When it comes to running a successful business, there’s a growing consensus among business leaders and investors that sustainability plays a crucial role.
Taking care of the planet, treating employees well, and being involved in the community are not only the right things to do but also beneficial for Business.
This includes customers, employees, partners, communities, and shareholders.
The question is: Can we measure the return on investment (ROI) of sustainability?
Is it possible to quantify the impact of sustainable practices on the bottom line?
If you are ‘the one’ in your business, who needs to convince ‘the others’, this might be the article for you!
The risks of ignoring sustainability
Let’s start by acknowledging the risks associated with not embracing sustainability. Climate change, carbon emissions, and the speed at which regulations and sustainable practices are being adopted pose significant threats to both the environment and businesses if ignored.
For organisations operating in regions with limited access to resources like water and electricity face real and current obstacles that can hurt their profitability and growth.
In fact, we have been seeing this in the UK too. Last summer with our heatwave, one of our clients was unable to ship their temperature-sensitive products as their fleet was not ‘up to the job’ in those conditions.
Another client has had significant additional business costs due to the Ultra-low emissions (ULEZ) charges being introduced in cities where they do a significant amount of work.
Change is occurring quickly, and the risks to businesses are real. To mitigate these risks and build resilience, businesses must adopt sustainability as a core part of their strategy.
The Case for Embedding Sustainability
To tackle sustainability effectively, businesses need to take it seriously. Implementing a robust sustainability program allows companies to manage their initiatives, set priorities, track progress, and measure results. As the saying goes, “You can’t manage what you don’t measure,” and this principle holds true for sustainability as well.
When sustainable practices are implemented effectively, they can contribute to a positive ROI and … It makes business good business sense.
Defining a Sustainability Business Case
Like any investment, measuring the ROI of sustainability requires a well-defined business case that considers various factors. Typically, the 5 business cases we see frequently for sustainability focus on these categories:
1. Increased sales and customer retention
2. Employee recruitment and retention
3. Investor attraction
4. Risk reduction
5. Cost savings
We will explore below
🔎real-life examples of sustainability benefits and
📊how you would capture the right information to measure your ROI.
1. Increased Sales and Customer retention
Embracing sustainability can have a positive impact on a company’s sales and revenue. Today’s consumers are becoming increasingly conscious of the environmental and social impacts of their purchasing decisions. They are more likely to support businesses that align with their values and demonstrate a commitment to sustainability.
When it comes to sustainability, businesses need to consider the unique perspectives and preferences of both B2B and B2C customers. Here’s how the ROI of sustainability can vary for these different customer segments:
For B2B customers
- Long-term partnerships
B2B customers often prioritise sustainability as they seek long-term partnerships with suppliers who align with their values and can support their sustainability goals. They are looking to award contracts to companies who can demonstrate their sustainability in a credible way – thus enhancing their own sustainable position.
- Competitive advantage
By showcasing your commitment to sustainability, you can differentiate yourself from competitors and win contracts with your customers who prioritise environmentally responsible practices in their supply chain.
- Enhanced brand reputation and reduce risk
Collaborating with B2B customers on sustainability initiatives can enhance your brand reputation, reduce the perceived risk of doing business with you and open doors to new business opportunities including innovation and new project opportunities specifically.
🔎We have seen our clients that have started to genuinely ask their biggest customers about their sustainability initiatives which have opened doors for innovation and collaboration as they found out that these customers are also on a journey and struggling with it too!
For B2C customers
- Consumer loyalty
B2C customers are increasingly conscious of the environmental and social impacts of their purchasing decisions. By investing in sustainability, you can build consumer loyalty and create a strong emotional connection with your target audience.
- Brand differentiation
Sustainability efforts can help your brand stand out in a crowded market, appealing to environmentally conscious consumers who are actively seeking products and services that align with their values.
- Positive word-of-mouth
Satisfied B2C customers who appreciate your sustainability initiatives are likely to spread positive word-of-mouth, influencing others to choose your brand over competitors.
📊Some suggested ways to identify the ROI of your sustainability efforts to drive top-line growth.
- Increase in sales revenue attributed to sustainable products or services.
- Growth in customer base through targeted marketing of sustainability efforts.
