Von Annika Raaf am 21.11.2024

The Business Performance Potential of Sustainability

Sustainability has been an important topic for businesses for some time now. It is also gaining more attention in the press, society and among experts. Many companies have integrated sustainability into their processes and products, sometimes even aligning their entire business strategy with it. Now, the questions arise: What are business performance implications of transforming your business for sustainability and is real world evidence really keeping up with theory?

Theories on the impact of sustainability on business performance

According to Corporate Social Responsibility (CSR) and Environmental Management (2013), the main drivers of corporate sustainability are ethical leadership and risk management within the company, as well as regulation, legislation, customer demands and expectations. These drivers motivate companies to offer sustainable products and services and to implement sustainable initiatives for improving business performance.

How sustainability initiatives improve business performance is shown in the diagram below. The graphic summarizes different communication theories as described in:

Sustainable Marketing And Its Impact on the Image of the Company (Signaling Theory) in Marketing and Management of Innovations (2023),

Measuring the Choice of Environmental Sustainability Strategies in Creating a Competitive Advantage in Business Strategy and the Environment (2017), and

Is sustainability a competitive advantage for small businesses? An empirical analysis of possible mediators in the sustainability–financial performance relationship in Journal of Cleaner Production (2018).

When a company expands its sustainability efforts, it gains greater credibility, and it can showcase its distinctive competencies to differentiate itself from others (Business Strategy and the Environment, 2017). This can improve the company's image, reputation, trust and customer satisfaction, creating a competitive advantage that leads to corporate success, including increased profits, market share and employee and customer loyalty.

 

 

A report by Serviceplan Corporate Reputation (2016) demonstrated that if a company operates in a market where products are very similar in terms of their functional characteristics and are therefore interchangeable, sustainability can serve as a unique selling point. Integrating sustainability into business strategy can also attract new customers who value companies that prioritize social and environmental considerations, according to the Involvement International Journal of Business (2024).

In addition, an SAP Insight study (2023) showed that making internal operations more sustainable, for example by reducing waste in production and packaging, reducing global transportation, and using resources more efficiently, can lead to cost savings.

In theory, companies that focus on sustainability should outperform those that don’t. But do these theories hold up in the real world?

Success stories: How start-ups and corporates profit from sustainability initiatives

In the past, there have been several examples that support these theories. In 2022, IBM surveyed more than 3,000 executives, CSCOs and COOs across multiple countries and industries to understand how executives address sustainability.

IBM was able to identify four sustainability archetypes for executives, including transformation trailblazers, who have high sustainability commitment and effectiveness, and commitment sideliners, who have low sustainability commitment and effectiveness.

According to the results, 65% of transformation trailblazers reported that their company outperformed their competitors in terms of innovation, compared to 38% of sideliners. In addition, companies with high commitment and effectiveness reported a 51% increase in annual revenue growth, compared to 27% for companies with low commitment and effectiveness.

For example, Unilever launched the Unilever Sustainable Living Plan in 2010, which set out the company's sustainability goals. Since then, Unilever has not only delivered significant environmental and social benefits but has also driven business growth and profitability.

The company aims to replace fossil carbon in all its detergents and home care products with recycled carbon by 2030. Today, Unilever uses purple carbon, captured from industrial emissions, and green carbon, derived from biomass, to make surfactants. In 2018, Unilever's sustainable brands grew 69% faster than the rest of the business, delivering 75% of the company's growth.

Introducing sustainable products can significantly improve a company's image and even increase sales of non-sustainable products. After BMW expanded its EV business, the company achieved an excellent sustainability image. As a result, BMW's sales increased, not only for their sustainable products (BEV), but mostly for their traditional vehicles.

There are also many sustainability start-ups that are achieving high market valuations. Not all are profitable. Cotopaxi, an outdoor gear and apparel company that uses sustainably sourced products, is an exception. Ten years ago, Cotopaxi was founded as a certified benefit corporation with a mission to help underserved communities around the world. Since its inception, Cotopaxi has grown into a 350-person company with annual revenues of $100 million.

The company donates 2-3% of its annual revenue to the Cotopaxi Foundation, which supports non-profit organizations such as the International Rescue Committee and has helped 3.8 million people living in extreme poverty.

Corporate gains from sustainability efforts not reflected in global market performance

As we have seen, there are many companies that have improved their business performance after committing themselves to sustainability. However, sustainability does not necessarily lead to a positive impact, as analysis shows.

A 2023 report by Scientific Beta found that average annual returns for exchange-traded funds (ETFs) focused on environmental, social and governance (ESG) issues were 0.2% lower than comparable non-ESG ETFs over the past decade. According to a report by the Institute for Energy Economics and Financial Analysis, ESG ETFs had an average return of 10.5% in 2023, 2% below the average return of traditional ETFs.

In addition, the lack of financial success of sustainable ETFs led U.S. investors to withdraw $13 billion from them in 2023.

Why do companies fail to benefit financially from sustainability?

There may be individual reasons for this, depending on the measures taken and the type of company. But very often, decision makers lack critical information:

  • Keeping up with evolving sustainability regulation and legislation can be burdensome, especially when they conflict across different jurisdictions
  • Without a deep understanding of consumer demands and expectations, companies may incorrectly position their product offerings and lose credibility, reputation, trust and customer satisfaction
  • Lack of knowledge about their competitors’ product portfolios and anticipated product innovations can lead to underinvestment in opportunities to create distinct competencies
  • Failing to analyze their competitor’s sustainability strategies can lead to suboptimal positioning and give competitors the opportunity to achieve a competitive advantage
  • Opportunities for cost savings can be missed by not keeping up with the latest sustainable resources and technologies

How can KnowledgeAgent help your company?

KnowledgeAgent can help you avoid these mistakes. We analyze your competitors' approaches, along with the current areas of innovation and industry regulations, to derive valuable insights tailored to your specific needs.

These insights serve as a solid foundation for developing a profitable, data-driven, and informed decision-making strategy. For instance, we prepared a client in the UK dairy industry for upcoming environmental policies affecting their industry. On another occasion, we analyzed the carbon emissions of several different business activities of engineering companies to identify steps in the value chain where emissions could be avoided.

Whether you need information about your market, competitors, or customers, KnowledgeAgent provides you with in-depth research, analysis, and best practices to help your company to successfully integrate sustainability while delivering high business performance.

Get in touch with us to find out more!

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