Kate van der Merwe explains why businesses must incorporate sustainability in all financial decision-making processes in order to remain relevant.
Ray Anderson, the founder of Interface, once said: “I always make the business case for sustainability. It’s so compelling. Our costs are down, not up. Our products are the best they have ever been. Our people are motivated by a shared higher purpose – esprit de corps to die for. And the goodwill in the marketplace – it’s just been astonishing.”
Companies of all sizes make significant decisions every day. Decision-making is an essential process in determining a company’s trajectory and performance. These decisions may be operational, or concern future internal and external investments. In this, the third in my series of sustainability-related articles, I will touch on the emerging practice of internal carbon pricing, consider how environmental factors shape decision-making within organisations and explore how a focus on sustainability can enhance the management of operations or the evaluation of future opportunities.
Companies already employ a variety of methods to embed environmental sustainability into their operations. In doing so, they are driving cost efficiency, reducing greenhouse gas emissions and gaining happier customers and employees. Carbon pricing is one such method. Companies set an internal price of carbon that is applicable across transactions, depending on the related carbon emissions. Carbon pricing enables these emissions to be incorporated into the budgeting process – directly feeding into day-to-day decisions.
Reducing this carbon cost may include greening your energy supply (more than 200 companies have committed to becoming 100% renewable as part of the RE100 initiative) or re-assessing production processes. For example, Microsoft introduced internal carbon pricing in 2012 and implemented carbon budgets across all business units. The funds collected are ring-fenced for investment opportunities that further reduce carbon emissions. Since Microsoft implemented carbon budgeting, the company reported a 7.5 million ton reduction in emissions and over $10 million savings per year. Carbon pricing embeds the environmental cost and is flexible in nature, allowing schemes to be piloted before being fully incorporated.
Just as carbon pricing helps to make the invisible visible, incorporating sustainability has many tangential gains that should be included within cost-benefit analyses. These benefits include indirect cost reductions, greater resiliency and enhanced brand goodwill. Truly embedding sustainability can mean a cheaper cost of capital, particularly with the emergence of green and sustainability loans. Danone, for example, brokered an innovative new €2 billion loan facility, where preferential rates are linked to the company’s third-party-verified ESG performance. To embed sustainability and avail of the benefits, or merely survive upcoming transitions, companies’ existing products or services may need reexamination. For example, how sustainable are your materials? How climate-resilient are your supply chains? Are your assets vulnerable? What happens to your customers or client base as the impact of climate change increases?
Savings aren’t only made by eliminating waste and inefficiencies in production or overheads. Companies can achieve higher employee attraction and retention by embedding sustainability. Both millennials and Gen Z are significantly concerned about the climate crisis and prioritise value alignment when looking for prospective employers, leaving companies that don’t live up to their stated values.
In looking for the next business opportunity, it also pays to assess environmental and social impacts. Significant problems must be solved if we are to successfully tackle the climate crisis. However, for those who seek to meet these challenges, there are important market opportunities. Millennials (who are projected to become the most powerful consumers this year) and those in the Gen Z demographic cohort actively use their purchasing power as consumers. They start or stop transacting with a company based on the company’s deemed ethical behaviour, creating a market incentive for sustainably minded businesses.
Environmental resources have often gone uncosted, but this is set to change. This shift should be embraced; it is an opportunity to innovate, to aid society and to eliminate waste and cost. If businesses wish to remain relevant and engender trust, they must incorporate sustainability in all financial decision-making. It is necessary for businesses, and society, to thrive.
Case study – Patagonia
Founded with a focus on the environment and people, Patagonia has a long history of environmental awareness. The company’s organic growth has been aligned with its core of utility, simplicity and nature, with decisions consistently factoring in the impact to the environment. Examples of this aligned evolution include the Worn Wear programme, Tin Shed Ventures and Patagonia Provisions. The Worn Wear programme recycles clothing, which enhances the company’s eco credentials while extending access to a new demographic with lower prices. Patagonia established Tin Shed Ventures to ethically manage the company’s investments, supporting start-ups trying to tackle the climate crisis (including two finalists in the 2018 Circular Economy Awards, a World Economic Forum initiative). And in innovating textile improvements for reduced environmental impact, Patagonia Provisions was born to manage the company’s sustainable farming activity. How has this decision-making impacted Patagonia? Employee turnover is at 25% versus the industry average of 43%, with roughly 900 applications for every job opening. The company has weathered storms, but quadrupled profits and revenues in the last decade, debt-free, and was awarded the Worlds’ Most Innovative Company award in 2018.
Case study – Interface
Carpet companies don’t usually make headlines, but Interface has a remarkable story to tell. The company’s founder, Ray Anderson, was inspired to redesign a carbon-intensive and environmentally damaging carpet business with a ‘mission zero’ vision back in 1994. After setting a goal to eliminate any negative impact on the environment by 2020, he began an intensive journey of innovation. Anderson created a recyclable carpet made from recycled or biobased materials, which worked better and cost less, while re-conceptualising overheads. In doing so, Interface managed to achieve:
- 82% reduction of net greenhouse gas emissions per ton;
- 84% increase in renewable energy use, with a 45% reduction of energy used per pound of product;
- 91% reduction of facilities waste;
- 100% carbon neutrality across all products; and
- $185.4 million annual savings realised by 2000.
Perhaps unsurprisingly, Anderson credits the company’s sustainability journey with its ability to successfully navigate the last recession.
Kate van der Merwe ACA is responsible for Global gFA Reporting Optimisation at Google.