The ROI Of Sustainable Practices
The WHY of implementing sustainable practices is easily apparent, it has become a no-brainer. However, we are quickly learning that sustainability can come in many forms and can also constitute an investment. Companies, regardless of their size or industry, are starting to investigate whether the ROI of sustainable practices is worth making it in the first place. Accordingly, consideration of the return on investment can then be crucial to select and prioritise the sustainable practices you want to implement. In this article, we will focus on the WHAT and the HOW:
- What do we mean by the term “sustainable practices”?
- How do we realise a positive Return on Investment from sustainable practices?
Importantly, sustainability does not just refer to activities such as recycling your paper and reducing your electricity consumption. Practises are considered sustainable as soon as they have a positive effect on the local or global environment, community, society, or economy. This concept has become a wide-reaching term and nowadays encompasses plenty of practices, such as the following:
- Designing products and packaging which can be easily dismantled and recycled;
- Providing quality healthcare to your employees;
- Implementing measures to prevent discrimination during the recruitment process and throughout their career;
- Establishing a due diligence program to ensure information security;
- Conducting a regular CSR risk analyses of your supply chain;
- Assessing your suppliers on their environmental and social practices.
The list goes on. Selecting those actions and prioritising their implementation should surely be linked to the objectives of your sustainable strategy but also to the potential benefits for your organisation. For these reasons, the estimated ROI of sustainable practices will also depend on your strategy.
Return on Investment
Corporate finance defines Return on Investment (ROI) as a “performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments”. First developed for financial operations, this concept has been smoothly integrated into every decision-making event within a company, including CSR decisions. To estimate efficiency and to make relevant investments, decision-makers indeed need to be able to estimate the likelihood of the expected outputs.
What is important to consider especially when approaching sustainable practises is that financial benefits can be direct or indirect. As it can be challenging to quantify the benefits and link them back to the sustainable practices implemented, reporting can be a supporting tool to monitor closely your progress and estimate accurately your ROI. Let’s cover now, some common examples of return you could expect from sustainable actions.
Efficiency and Cost-saving
Yes, sustainability can also help you to reduce costs and increase efficiency. The first type of sustainable practises we can distinguish are the ones that help you to cut the costs significantly and that can easily be quantifiable. If we take the example of a manufacturing company which integrates sustainability in its supply chain by investing in durable equipment instead of only considering short-term costs. Most of the time, it improves the efficiency of the supply chain but also increases the lifecycle of equipment, and that will directly lead to greater savings. As a second example, if you reduce the quantity of material used for product packaging, it will significantly cut the cost of your procurement expenses, especially for big companies.
This article published by Bain & Company in 2020, explains how big companies “cannot afford to ignore sustainability”. Those companies are “learning that eliminating just one gram of PVC in a product can lead to measurable savings and nearly 3.4 grams of reduction in fossil fuels.” Indeed when eco-designing your product or service, you often optimise the use of raw materials and reduce your environmental impacts.
Develop your brand trust
The Consumer Culture Report published by 5W Public Relations in 2020 shows that 83% of Millennials say it’s important for the companies they buy from to align with their beliefs and values. So yes, consumers, and especially the younger generation, are actively on the lookout for eco-friendly and socially impactful products. Developing those products and services may require more resources but should be seen as an investment as the final value will be greater. When referring to sustainable practice’s investment, it could mean its integration within the intrinsic characteristics of your product, by for instance developing eco-designed products, offering circular services or obtaining eco-labels.
However, doing business in an ethical way, building a transparent supply chain or treating people fairly, also constitute sustainable practices and therefore can have great effects on your brand trust, in the eyes of consumers but also employees. The future of work, journey to 2020 report published by PwC, states that 70% of people around the world want to work for an organisation with a powerful social conscience. If you want to sell more products and attract talented employees, sustainable practices can help you to improve your corporate value, develop a competitive advantage and become an attractive employer. The benefits are twofold!
Attract Investments and Partnerships
Unsurprisingly, a good way to attract investment is to invest in sustainability. Financial bodies are now embedding socio-environmental considerations in their investment decisions. A 2018 study from Morgan Stanley shows that 84% of investors take ESG factors into account when making a financial decision. ESG scoring agencies such as MSCI ESG ratings, Sustainalytics, or the Dow Jones Sustainability Index integrate sustainability as a financial indicator in their scoring and now influences the investment decisions of a multitude of investors. As such, sustainability is seen both as risk avoidance and profit-driving activity.
From a supply chain standpoint, a recent trend has been to take CSR performance into account when selecting new partnerships or driving innovation within existing supplier relationships. Logically, you do not want your supplier of raw materials to be involved in a child labour scandal, nor your strategic partner to be publicly shamed for remunerating employees below the minimum legal salary. To prevent this from happening, more and more companies are requesting their partners to embed sustainability in their strategies. Through platforms like EcoVadis, supply chain partners can communicate their sustainable expectations, and demonstrate adherence to regulatory standards in a transparent manner. Here, investing in sustainability means better partnership opportunities, as well as more transparent relationships.
A good return on investment, right?
By enabling cost-saving and efficiency-gaining, developing brand trust, or attracting investments and partnerships, sustainability has a great return on investment for your company. Therefore, when considering the return of investment of sustainable practices, decision-makers should always keep in mind the direct and the indirect financial benefits. In other words, sustainable actions can be an investment that will increase economic resources in the short term or indirectly in the long term. Operating within an interdependent system, individual sustainable practices also contribute towards expanding natural and social resources for our entire ecosystem.