Sustainability

ESG: The Three Pillars of Future Value Creation

  • Benedyct Muirheid
  • June 03, 2021
3 Pillars of Sustainability

Today’s corporations are dealing with a complex mix of social, environmental, market, and technological trends which require sophisticated, sustainability-based management techniques. Executives have often been reluctant to place sustainability at the core of their business strategy in the mistaken belief that sustainability is merely a “cost” of business. 

However, creating a business plan that incorporates social equity, environmental protection, and economic viability—otherwise known as the 3 Pillars of Sustainability—has become essential in a rapidly shifting corporate environment. 

Why is Sustainability Important?

Nowadays, being competitive means that your business is making a conscious effort to ensure sustainability across the environmental, social, and corporate governance (ESG) spectrums. 

Companies that make sustainability core to their business strategy drive innovation while stimulating enthusiasm and loyalty from employees, customers, suppliers, and investors. 

This is to say that sustainability has pushed its way into the boardroom. There’s no time to scratch your head and wonder why sustainability is important. Today’s consumer wants to know that their dollars are supporting sustainable organizations meaning adapting your business strategy is pivotal to meeting the demands of your customers. 

Enable Innovation

New challenges present new opportunities. Consumers are increasingly driven to products that are eco-friendly and businesses that adhere to Corporate Social Responsibility (CSR) guidelines

Customers dictate the market and businesses have had to adapt to their new demands. These adaptations go well beyond designing green products and reducing packaging. Sustainability-based management techniques require a review of the entire business strategy to identify weaknesses and inefficiencies. 

Ensuring that an organization’s sustainability strategy addresses social, environmental, and economic elements—or the three pillars of sustainability— requires a new way of thinking and presents a clear opportunity to drive innovation.

The company Amyris, which specializes in ‘clean chemistry’, uses sustainability initiatives to propel the development of their fermentation-based production system to develop an array of molecules for a wide range of products, from beauty to biofuels. Their innovative approach has increased productivity and quality, reduced environmental impact and costs, and increased global competitiveness.

It’s no secret that the sustainability trend is here to stay, and ignoring it will leave companies further behind the competition than a traveling rotary phone salesman.

Drive Competitive Advantage

Sustainable businesses are redefining the corporate ecosystem by designing models that create value for all stakeholders – including employees, shareholders, supply chains, civil society, and the planet. ” This offers them a leg up on the competition and puts them in a better place to adapt to new challenges or trends from any link on the supply chain. 

Michel Porter and Mark Kramer, two business and economics experts at Harvard Business School, pioneered the idea of creating shared value. They argue that businesses can generate economic value by identifying and addressing social problems that intersect with their business. 

The concept of shared value recognizes that societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal costs for firms.

The electric vehicle manufacturer, Fisker, is leveraging the massive shift towards low carbon technologies to disrupt the automotive industry with an asset-light business model. They are positioning themselves as an e-mobility provider rather than a classic car manufacturer— with the intent to build a strong brand based on creating the world’s most sustainable vehicles. 

Companies like Fisker are utilizing the principles of corporate sustainability and listening to the demands of consumers to find a gap in the market and drive innovation. Positioning themselves as an e-mobility provider gives them a sizeable competitive advantage over other car manufacturers who are simply offering an electric vehicle option. 

Improve Financial Performance

A common misconception among business owners is that profit and sustainability operate in a zero-sum relationship. If you want to increase sustainability, then your profits will suffer. These businesses stagnate while others are pushing to find new avenues of income and wider customer bases. 

The truth is that you can ‘expand the pie’, increasing both profits and sustainability simultaneously. Driving innovation and building new competitive advantages goes hand in hand–as does increasing financial performance. An added element of financial benefits is that companies are realizing significant cost-saving potential via sustainability-related efficiencies like waste reduction or energy-efficient lighting. 

Additionally, investors track high performers on ESG factors and are recognizing a positive correlation between financial and ESG performance. Businesses get noticed for being good corporate citizens as they are pushing the boundaries to find new, sustainable solutions. 

An Oxford University study on sustainability and corporate performance found that in a meta-analysis, 90% of the studies found that good ESG standards lower the cost of capital, 88% concluded that proper sustainability practices result in better operational performance; and 80% showed that stock price performance is positively affected by a high-quality ESG approach. 

According to the Harvard Business School, between 2006 and 2010, the world’s 100 most sustainable companies experienced significantly higher sales growth, return on assets, profit before taxation, and cash flow from operations compared to control companies.

The research shows that sustainable companies deliver significant positive financial performance and that investors are seeking out companies who engage in ESG practices – another reason why sustainability is important. 

Conclusion

As with any transformation, a sustainability strategy must be well-managed and built from within. Businesses that don’t adapt to the new demands of consumers and the sustainability-driven movement will be left behind. 

However, companies that are incorporating sustainability-based management techniques into their day-to-day are challenging the prior notion that sustainability and profit are negatively correlated and are realizing financial benefits.

The 3 pillars of sustainability should be addressed in any successful corporate strategy and present an opportunity to redesign, retool, and advance business strategy. In the process, weaknesses and inefficiencies are weeded out and replaced with the seeds of innovation that spur new growth. 

Thus, planting the seed of sustainability provides the foundation for businesses to flourish.

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