The Return on Sustainability: Identifying and achieving the Business Case behind environmental, social and economic issues
Sustainability is the business practice of managing short and long term profitability by addressing the opportunities and risks related to three variables:
1) economic – particularly the increased complexity of global business,
2) social – e.g. external and internal stakeholders’ heightened awareness and connectivity, and consequent accountability imposed on businesses
3) and environmental – such as natural resources, climate change and population growth variables.
Sustainability matters because it helps drive the value of an enterprise – it is about managing return on capital. In the short term, sustainability helps uncover opportunities to improve drivers such as revenue, cost, capital intensity and risk impacting the bottom line in the next months. Sustainability also affects company value by helping computing today the value of opportunities and risks that will materialize in the future in those areas – a significant amount, given that 70% of the average company’s value comes from its performance beyond the next 5 years.
This lens provides a new angle to read the importance of results like those of BASF, that cut CO2 emissions since 2002; or those of Procter&Gamble that set targets to sell by 2012 USD 50bn of “sustainable innovation products” while planning to carbon dioxide emissions, energy consumption, water usage and disposed waste for a total reduction over the decade of at least 50% per unit of production.
Sustainability matters to a number of stakeholders – be them clients, partners, regulators, NGOs, employees and investors. Investors, specifically, use sustainability performance as part of their ESG (environmental, social and governance) analyses – often equating strong sustainability scores with a key performance predictor: management quality. For those who can harness its power it represents a substantial competitive advantage – as witnessed by leaders who have increased their penetration and innovation performance with it. But for those who are unable to address its challenges, it is a substantial threat – as epitomized by a consumer products firm who lost more than half of its market value almost overnight because of inappropriate chemicals in components used in its products; or by those steel makers whose leadership was eroded when energy prices rose.
Resource productivity (energy, CO2, other resources across the value chain) and operational risk (health and safety, product safety and stewardship) are the two macro areas where economic value is won or lost. Companies’ management processes are fully apt to managing traditional finance and value chain processes, and decision-making – but are not ready to manage resource productivity and operational risk holistically, as they were built for an economic order where sustainability’s threats and opportunities weren’t as material as today.
Industry leaders have the opportunity to weaken their competitors (and capture part of their value) by proactively highlighting the sustainability challenges of their industry, and demonstrating that they have a solid advantage over the rest of the pack – leaving their competitors exposed to the hard scrutiny of stakeholders.
Existing solutions (for example transaction and analytics related to Financials and Risk, Supply Chain and Procurement, human resources) can already constitute the base of a company’s proactive response to sustainability requirements. The quantum leap comes with the extension and integration of such backbone through an unparalleled set of sustainability-specific solutions – from sustainability performance management to carbon accounting, from operational risk management to energy and other resource productivity, from product safety and compliance to green IT solutions.
SAP has taken the lead in addressing the opportunities and challenges presented by the sustainability. Measurement, analysis, monitoring and process support solutions already power the “nervous” (analytical, transactional) system of companies touching, collectively, 60% of the world GDP – and individually accounting for the large majority of the leaders. The result is a concrete new way of managing enterprises that only SAP can offer.