The business case for sustainability

Companies that align their business and employee values with environmental and social responsibility may also see decreased employee hiring and retention costs . Patagonia, a brand renowned for its commitment to its sustainable mission and responsible business practices, has a 4% employee turnover rate—much lower than the average across the retail and consumer goods sectors. Sustainability’s impact on corporate finance should not be overlooked either. Studies show that businesses with responsible ESG practices often have lower cost of equity and debt capital . There are also an increasing number of tax benefits available at the federal and state level that accelerate the timeline for sustainability initiatives to reach positive ROI. Notably, the Inflation Reduction Act (IRA) made $416 billion available to businesses to invest in solutions that reduce pollution, expand clean energy production, and address historical and emerging inequities.


THESE COMPLEX CHALLENGES CAN CREATE VALUE FOR BUSINESS
Sustainability has become an important factor in business strategies.Large multinationals and mid-sized companies are increasingly taking a long-term view toward managing environmental and social risks.Many companies recognize that by addressing environmental and social issues they can achieve better growth and cost savings, improve their brand and reputation, strengthen stakeholder relations, and boost their bottom line.Strategic integration of sustainability prepares companies to better anticipate and understand long-term trends and the effect of resource use, and to address stakeholder expectations.According to a 2011 McKinsey Survey, 76 percent of CEOs consider that strong sustainability performance contributes positively to their businesses in the long term.
2 Companies are capitalizing on local conditions and shaping their business strategies to accommodate constraints on natural resources in a way that allows them to develop innovative new products, services, and business models.This also provides opportunities to bolster their growth, profitability, and add societal value.The business case for sustainability is also connected to improved reputation and brand value.The global survey of senior executives from around the world conducted by the Economist in 2011 found that 76 percent of respondents think that embedding sustainability into the company's business leads to enhanced reputation and increased brand value.The more a company proves to stakeholders that its business is driven by strong sustainability policies, the lower the risks associated with that company.In contrast, weak environmental, social, and governance (ESG) performance can negatively impact a firm's reputation, which in many cases can be costly.British Petroleum (BP) is a good example of how a company's brand value can be affected by poor sustainability policies.

CREATING INNOVATIVE SOLUTIONS
Jain Irrigation is an example of a company that created innovative social solutions and feeds those innovations back into communities.The IFC client, based in Jalgaon, India, pioneered a system of contract farming in which the company buys farmers' crops at a guaranteed price, thereby enabling farmers to plan and obtain loans for irrigation products, such as an affordable drip irrigation system that reduces water consumption.Jain Irrigation has worked closely with its rural customers to promote precision farming, which increases output by optimizing the balance between fertilizers, pesticides, water, and energy.This approach has given Jain Irrigation a competitive edge: its close relationship with smallholder farmers and the fact that its products are customized to local conditions make it easier to win business from large agricultural suppliers.

PROTECTING BRAND VALUE
Due to the Gulf of Mexico oil spill, BP has lost more than $32 million a day in brand value.BP's market value has dropped from $184 billion to $96.5 billion, roughly 48 percent in a period of two months.Developing a good environmental and social reputation can contribute to a willingness among customers and investors to pay a price premium, which directly affects the company's bottom line.
Investment in resource efficiency is important for small and large companies.It helps them strengthen their competitive advantage.Studies have shown that improvements in resource efficiency in energy and water have lead to significant cost savings and lower environmental impact.DuPont, for example, has cut costs by $2 billion in the last 10 years by investing in energy efficiency equipments while reducing greenhouse gas emissions by 75 percent.Another good example in reducing operational costs and environmental impact is the IFC client Kuybyhev Azot in Russia.Companies are working with suppliers to become more resource efficient and environmentally sustainable.For example, Wal-Mart is aiming to save $3.4 billion from reducing supplier packaging by 5 percent by 2013.
There is a correlation between good environmental and social performance and financial performance.According to a Harvard Business School study that tracked performance over the last 18 years, companies with strong ESG performance outperformed companies with weak ESG performance, as measured in accounting terms. 3The study found that performance was stronger in sectors that were significant users of natural resources, where brand and human capital were particularly important and where the companies competed on a business-toconsumer basis.

