HOW TO
MAKE SUSTAINABLE DEVELOPMENT FINANCIALLY DESIRABLE FOR BUSINESSES
Innovative business models driving impact at scale
To initiate a movement towards responsible production at scale, the most important is to first convince business leaders and investors of the financial value of reducing their carbon emissions or taking a stance at social causes.
Switching to a more sustainable development is difficult because it involves immediate costs for the company. They should consider these costs as strategic investments.
We need to make sustainable development financially desirable. Here are some innovative businesses driving this change.
1) Factor climate risks in the future financial performance
The covid-19 crisis has brought more focus on the importance of taking into account systemic risks to build more resilient organizations. Taking into account climate risks in the financial performance and disclosing these risks for the investors has been discussed for a few years already.
« Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing scepticism from the markets, and in turn, a higher cost of capital, » BlackRock Inc’s boss Larry Fink wrote in his annual letter to CEOs in 2019.
In December 2015, a Task Force on Climate-related Financial Disclosures (TCFD) was created by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. In 2017, the Task Force issued recommendations.
One of the main recommendations from numerous experts in climate change, including the TCFD, is to take a scenarios analysis approach : analyze potential scenarios taking into account various climate risks, such as a 2°C temperature rise, but also carbon taxes or customer preference shifts, and plan strategies accordingly. Through this approach, organizations will have to recognize the potential impacts of climate change on their business model and take action.
Among the risks, companies can expect tougher government measures that will extract a growing price for their carbon emissions. That’s why more and more companies are taking an approach called internal carbon pricing. At its core, this involves setting a monetary value on the company’s own emissions that reflects carbon prices outside the firm. In 2017 nearly 1,400 companies were actively using internal carbon pricing or planning to do so. By putting their own price on carbon, companies can better evaluate investments, manage risk, and forge strategy.
Other risks are also natural disasters caused by rising temperatures and sea-level. There is a growing number of startups leveraging on geospatial or scientific data to create predictive models and assess the impact of climate change: Jupiter Intelligence, RisQ, Carbon Delta (MSCI), Emnotion, The Climate Service, Sust Global, Oxford Earth Observation or Astraea.
FAIRR
A global network of investors addressing ESG issues in protein supply chains.
Business model innovation :
In March 2020, FAIRR has introduced the Coller FAIRR Climate Risk Tool, the first tool of its kind to take a scenario of 2°C of warming by 2050 and analyse impacts on the profitability of the world’s largest listed meat producers depending on whether a company takes a regressive, market neutral or progressive approach to managing climate risk. Among scenarios of climate risk, the tool has taken into account a potential tax on meat in 2025 or the high growth in alternative protein market.
Impact : Encourage companies in the meat industry to factor in climate risk into their strategy.
Scale : The meat industry is one of the largest producer of carbon emissions. Today only 5% leading meat companies have undertaken a climate « scenario analysis ». Model predicts that alternative proteins will command at leats 16% of the total meat market by 2050, potentially rising up to 62%.
Business value (ROI) : Taking these risks into account when planning their strategy is going to benefit the long term and even short term profit of the company. In fact, in the last 20 years alone, the effects of climate change have reduced the average annual profitability of Australian farms by 22%. A potential carbon tax on meat, higher feed costs due to volatile crop yields and an increase in livestock mortality due to heat stress all present costly and complex challenges for meat producers and hence, forward-looking analysis becomes paramount.
Danone
Multinational food company, global leader in dairy.
Business model innovation :
In February 2020, Danone has made a « first step to provide visibility into the cost of carbon emissions to earnings » by disclosing its « carbon-adjusted earnings per share« . It’s the first company to take into account the cost of carbon’s impact on the planet in its performance. « We are convinced that there is an urgent and significant opportunity to put climate actions even more at the core of our business model, » said Emmanuel Faber, chairman and chief executive at Danone.
Impact : This creates an incentive for the whole company to invest on climate change.
Scale : Danone said it would spend 2 billion euros over the next 3 years to fight climate change. It intends to be carbon-neutral by 2050.