- Improvement in customer retention rates due to strong sustainability practices.
- Increase in customer satisfaction and loyalty scores.
2. Employee Recruitment and Satisfaction
Sustainability practices are a game-changer when it comes to attracting and retaining top talent. Here’s why:
- Talent magnet
Today’s workforce, especially younger generations, is on the lookout for companies that walk the sustainability talk. They want to be part of organisations that align with their personal values and contribute to a greater purpose. By showcasing your sustainability initiatives, you can catch the eye of job seekers who are passionate about making a positive impact.
🔎 We spoke to one of our clients, in the technology sector about a year after they had launched their company-wide sustainability initiative. They went from struggling to fill some of their roles, to having people independently approach them for roles that were not even advertised. They put it down to their sustainability efforts!
- Employer brand boost
A robust sustainability program enhances your employer brand, making you a more desirable destination for potential candidates. When you authentically demonstrate your commitment to social and environmental responsibility, you create an appealing image that resonates with job seekers seeking meaningful work.
- Engaged employees
Implementing sustainable practices in the workplace goes beyond attracting talent; it also improves employee satisfaction and wellbeing. (Did you know Wellbeing is one of the United Nations Sustainable Development Goals and an important part of the sustainability Agenda?) By creating a sustainable work environment, implementing eco-friendly practices, community involvement and encouraging employee involvement in sustainability initiatives, you foster a sense of purpose and pride among your workforce. When employees feel valued and engaged, they become more productive, motivated, and loyal, ultimately reducing turnover and saving on recruitment costs.
📊Some suggested ways to identify the ROI in employee engagement.
- Reduction in employee turnover rates, leading to cost savings on recruitment and training. (🔎One of our clients was able to reduce its recruitment bill by 50% year on year! This goes straight to the bottom line!)
- Increase in employee satisfaction and engagement scores.
- Improvement in employee retention rates, particularly among sustainability-minded talent.
- Positive feedback and testimonials from employees regarding the company’s sustainability efforts.
3. Investor Attraction
In today’s investment landscape, sustainable practices have gained significant attention because investors are increasingly drawn to businesses that show a commitment to environmental and social responsibility. By focusing on these things, the investors are looking to reduce their risk, both in the short and long term.
By aligning with sustainable principles, businesses seeking investment not only contribute to positive change but also unlock potential financial benefits, such as higher valuations and increased access to investor funds.
Some key factors that demonstrate the benefits of sustainable practices to attract investor funds:
- Growing investor demand
Investors are actively seeking out businesses that integrate sustainability into their core operations. By embracing sustainable practices, companies position themselves to attract investors who are looking for opportunities that align with their values and support a more sustainable future.
- Access to sustainable investment capital
Prioritising sustainability allows companies to tap into a growing pool of dedicated sustainable investment funds. These funds specifically support businesses that have a positive impact on the environment and society. By demonstrating a commitment to sustainability, companies increase their chances of accessing these funds, expanding their financing options, and potentially receiving a higher valuation.
- Competitive advantage in valuation
Companies that can provide evidence of their sustainability performance and outcomes are more likely to receive a higher valuation. Investors recognise that businesses with sustainable practices are better equipped to generate long-term returns, manage risks effectively, and adapt to changing market trends. As a result, these companies may be valued more favourably compared to their peers that do not prioritise sustainability.
- Risk mitigation and resilience
Sustainability practices help companies proactively manage risks associated with environmental and social factors. Investors find this risk mitigation attractive, as they seek resilient investments that can withstand market uncertainties, regulatory changes, and resource scarcity. By demonstrating a commitment to sustainability, businesses showcase their ability to navigate potential challenges, increasing their appeal to investors.
📊Potential ROI measures from an Investment angle
- Increase in the number of investors interested in you as a sustainable business.
- Growth in sustainable/green investment capital received.
- Higher valuation compared to industry peers due to strong sustainability performance.
- Positive recognition and ratings from sustainability-focused or ESG investment indices.
4. Risk Reduction
Sustainability can help businesses mitigate various risks and increase their resilience in an ever-changing global landscape. By proactively addressing environmental, social, and governance (ESG) factors, companies can minimise potential negative impacts on their operations, reputation, and financial performance.
