Sustainability: a new corporate function that you can't ignore
In today's rapidly evolving business landscape, sustainability has emerged as a crucial factor for companies across various industries. No longer seen as just a corporate buzzword, sustainability has become an essential element in strategic decision-making and long-term success. Let us have a closer look at the drivers behind this shift.
Conscious consumer behaviour
Consumer preferences are undergoing a profound transformation, with individuals becoming increasingly aware of the environmental and social impact of their purchases.
According to a survey conducted by Nielsen, 73% of global consumers are willing to change their consumption habits to reduce their environmental impact.
This shift is reshaping the business landscape and forcing companies to take sustainability seriously. People are no longer solely focused on price and quality; they want to support brands that align with their values and contribute to a better future.
Companies that have recognised and adapted to this change have seen remarkable success. For instance, Patagonia, the renowned outdoor clothing and gear company, has experienced tremendous growth by embedding sustainability into its core business practices. Its annual revenue exceeded $1 billion, showcasing the financial rewards of prioritising sustainability and meeting consumer demand for ethically sourced products.
On the other hand, companies that have failed to address sustainability concerns have faced significant challenges. One such example is ExxonMobil, the multinational oil and gas corporation. ExxonMobil's lack of transparency and inadequate response to climate change have drawn severe criticism from consumers and investors alike. As a result, the company's market value plummeted by over 40% in the past decade, underscoring the financial risks associated with neglecting sustainability concerns.
Access to green financing
The rise of green financing and access to banking has become a critical driver of sustainability efforts within the corporate world. Financial institutions are increasingly recognising the importance of incorporating environmental, social, and governance (ESG) factors into their lending and investment decisions. According to a report by the Global Sustainable Investment Alliance (GSIA), sustainable investments reached $35.3 trillion globally in 2020, a 15% increase from 2018.
One of the key enablers of sustainable financing is the European Union's Sustainable Finance Taxonomy. The taxonomy establishes a classification system for environmentally sustainable economic activities, providing clarity for investors and businesses seeking sustainable investment opportunities. By aligning with the taxonomy, companies can access financing options that prioritise sustainability and gain a competitive advantage.
According to the European Commission, the taxonomy is expected to drive at least €250 billion in additional annual investments in sustainable activities.
The impact of green financing and access to banking goes beyond large corporations. Small and medium-sized enterprises (SMEs) are also recognising the benefits of sustainable financing. In a survey conducted by BNP Paribas, 75% of European SMEs reported that sustainable financing positively influenced their business strategies, with 63% believing it improved their financial performance.
As sustainability reporting frameworks become more prevalent and financing institutions prioritise sustainable investments, SMEs will increasingly be encouraged to integrate sustainability into their operations.
Mandatory sustainability reporting
The introduction of sustainability reporting frameworks in the European Union (EU) and the United States (U.S.) has played a crucial role in driving corporate sustainability efforts and fostering transparency and accountability. These frameworks set standards for companies to disclose their environmental, social, and governance (ESG) performance, allowing stakeholders to evaluate their sustainability practices.
In the EU, the European Green Deal serves as the flagship initiative for the region's sustainable growth strategy. As part of this framework, the Non-Financial Reporting Directive (NFRD) was introduced to enhance the transparency and comparability of sustainability information. To further strengthen reporting requirements, the EU has proposed the Corporate Sustainability Reporting Directive (CSRD), which will expand the scope and depth of sustainability reporting obligations for companies. The CSRD aims to standardise sustainability reporting across the EU, providing stakeholders with reliable and comparable information.
Companies like Unilever, known for their commitment to sustainability, have embraced these frameworks and experienced substantial growth. Unilever's Sustainable Living Brands, which contribute to the company's social and environmental goals, grew 69% faster than the rest of the business in 2020, demonstrating the financial benefits of sustainability integration.
In the United States, sustainability reporting is also gaining traction. The Securities and Exchange Commission (SEC) has proposed new rules that would require companies to disclose climate-related risks and their greenhouse gas emissions. These regulations aim to enhance transparency and provide investors with crucial information to assess climate-related risks and opportunities.
While the implementation of sustainability reporting frameworks has initially focused on large companies, it is expected to expand to smaller businesses in the future. The EU's Sustainable Finance Strategy, part of the European Green Deal, outlines plans to extend reporting requirements to SMEs, recognising the need for broader sustainability integration across the business landscape.
Purpose-driven employment
Sustainability has emerged as a significant factor in attracting and retaining top talent. Today's workforce, particularly Millennials and Generation Z, seeks employment opportunities that allow them to make a positive impact on society and the environment. Companies that prioritise sustainability and demonstrate a commitment to social responsibility are more likely to attract highly skilled employees.
According to a survey by Cone Communications, 76% of Millennials consider a company's social and environmental commitments when deciding where to work. In addition, research by Deloitte indicates that Millennials who perceive their organisations as socially responsible are more likely to stay with their employers for an extended period.
Google, known for its sustainability initiatives, exemplifies the power of attracting talent through sustainability. The company has committed to achieving carbon neutrality and powering its operations with 100% renewable energy. This dedication to sustainability has contributed to Google's recognition as one of the best places to work, attracting top talent from around the world.
Geopolitical push for energy transition
The on-going conflict between Russia and Ukraine has acted as a catalyst for the adoption of renewable energy sources, particularly in Europe. The disruptions in natural gas supply and the geopolitical tensions have prompted countries like Germany to reduce their reliance on fossil fuels and expedite the transition to renewable energy.
In 2022, solar energy replaced an estimated €29 billion of Russian gas supply, making the EU more resilient - and sustainable.
To further reinforce the transition to renewables, the European Union has set ambitious goals. From 2035 onwards, all new car sales in the EU will be electric-only, driving the need for increased electric vehicle charging infrastructure and renewable energy generation.
The transition to electric vehicles (EVs) plays a pivotal role in achieving sustainable transportation. According to the International Energy Agency (IEA), the number of EVs on the road reached over 10 million in 2020, with sales expected to grow rapidly in the coming years. The EU's decision to ban the sale of new internal combustion engine cars by 2035 will further reinforce the transition to electric and other renewable energy sources, driving the need for increased investment in renewable energy infrastructure.
Conclusion
Sustainability has become an integral corporate function due to the growing demands for making a positive impact by consumers, investors, employees and governments alike. This coincides with the international geopolitical processes, where transition towards renewable sources of energy is disrupting the global markets.
Businesses that embrace sustainability are better positioned for long-term success, while those that neglect it face financial risks and reputational damage. As we navigate the Fourth Industrial Revolution, sustainability will continue to shape the business landscape, requiring companies to adopt a holistic approach that considers social, environmental, and economic factors.