Business value (ROI) : The investments are expected to « deliver in the mid-term a consistent mid-to-high single digit recurring earnings per share growth, » Danone said. The CEO of Danone also says that investors are supportive of the direction in which he’s taking Danone.
Datamaran
Software that supports a fully automated business process for monitoring external risks and opportunities, including environmental, social, corporate, governance, geopolitical and technology issues.
Business model innovation :
Powered by AI, the Software-as-a-service offers real-time analytics on strategic, regulatory and reputational risk drivers, tailored to the business.
Impact / Business value (ROI) : Helps companies cut through the complexities and understand their external risks across the value chain.
Scale : Used by 8000 companies, including large clients such as Unilever, BASF, Philips, Airbus or American Express.
Microsoft
Multinational tech company.
Business model innovation :
In 2012, Microsoft had introduced an internal carbon tax for all divisions and supply-chain partners. The company announced that in July 2020, they will phase in their carbon tax to cover their scope 3 emissions (indirect emissions), which nearly doubles their fee to $15 per metric ton on all carbon emissions. Unlike some other companies, their internal carbon tax isn’t a “shadow fee” that is calculated but not charged. Their fee is paid by each division based on its carbon emissions, and the funds are used to pay for sustainability improvements.
Impact : It holds their business divisions financially responsible for reducing their carbon emissions, including emissions from their supply chain, and from the use of their products by the customers.
Scale : Microsoft has committed to be carbon negative by 2030.
Business value (ROI) : With the funds collected through the carbon fee, they have saved more than $10 million per year.
Astraea
A startup building a software to access, analyze, and deliver geospatial information.
Business model innovation :
Due to the reduced cost of satellite technology and the availability of new sensor technologies, and leveraging on machine learning, Earth-observing data can be used to extract actionable insights about our planet. For example, monitoring changes in forests across large, inaccessible regions over extended time periods helps understand the impacts forest loss and degradation have on climate change.
Impact / Business value: They help businesses to predict the risk of climate change on specific assets.
Scale : Raised $7 M.
2) Turn the sustainability imperative into a branding opportunity
More and more studies are proving the value from sustainable development in terms of customer acquisition, loyalty or employees motivation.
Millennials are particularly conscious. According to a 2015 Cone Communications Millennial CSR Study, « more than 9-in-10 millennials would switch brands to one associated with a cause ».
Brand purpose has become the buzzword for marketers for a reason : it impacts the bottom line.
Communicating about sustainability efforts that are disconnected from the business model is neither effective nor sustainable. Philanthropic initiatives often produce little more than anecdotes for the next CSR report. Real impact comes from aligning a bold vision with the resources to deliver it. Brands with purpose build trust and goodwill with stakeholders who want them to succeed, and make them more resilient. Over time, it translates into dedicated staff, loyal customers and the suppport of policymakers and the public.
Some recognized labels such as B Corp or 1% for the Planet, and a few purpose-driven creative agencies such as Futerra, are helping brands to make their engagements more visible, therefore turning the sustainability imperative into a branding opportunity.
Futerra
A creative agency with a mission of « making sustainable development so desirable it becomes normal ».
Business model innovation :
Creating communication campaigns for brands to make their sustainability commitments visible, and reinforce the attractivity of the brand. The agency is majority owned and led by women, and is one of the UK’s first B-Corps.
Impact : They turn sustainability commitments into a brand image opportunity
Scale : They have worked with many Fortune 500 companies since 2001
Business value (ROI) : Improve brand reputation, visibility, increase loyalty
1% for the Planet
An international organization founded in 2002 by Patagonia’s founder, whose members contribute to at least 1% percent of their annual sales to environmental causes.
Business model innovation :
Members commit to donating 1% of their annual revenue to vetted environmental nonprofit partners through monetary and/or volunteer support. It gives a certification to their commitment and « members witness how it actually impacts their bottom line ».