🔎 We have seen an increase in demand from high street banks asking their clients about this topic. Not being able to answer these questions might put you in a less favourable position with a bank you have worked with for years!
- Environmental risks
Climate change risks, such as natural resource scarcity, climate change, and extreme weather events, can disrupt supply chains, increase operational costs, and damage infrastructure. By adopting sustainable practices, businesses can reduce their resource consumption, improve energy efficiency, and develop contingency plans to adapt to changing environmental conditions. This proactive approach can minimise the risk of disruptions and ensure business continuity.
- Social and governance risks
Labour issues, ethical concerns, and regulatory compliance can also have significant consequences for businesses. By implementing fair labour practices, promoting diversity and inclusion, and maintaining transparent governance structures, companies can mitigate the risk of reputational damage, legal penalties, and consumer backlash. Having good governance around the transition to be more sustainability is something we are also seeing a lot of at the moment.
Sustainability-oriented companies are better positioned to anticipate and respond to emerging market trends and regulatory changes. By staying ahead of evolving ESG requirements, businesses can avoid compliance issues and adapt their strategies, accordingly, reducing regulatory risks and potential financial impacts.
📊Proposed measures:
Decrease in environmental and social risks, such as regulatory fines or legal disputes.
- Reduction in operational risks associated with resource scarcity or supply chain disruptions.
- Improved resilience to climate change impacts and natural disasters.
- Mitigation of reputation risks through proactive sustainability management.
5. Realising Cost Savings through Sustainability
To achieve the fastest ROI, businesses typically explore what they can do on cost savings via sustainable practices across all departments and functions.
From manufacturing processes and facilities management to waste reduction and green office services, every aspect of the organisation offers potential for improvement. By adopting sustainable business practices, companies can enhance efficiency, reduce waste, and lower costs in areas such as production, sourcing, fulfilment, distribution, logistics, engineering, finance, customer service, HR, information technology, sales, marketing, and real estate. Remote work and virtual meetings can also contribute to significant cost savings.
Some common ways that cost savings are realised include.
- Measuring Energy Usage and Savings
Tracking energy expenses is a simple way to calculate hard savings resulting from energy efficiency. Monitoring electric, gas, and oil bills allows businesses to identify anomalies, trends, and opportunities for change. Installing Internet of Things (IoT) measuring sensors provides a more detailed breakdown of electric consumption, enabling businesses to pinpoint areas for improvement. Investing in alternative energy sources like solar and wind power may require an upfront investment, but long-term savings can offset the initial costs.
- Efficient Fleet Management
For businesses involved in physical goods delivery, maximising fuel efficiency can significantly reduce costs and greenhouse gas emissions. Simple measures like reminding drivers to turn off engines during idle times, implementing optimal routing algorithms, and maintaining vehicles properly can go a long way. Additionally, transitioning to electric or hybrid vehicles can further reduce fuel expenses and emissions.
🔎 The biggest cost saving (and of course, carbon savings too) one of our clients has seen has been by implementing a route planning tool for their drivers. Saving time, carbon and fuel, and improving the well-being of the drivers as they are spending less time on the road!
- Material and Waste Management
Another area where businesses can achieve cost savings is through efficient material and waste management. By implementing recycling and waste reduction programs, companies can minimise disposal costs and potentially generate revenue from recycled materials. Additionally, optimising packaging design and reducing excess packaging not only saves money but also contributes to a greener image.
📊Proposed metrics:
- Reduction in energy consumption and costs through energy-efficient practices.
- Savings achieved from waste reduction and recycling programs.
- Lower water usage and associated cost savings through sustainable water management.
- Decrease in operational costs due to improved efficiency in resource utilisation.
Conclusion
While measuring the ROI of sustainability can be challenging, it is possible to quantify the impact of sustainable practices on a business’s financial performance. By considering cost savings, increased sales, employee recruitment and satisfaction, and risk reduction, businesses can develop a comprehensive sustainability ROI model. Implementing online sustainability management tools and frameworks can help track progress, measure results, and drive positive returns. So, yes, it is possible to measure the ROI of sustainability, and businesses that embrace sustainability can reap the rewards in more ways than one.
Get in touch if this is something you would like some more information on!