Cost or value? Why is sustainability strategically undervalued?

Many corporates still need the sustainability business case

"Surely there comes a time when counting the cost and paying the price aren't things to think about any more. All that matters is value - the ultimate value of what one does."

James Hilton

One way or another, the dissonance between cost and value (in various dimensions) has been a long-running thread throughout my 25 year journey in sustainability. While discussions on the business case for sustainability might have less prominence now than in the past, the implications of failing to understand it remain in many situations.

Recent conversations with sustainability practitioners and potential clients have highlighted how many organisations still don’t see the value in developing thorough and meaningful approaches to sustainability. This can be highlighted by many of the key challenges faced by sustainability practitioners.

The business case for sustainability is (shockingly) still either not recognised strategically (i.e. it is understood as an additive factor for operational efficiency or marketing/PR but not as a strategic value creation/destruction factor), or in many cases it is little understood at all.

There often remains a challenge in moving from the general case for sustainability and financial outperformance (see our overview of evidence for sustainability as a value driver) and the specific, where it may be less certain and more difficult to identify sustainable value foregone.

Corporate Sustainability: cost centre or value driver?

This all reinforces the contention that sustainability is often perceived as a cost centre rather than a value centre.

Viewing sustainability as a cost centre is damaging and probably a self-reinforcing fallacy. If you only operate in the area this implies your zones of focus and action are more likely to be self-limiting. Your focus will be on compliance and value protection and not on where the real/significant risks, impacts or opportunities may lie.

It is always important for organisations to understand the relationships between the decisions they make at the ‘heart’ of the value chain and the fact that in many (probably the majority of cases), the largest impacts which arise from a product are those which occur up and downstream. For many categories of product, from agricultural commodities to electronics and white goods (especially for example washing machines) it is the ‘use phase’ of products where the largest consumption impacts arise.

This is illustrated in the diagram below (adapted from “To Whose Profit⁽ⁱⁱ⁾”), highlighted a sort of ‘reverse pareto’ – where 80% of management effort goes to address 20% of impact.

It is perhaps unsurprising that practitioners focus on areas where they may have greater direct control rather than varying degrees of influence, or where they have concern but little control or influence.

However, given the scale and scope of impacts and the pressing need to demonstrate real performance improvement, there is a growing requirement for considering corporate sustainability in the context of collective value chain effort. This is also the likely reason for poor take-up, as it’s complicated and difficult for the simple reason that it can only be delivered through the actions of other parties, not through the company’s own direct control (unless it is vertically integrated).

Of course, it’s also likely that outcomes achieved from focussing corporate sustainability efforts in areas of the value chain outside the direct control of the business, are also those which would yield the greatest opportunities for value creation.

How does your organisation view sustainability?

​It's possible to identify different ​approaches to corporate sustainability by looking at ​the responses made by businesses as follows:

COST-CENTRE RATIONALE

• ​Focus on compliance, value protection, cost saving
• Limited investment in staff and initiatives
• Less likely to be integrated with core strategy
• More likely to leave value and business opportunities on the table/to competitors
• Lower likelihood of managing risks
• Less able to demonstrate value to investors
• ​Less focus upon opportunity costs arising from business as usual

​VALUE-CENTRE RATIONALE

• ​​​Broader focus on value and opportunity
• Using sustainability for value creation, solving customers current and future needs
• Awareness of sustainability context, drivers and value built into business development and planning
• Greater investment in staff and initiatives
• Longer term approach
• Increased likelihood of managing risks
• More able to demonstrate integrated response and value to investors