Impact : Encourages businesses to take a strong financial commitment to sustainability
Scale : More than 1,800 business members, have invested over $225 million in environmental nonprofit solutions
Business value (ROI) : In a survey, conducted online within the US on behalf of 1% for the Planet from July 5-12, 2018 : 45% of younger adults, ages 18-34, were aware of our brand, 46% of consumers said seeing their logo on a product would positively influence their purchase and 59% of younger adults, ages 18-34, saw their brand positively influencing their purchasing decision.
B Corp
A certification for businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. B Corp is administred by the non-profit B Lab.
Business model innovation :
To be granted and to preserve certification, companies must receive a minimum score on the B Impact Assessment (BIA). The BIA has two primary objectives for companies: to differentiate their performance, and to help them identify and take concrete actions for improvement. They must also pay an annual fee ranging from $500 to $50,000, depending on annual sales.
Impact : Accelerating a culture shift to redefine success in business and build a more inclusive and sustainable economy.
Scale : 3,300 for-profit companies in 71 countries (April 2020)
Business value (ROI) : One study (Chen and Kelly, 2015) found that the average revenue of B Corps over a 5 year period was not significantly different compared to that of their non-certified competitors. Alternatively, the same study found that revenue growth rate was significantly higher in B Corps relative to their publicly held, non-certified, matched firms.
3) Shift the focus to long term financial as well as non financial results
One of the main reasons businesses are not taking these risks or opportunities into account and are not pursuing a purpose-led long term vision is that investors are putting pressure for short term returns.
The alignment of investors with the long term vision is crucial. Social enterprises can achieve this alignment by looking for « impact investors« , who invest « patient capital » and accept slower return on investment. When it comes to listed companies, how to ensure such alignment? That’s the problem that the author of the startup bible « The Lean Startup », Eric Ries, is trying to solve by launching a Long Term Stock Exchange.
Still, we observe a growing importance of the ESG indicators (« Environment, Social and Governance ») in investors decisions, which is putting more pressure on businesses to show results in terms of sustainability. That’s why a growing number of companies now give their executives long-term financial incentives linked to ESG factors. According to a study by Vlerick Business School, less than 1% of CEOs in the UK have long term incentives focused on environmental sustainability though.
Here are a few inspiring companies trying to shift the focus to long term financial results and non-financial ESG results.
The Long Term Stock Exchange
A company that wants to create a new type of stock exchange in which investors of the listed firms are asked to commit to the long term.
Business model innovation :
Investors in LTSE-listed firms are asked to commit to the long term. Listed companies also will have to accept a set of governance standards and incentive systems that deprioritize the short-term. Short-selling, or betting that a company would lose value, would still be allowed and investors won’t have a legal limit on their ability to sell shares at any time. But the idea is that founders would at least have a contract that enough of the company is owned by people willing to stick by them through ups and downs.
Impact : Incentivize executives towards long term results.
Scale : It launched in September 2020.
Business value (ROI) : Companies listing on the LTSE benefit by reducing short-term pressures and being encouraged to innovate and invest in long-term value creation.
DSM
A Dutch multinational corporation active in the fields of health, nutrition and materials.
Business model innovation :
The company has used ESG measures for many years and bases 50% of its executives long-term financial incentives on environmental measures.
Impact : Its CEO was named in the top 50 World’s Greatest Leaders by Fortune magazine for his vision in evolving DSM into a company built on sustainability. The leading ratings agency for ESG, Sustainalytics, has rated DSM number one in its industry sector for two years in a row.
Scale : Their solutions reach 2,5 billion people worldwide.
Business value (ROI) : A steady growth for many years. DMS recorded a double digit growth in Adjusted EBITDA of 10% in 2019.
Domini Impact Investments
Business model innovation :
Pioneered impact investing for individuals as well as institutional investors with a range of impact equity and bond funds, based on the Domini 400 Social Index.
Impact : Driving a shift towards sustainable business practices, engaging companies through various collaborations and partnerships to address sustainability issues…
Scale : Nearly $10 million invested in green and sustainability bonds, and over $500,000 invested with Community Development Financial Institutions 175,000 phones sold (2019)
Business value (ROI) : The fund has returned 33.92 percent over the past year (2019) and 15.54 percent over the past three years (2017-2019).
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