Sustainability Initiatives Build Their Own Business Case
Signs were tell-tale and yet scientists, futurists, astrologers or crystal-ball gazers, in short, the entire human race failed to notice the risks of unbridled industrial development and tampering of earth’s bio-diversity. The pandemic continues to ravage globally, albeit with varying intensity, more than a year after the world understood its enormity. In the new normal, the global risks report published by the World Economic Forum and similar such institutions, start to make sense, that the VUCA (volatility, uncertainty, complexity and ambiguity) world has indeed arrived. Pandemic is just one of the multiple events being predicted amongst many others along the three dimensions of sustainable development – economic, social, and environmental.
Need to Act: As per the latest Sustainable Development Report 2021, COVID-19 pandemic is a setback for sustainable development globally. For the first time since the adoption of the SDGs in 2015, the global average SDG Index score for 2020 has decreased from the previous year, impacting all the three dimensions of sustainable development: economic, social, and environmental. The recently concluded G7 Finance Ministers conclave, provided total commitment to deliver the significant structural change needed to meet the net-zero commitments and environment objectives. The meet emphasised the need to green the global financial system so that financial decisions take climate considerations into account that will help mobilise huge amount of private sector finance needed for this transition and support moving towards mandatory climate-related financial disclosures in line with domestic regulatory frameworks. Private sector needs to do its bit and stand-up to invest in-line with public sector to continually improve on the SDG index score. Apart from the corporate responsibility, consumer trends also indicate massive shift towards sustainability backed brands:
- Demand for local and natural produce – 46% of consumers will continue to shop more locally produced goods
- Demand for natural & organic – 72% of consumers say it’s at least moderately important that brands use natural ingredients
- Ethical stories & purpose – Brands with purpose typically have a market performance 3x that of those without purpose
- Product traceability and transparency – 63% of consumers prefer to buy from companies which are transparent—with where it sources its materials, how it treats employees fairly, etc.
What Needs to be Done: Sustainability reporting is done at three levels – Internal (Operating Level), Management View (disclosed along with annual report, although there is no widely accept regulatory framework for sustainability reporting) and External Reporting (Investor perspective). External reporting consist of framework and materiality concepts like S&P, SASB, CDP, Sustainalytics, Dow Jones, Trucost, Yahoo Finance, SAM Ranking etc. These organizations based on their evaluation parameters assigns scores/risk to an organization which can then be used from investor’s perspective to understand organization’s green investing and future roadmap.
A list of frequently reported KPIs in the area of Sustainability for the CPG industry are mentioned below. There are variations in reporting of different companies due to a lack of uniformity in regulatory guidelines. For example – scope 1, 2 (upstream), and 3 (downstream) emissions reporting is based on the CPG industry’s applicability.
- Environmental Performance: Reduce CO2 emission; minimize natural resources consumption; improve usage of renewable energy; reduce waste generated
- Social Performance: Improve worker safety; guarantee gender equality & culture diversity; improve job satisfaction and skill development
- Economic Performance: Improve product quality & innovation; reduce direct and indirect costs; enhance delivery efficiency
- Governance Performance: Improve environmental compliance and audits; minimize risk management cost; promote supplier sustainability
While most of the consumer goods enterprises already have structured processes and systems in place to drive business processes, additional investments will be required to spruce up decades old systems originally built to drive purely efficiency and effectiveness parameters. In order to capture and enhance performance along the above KPIs, continued investments are required along the following four pillars:
- Climate and Natural Capital Accounting: Build true cost values into end to end management of enterprises and across business networks
- Resource Productivity, Tracking, and Reuse: Building resilience and circularity principles into supply chain, material flows, markets, and resource consumption
- Next-gen Sustainability Performance Management: Mapping operational data to show impact with holistic sustainability reporting enabling sustainable business steering and decisions
- Protecting People, Communities, and Societies: Ensuring continuous improvement in safe, equitable, and compliant businesses, within the company and across the value chain
Sustainable Business Case: From an economic perspective, moving towards a circular economy delivers plentiful benefits, from preserving material value to creating jobs but more importantly, it has the potential to mitigate climate breakdown, enabling us to cut 39% of total global emissions—bringing us down to the levels needed to protect and repair our planet. However, from a corporate perspective, additional investments need to pass the traditional scrutiny of driving incremental value or optimising existing cost structures. Good part about sustainability initiatives is that, the incremental investments can readily be justified by most of the KPIs included in the economic, environmental, social and governance KPIs defined above. The list below1 captures the key KPIs and the value drivers that can drive enhanced shareholder value by either generating new revenue streams or optimise costs through efficiency or effectiveness improvements.
- Revenue Growth: Increased revenue from new products / services / New consumer markets and segments / Higher per unit price realization: 2 to 10%, Revenue loss due to quality and compliance issues: 10 to 20%, Production sites with environmental certification / Optimised production downtime: 5 to 30%
- Operating Margin: Scrap and rework cost (% of manufacturing cost): 5 to 30%, Cost of products recalled (per million units of products sold), Environmental violation fines/penalties (% of revenue) / Environmental risk management cost (% of revenue): 5 to 30%, Fuel Costs / Energy spend optimization: 3 to 10%
- Asset / Capital Efficiency: Enhanced PPE / Asset utilisation (% of revenue): 2 to 5%, Obsolete inventory optimization: 1 – 2%
- Enhanced Company Strengths: Differentiate through sustainable value of processes, products & services, Safeguard Compliance – Address regulation and taxation challenges proactively, Avoid sanctions, Protect business viability, Drive Brand Value – Attract superior talent, enhanced reputation
In our experience of working with customers globally, the enlisted value drivers should typically make the business case for Sustainability Initiatives. In 2013, Timothy Morton, a philosopher and ecologist proposed that humanity had entered a new phase, where “nonhuman beings” were responsible for the next moment of human history and thinking. These are not computers or space aliens, but a particular group of objects that were “massively distributed in time and space, called “hyperobjects” like nuclear waste, plastics in the sea, etc. The coronavirus is further proof that we live in a dark ecology. Ultimately Sustainability initiatives is an investment for the future generations to wrest back or atleast an attempt to wrest back that control.
Explore SAP Sustainability Solutions and Service offerings and engage with us to define a custom roadmap towards achieving Sustainability targets for your enterprise.
Note: 1. Source – SAP Business Process Benchmarking Program and SAP Customer Experience based on results from early adopters of SAP solutions or are conservative outside-in estimates of the benefits of adoption. As each enterprise is at a different level of maturity, our recommendation is that you work with SAP to determine the value proposition for your enterprise.