Growing a business for a sustainable future
The financial bottom line isn’t the only one that counts. Companies that perform according to a triple bottom line of social, environmental and financial responsibility tend to reduce risks and gain opportunities. Sustainable growth is the wave of the future for successful companies.
Long gone are the days when a corporation was only responsible to its shareholders and for the financial bottom line. While companies need to be profitable to stay in business, the past 15 years have witnessed a sea change in the way many firms view their spheres of responsibility. Today companies are expected to act with social, environmental and ethical responsibility as well as financial responsibility. The goal is sustainable growth: creating value for shareholders and society while reducing negative environmental and social impacts. For smart companies, this new era of corporate management is as much about seizing opportunities as it is about avoiding risks.
The pressure to manage growth according to social, environmental and ethical responsibility comes from many different parts of society. Consumers expect firms to uphold these kinds of standards in terms of the products and services they want and the way they are delivered. For instance, consumers are making an increased demand for organic food and for products not produced using child labour. An increasing number of investors believe that social, environmental and ethical performance has financial implications in the short, medium and long term – both as risk and as opportun-ity. Regulators are putting teeth into a regulatory and legal framework that holds firms to high standards of workplace and environmental responsibility.
Companies that don’t take seriously these stakeholders’ concerns face a number of risks. They face risks to their reputation, as has been made painfully evident in recent corporate scandals. A brand that has taken years and even decades to build can be destroyed in an instant through negative publicity. This not only influences consumer behaviour, but it can affect relations with regulators and ultimately can jeopardize the company’s licence to operate.
These risks are real, and they are often the driving force for companies to adopt a commitment to sustainable growth. But it is when firms see the opportunities, and not just the risks in sustainable growth, that they can truly reap the benefits of a new way of doing business, says My-Linh Ngo, senior analyst with the Sustainable and Responsible Investment (SRI) department of Henderson Global Investors, a leading international investment management company.
“Companies increase their chances of being financially successful in the long run if they have better knowledge and understanding of the environment in which they operate,” she says. “This means being aware of all risks and opportunities, including those related to social, ethical and environmental responsibility. Companies are starting to recognize that managing these factors well is a more proactive, upstream approach to running a business. It is better to prevent negative incidents and create opportunities.”
One company that has seized the opportunities in this approach is DuPont, the global energy and chemicals company. It defines sustainable growth as “the creation of shareholder and societal value while we reduce our environmental footprint along the value chains that we operate.” The company has, for instance, set an ambitious target of zero occupational injuries and illnesses and environmental and safety incidents. Each year, the company reports steady progress towards that goal, which not only demonstrates responsibility towards its employees’ welfare but also makes for more cost-effective workplace practices and lessens the risk of litigation. DuPont also derives 25 percent of its revenue from non-depletable resources and has exceeded its goal of reducing its greenhouse gas emissions – a contributor to global warming – to 72 percent below 1990 levels.
“We have the choice to view major societal concerns like climate change, fossil fuel energy use and the impacts of chemicals to human health and the environment … as things that we must defend,” said Charles O. Holliday, Jr, chairman and CEO and chief safety, health and environment officer for DuPont in the company’s Sustainable Growth 2004 Progress Report. “Or we can see them as opportunities to create solutions that not only improve our bottom line but also create tremendous benefit for society. We have chosen to see these as opportunities and to use these to drive our business growth.”
Like many consumer goods manufacturers, IKEA, the home furnishings company, faces increasing societal pressure to provide fair and safe labour standards among its suppliers in developing countries. But as Anders Dahlvig, group president of IKEA, says in the company’s 2004 Social and Environmental Report, “There’s no conflict between good business and good companies. By making demands on suppliers with regard to environmental and social responsibility and by helping them to meet these demands, our business relationship contributes to a better everyday life for the people manufacturing IKEA products. Better working conditions lead to more efficient production and better productivity. In this way suppliers can produce at a
lower cost and IKEA can sell at lower prices in its stores.”
As these examples show, effective management of social, environmental and ethical responsibility can potentially build long-term sustainable business success. This includes an enhanced company profile and reputation, helping the company to attract and retain the very best staff to grow the business, Ngo says. Paying attention to these factors keeps companies tuned into their stakeholders and better able to respond quickly to change, she adds.
“As companies are more informed and aware of stakeholder views, they are in a better position to anticipate and take a course of action that will be positive for the company, gaining first-mover advantage,” she says. “Companies can boost their competitiveness in a number of ways, ranging from product differentiation, as a result of superior environmental and social credentials, to reducing their cost base by cutting down on wasteful energy and raw material consumption and unnecessary legal proceedings.”
There are many ways in which companies are demonstrating that they are serious about adding non-financial factors to their sphere of responsibility. More than 500 companies worldwide now publish annual social and environmental, or sustainability, reports according to the Global Reporting Initiative, an inter-national body promoting voluntary reporting by organizations of the economic, environmental and social impacts of their activities, products and services. Many others adhere to international standards such as: ISO 14001 for environmental management systems; the UN Global Compact principles, which hold signatory companies to high social and environmental standards; the OECD Guidelines for Multinational Companies; and International Labour Organization (ILO) standards protecting labour and human rights in the workplace.
Companies that adhere to a philosophy of sustain-able growth are increasingly recognized among investors. In the US, nearly one in eight dollars held with investment institutions is either in ethically screened portfolios or subject to social responsibility criteria. In the UK, more than 170 billion euros are invested in institutional and retail funds with active SRI policies. The Dow Jones Sustainability Indexes and the FTSE4Good index, which measure the sustainability of companies, have a growing influence among investors.
“Paying attention to the risks that can arise from poor social, environmental and ethical responsibility is linked to long-term survival for a company,” says Anna Nilsson, analyst with Robur, a Swedish investment management company and a pioneer in SRI investing in the Nordic market. “Companies who aren’t successful in these areas miss out on opportunities to do well by doing good. It all comes down to leadership. True leaders consider every risk and every opportunity; it is the only way to be sustainable in the long run.” ¦