BUS604: Innovation and Sustainability

Many business leaders already see sustainability as much more than a corporate social responsibility exercise that boosts reputation by giving a share of profits to community and environmental projects. Their companies are deploying the sustainability toolkit to open up new business opportunities through innovation, to pursue efficiency gains, to attract employees, customers and investors, and ensure their license to operate. 

A 2014 McKinsey study found that 44 percent of sustainable business leaders cite growth and new business opportunities as reasons for tackling sustainability challenges. Innovation is the key to finding them. 3M, for example, embeds sustainability into its innovation pipeline, aiming to minimize waste and avoid pollution through product reformulation. One result is the firm's Novec fire suppression system: the first viable and sustainable alternative to hydrofluorocarbons (HFCs), a powerful greenhouse gas. With a new global agreement on reducing HFC use secured in October 2016, 3M is placed to benefit hugely as the global market switches to safer alternatives. 

Focusing on sustainability can yield large cost savings: one report shows that many companies have achieved an average internal rate of 27 percent on their low-carbon investments. Dow cut its 2014 energy consumption by 110 trillion BTUs – nearly as much as all the energy used by households in the American state of Illinois. It also reused 344 million pounds of manufacturing by-products in the same year, continuing an approach to resources that had saved the company US$9.4 billion in the 15 years to 2010. In the 15 years from 1994 to 2010, Dow saved 1,800 trillion BTUs, which is the energy equivalent to powering all residential buildings throughout California for more than one and a half years. The company's energy efficiency efforts prevented more than 95 million metric tons of carbon dioxide from entering the atmosphere and contributed cost savings of US$9.4 billion.

The growing body of evidence showing that higher sustainability performance means better financial performance is steadily gaining traction with investors. In a review of 200 studies on sustainability and corporate performance, Oxford University and Arabesque Partners, an investment management firm, concluded that 90 percent of studies in this area found that high environmental, social and governance (ESG) standards reduced companies' cost of capital, and that 80 percent show a positive correlation between stock price performance and good sustainability practices. (For more detail, see Section 4).

Sustainable companies' reputation for doing good while doing good business also helps them to attract and retain talent, especially among the millennials who will account for three quarters of the global workforce by 2025. A 2015 survey of 7,800 future business leaders from 29 countries found that 75 percent think businesses are focused on their own agendas rather than improving society, and over 50 percent would take a pay cut to find work that matches their values. A 2016 PricewaterhouseCoopers study found that millennials are 5 times more likely to stay with employers when they feel a strong connection with their employer's purpose. Similarly, a study by the Society for Human Resource Management found that morale was 55 percent better in firms with strong sustainability programmes, employee loyalty 38 percent better, and workforce productivity increased by 21 percent. 

Lastly, more sustainable companies tend to be more trusted by consumers and B2B customers, and trust makes customers more likely to buy. Unilever has found that brands that stand for a clear sense of social or environmental purpose are growing at twice the rate of other brands in the company's portfolio.