CUSTOMERS AND INVESTORS VALUE STRONG ESG PERFORMANCE
The growing demand by consumers and investors for sustainable products and services, coupled with increased scrutiny and reporting on corporate responsibility, are driving companies to pay greater attention to their ESG performance.According to McKinsey's global survey of 7,751 consumers, 87 percent are concerned about the environmental and social impacts of the products they buy and 54 percent are willing to pay a premium for products that are sustainably manufactured.
Increasingly, investors are considering environmental and social issues when selecting investments.According to Bloomberg, in 2010, 5,000 investors in 29 countries accessed more than 50 million ESG indicators in the Bloomberg platform-a 29 percent increase over the previous year.Different sustainability reporting frameworks such as the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP) have become important tools for investors in making informed investment decisions.The number of companies using GRI as a framework for sustainable reporting has increased by 73 percent in the last four years, with a dramatic increase from developing countries that are reporting on sustainability measures.
The socially responsible investing (SRI) market enables investors to have a positive return on their investments while also bringing positive impacts to society.According to the Ethical Funds global survey of investors, 92 percent of respondents think that financial returns of SRIs play an important role in their decision to invest in SRIs.Similarly, environmental and social evaluation plays a crucial role in the investors' decision to allocate their capital to SRI funds.
The growth of SRIs has increased exponentially in the last 10 years.The SRI market has grown at an annual rate of 22 percent since 2003.By 2015, SRI assets under management will reach $26.5 trillion or 15 percent of the global total.In 2011, SRIs attracted about one dollar out of every nine invested.Investors are attracted by SRI markets due to their robust financial performance.The majority of SRI funds outperformed S&P 500 over a 10-year period by an average of 6.7 percent.Similarly, over a 5-year period the Dow Jones Groups Sustainability Index performed at an average of 36.1 percent better than did the traditional Dow Jones Group Index.

IMPROVEMENTS IN ESG PERFORMANCE CAN RESULT IN GREATER DEVELOPMENT IMPACT
The success of a company is inextricably linked to the success and sustainability of the communities in which they operate.The Coca-Cola Company and Newmont help illustrate how companies are integrating sustainable development objectives into their core business strategies, thereby benefiting the communities and local economies in which they operate.
The Coca-Cola Company played an important role in the sustainable development of communities in Zambia through the value of goods generated, jobs created, and its positive impact on the supply chain.Coca-Cola procures approximately 25 percent of inputs from local smallholder farmers.Remaining inputs are purchased from companies based regionally.Smallholder farmers play an important role in growing the sugar that is used in Coca-Cola products.In the case of Zambia, sugarcane workers are among the most vulnerable to labor violations due to the lack of formal contractual arrangements to protect their rights, and the low-paid/seasonal nature of their work.For this reason, Coca-Cola introduced an audit program to assess whether supplier and bottler workplaces uphold internationally recognized labor and environmental standards.Through its local partners, Coca-Cola introduced programs to support HIV/AIDS services for its employees and their dependents free of charge, including education and awareness-raising programs, voluntary testing and counseling, and free antiretroviral drugs.
Since Coca-Cola uses water as the primary ingredient in its beverages as well as in its manufacturing activities, the company's most significant impact is on water resources at the agricultural stage.Prior to investing in the Ahafo Mine, Newmont engaged with local communities to responsibly resettle and compensate roughly 1,700 households located in the mining area.Due to resettlement of communities, Newmont built new homes and schools and residents were granted legal title to the land, along with potable water and access to electricity.Additionally, Newmont launched a community development fund to contribute an estimated $500,000 annually to support community development programs such as the provision of water, sanitation, upgrading local clinics and training centers, HIV/AIDS programs for workers as well as a program on malaria prevention, and an information forum for women in the community.In addition to Newmont's community programs, IFC introduced linkages programs to increase local participation in the project and bring additional benefits to the surrounding communities.

OF COMPANIES WITH WEAK VS. STRONG ESG PERFORMANCE Source
: Eccles G.R., Ioannou I. Serafeim G. "The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance," Harvard Business School, November, 2011.
3 Eccles G.R., Ioannou I. Serafeim G. "The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance," Harvard Business School, November, 2011.FINANCIAL PERFORMANCE million in the Ahafo Mine in Ghana to develop four mining areas, and build and operate related mine facilities.IFC supported the project with $125 million in loans or about 21 percent of total cost.