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Turning Risk into Success

Posted by Sara Gutterman

Feb 13, 2014 2:12:00 PM

Sustainability has evolved beyond a buzz word on Wall Street—it has become a sound investment strategy. In fact, we’re starting to see investors shift funds and focus away from companies that are not developing viable social and environmental policies that appropriately address the financial risk associated with our changing climate and diminishing resources.

A recent study by Ernst & Young shows that companies with mature environmental risk management strategies are financially outperforming their competitors, with “companies in the top 20% of risk maturity generating three times the level of EBITDA as those in the bottom 20%.”

Developing a corporate sustainability strategy today is like crafting an Internet strategy ten years ago—it has become a strategic imperative. Companies large and small are clamoring to create authentic, verifiable sustainability plans that can be rationalized in clear words and metrics to investors, partners, employees and other stakeholders.

The creation of genuine sustainable solutions doesn’t just give a company a quantifiable advantage, it can sometimes determine the difference between winners and losers. But in our highly competitive and resourced challenged world, companies are finding that implementing measurable green business practices is not as simple as coming up with catchy marketing slogans. Choices are not often black and white and can be open for interpretation.

Business assumptions that were made even a decade ago about natural resource supply are no longer applicable today. Companies in all industries are becoming more susceptible to challenges that directly result from environmental degradation, such as natural resource scarcity, high energy prices, commodity price volatility, pollution impacts, and extreme weather events, all of which can translate into unpredictable financial results, raw material shortages, and even reputational damage.

Water and deforestation risks are quickly mounting, affecting companies in the construction, manufacturing, agriculture, and food and beverage sectors. Case in point: beverage giant Coca Cola is facing serious problems increasing production of its beverages due to water scarcity around the world (although I can’t argue that this is necessarily a bad thing), and companies in the construction industry are facing volatile pricing and product shortages for materials ranging from steel to lumber.

The companies that will win the race to sustainability are the ones that will be able to successfully decouple financial growth and environmental impact, determining ways to create closed-loop systems that not only reuse and recycle materials, but also somehow regenerate the precious resources that those businesses depend on as inputs.

These companies will understand the environmental risks and opportunities associated with their business, and they will develop methodologies to measure their natural capital in financial terms. They will develop new efficiencies that are unknown today, as well as new metrics that will bring business clarity to sustainability decisions.

Successful companies will also embrace the ever growing demand for transparency. As consumers become more sophisticated about environmental realities, they are requiring the businesses they support to divulge information about their corporate practices and product inputs. Take for example, two colossal fast food chains that recently announced big changes due to consumer demand and public outcry: Subway announced that it would remove a harmful chemical, Azodicarbonamine, from its sandwich bread, and Chick-fill-A announced the phase out of meat from chickens raised with antibiotics (they plan to replace antibiotics with natural options like oregano.)

Just as the Internet and advanced communication technology has leveled the playing field and allowed small companies to compete with large companies in innovative ways, the adoption of environmental risk management strategies will help small and medium sized green companies trump larger competitors that cling to conventional business models.

With a predicted 3 billion new middle class consumers by 2030, exponential growth of the US green building market from $36 billion to an estimated $83 billion by 2016, and increasing environmental regulations, it is clear that only companies that successfully embrace sustainability—increasing productivity while minimizing environmental impact—will succeed.

Companies like Unilever, P&G, and Ford are leading the way in the transformation from dollars and cents to dollars and sense. Impact investments that prioritize a blended value solution of environmental stewardship, social responsibility, and profitability are on the rise, creating momentum for transparent, sustainable businesses. Corporations have always had a fiduciary responsibility to generate positive financial returns. Now, like never before, they have a duty to create a positive environmental impact.

How do you think corporations can be more successful in balancing profitability and environmental stewardship? Write to me at sara.gutterman@greenbuildermedia.com or follow me on Twitter @SaraGBM.

SaraHS

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