North Wales Management School - Wrexham University

Improving ROI through sustainability

Posted on: May 16, 2019
Improving ROI through sustainability

The growing number of companies voluntarily adopting and implementing a broad range of sustainability practices has provoked a debate about the nature of sustainability and its long-term implications for organisations. Is the adoption of sustainability practices a form of strategic differentiation that can lead to superior financial performance? Or, common practice, a hygiene factor that can ensure corporate survival but won’t necessarily be a competitive advantage?

Sustainability is often seen as being bad for business; traditional ROI models focus more on the short-term gains of an investment, and return on investment in sustainability is not instantly clear. However, business strategies centred around sustainable development should look at the long-term gains, both financially and environmentally. Evidence shows that sustainability can be both a necessity and a differentiator. Some companies are creating real strategic advantage by adopting sustainability measures their competitors can’t easily match.

Marks and Spencer, Ikea, Unilever, Patagonia and Nestle are all market leaders who invest heavily in sustainability. Last year, IKEA’s global revenue amounted to 38.8 billion euros, whilst at the same time the brand invested heavily in their goal to be 100% reliant on renewable energy. Nestle have vowed to make 100% of its packaging recyclable or re-usable by 2025, while this Spring, Marks and Spencer announced that 100% of the cotton used in their fabrics is more sustainably sourced, meaning cotton farmers have been trained in techniques which use less water, less pesticide and fertiliser.

So how are such organisations using their sustainability practices strategically to improve ROI? Many customers will opt for one company over another if they associate them with positive ideas regarding sustainability. Patagonia, for example, donate 1% of their sales to environmental charities and encourage consumers to fix and reuse their clothes instead of buying new ones. While this may seem counter-intuitive to profit-fuelled businesses, Patagonia grows its profits every time it amplifies its social mission – such is the power of brand association.

There are both cultural and workforce benefits to being a sustainable organisation. Besides fair pay, flexible working and a good work-life balance, today’s millennial workers are looking for socially responsible employers. This benefits sustainable organisations in two ways; top talent will seek out opportunities to work with them, and they will retain talent for longer, forfeiting hefty recruitment costs for a new employee (now said to be close to £50,000). The bottom line? Recruit people who share your values, and they will stay longer.

Yes, some sustainability activities are simply becoming “best practice” and therefore a necessity. The adoption of strategic sustainability practices – those which will deliver long-term impact specific to the company – is significantly and positively associated with both return on capital and market valuation multiples, while common sustainability practices – such as switching to LED lighting or reducing plastic packaging – also benefits the latter.

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