes!
In the meta study “ESG and Financial Performance” conducted by Rockefeller Asset Management, more than 1000 studies published between 2015 and 2020 were analysed to find proof for improved financial performance (Link).
They differentiated between studies focusing on the corporate and the investor perspective as well as studies focusing on climate change topics and all analysed studies (Figure 3).
The meta study was able to find clear results, especially in the studies analysing the corporate perspective. They found that 58% of all studies showed positive results and less than 10% negative results, regarding improved financial performance of corporates and their sustainability commitment (Figure 3).
They also found that improved financial performance due to an established sustainability strategy / ESG measures, became more visible over the long-term. A study with long-term focus was 76% more likely to find positive results and firms with strong ESG ratings had 3.8% higher returns in the mid- and long-term (p. 7). This once again underlines the importance of the long-term view when establishing a sustainable strategy/practice.
Source: Rockefeller Asset Management: ESG and Financial Performance; p.4; Link
Overall, it is clear to say that despite potential higher initial costs, establishing a sustainable strategy and going green can definitely create financial benefits for a firm from several sources. As already discussed, sustainable practices can enable cost savings and create operational efficiency, especially over the long-term. A sustainable strategy can mitigate risks and reduce potential regulatory cost, creating advantages over non-sustainable competitors. Sustainable branding can increase the demand and the profit margin on products. And sustainability efforts seem to positively impact the financial performance of firms, as shown in a majority of scientific studies conducted.
Sources
Unilever News: Why is sustainability important for business?; Sept. 2023; Link
World Economic Forum: Winning the Race to Net Zero; Jan. 2022; Link
IBM Research Insights: Consumers want it all; Link
Rockefeller Asset Management: ESG and Financial Performance; Link
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