How sustainability went from a cost to an opportunity

Doing the right thing for both the planet and business have become inseparable.

Whilst 2020 will always be the year the global pandemic took hold, 2021 may yet be remembered as the tipping point in corporate and global action on sustainability.  

If that’s the case, those looking back will inevitably focus on the major headlines, from President Biden returning the US to the Paris Agreement and Prime Minister Johnson’s plans for a green industrial revolution to major organisations announcing their net zero pledges before 2021 United Nations Climate Change Conference (COP26) in Glasgow. 

But for many businesses that tipping point has another meaning: the year that doing the right thing for the planet and for business became inseparable. This change is being driven by a simple fact. Advances in low-carbon technologies mean that many green options, from energy use to waste reduction, have gone from being a cost to the business to being break-even or value additive. 

There are a number of sources of ‘green value’ — from enhanced reputation, greater resilience to attractiveness to investors and consumers and for the first time perhaps, the case can now be made on cost savings alone. 

Falling green energy prices  

Energy is a significant cost for most companies, making the business case for using renewables, which traditionally cost more, or required significant capital investment up front, challenging. 

That not only changed, it did so faster than anyone thought possible. US technologist Ramez Naam has spent a decade writing about and modelling solar energy prices. Despite being seen as an outlier, whose forecasts were far more optimistic than official sources like the International Energy Agency (IEA), he proved to be hugely underestimating the trend. In fact, the cost of solar energy in 2020 was less than half his 2011 forecast and less than a quarter of IEA’s 2010 forecast.¹

This illustrates how, once technologies have been developed, they can be rapidly refined and reduced in cost. A parallel is electric vehicles which, once highly expensive and limited in range, are now becoming both more affordable and effective. Once this happens, momentum builds fast. The proportion of electric or hybrid UK car sales nearly doubled in the first three months of the year, compared to the same period in 2020.²  

So, falling costs in green energy and rapid advances in low-carbon technology are making business cases in 2021 that looked impossible just a few years ago. 

Wider trends that support sustainability  

That basic cost driver is supported by major, related trends. In 1970, economist Milton Friedman declared that “the social responsibility of business is to increase its profit”³ but by 2019 a more progressive message had emerged from the 2019 US Business Roundtable (which brings together America’s most powerful CEOs) stating that “the purpose of a corporation is to create value for all our stakeholders, whose long-term interests are inseparable”.⁴

Those stakeholders are now pushing organisations to care more about sustainability: pressure from young people — who increasingly hold companies accountable for their impact; from regulators — who seek to expand reporting on sustainability performance, and from institutional investors and the banks — who are incorporating Environmental, Social and Governance (ESG) factors into their valuation and investment models. 

The investor focus on environmental and other non-financial factors is sharpening. The 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor Survey (pdf)  found that, of the 98% of investors surveyed who assess ESG, 72% carry out a structured review of ESG performance, compared with just 32% in the previous survey conducted two years earlier. 

The trajectory is not only clear but appears to be unstoppable. Many predicted that the economic pressures caused by the COVID-19 pandemic would slow down the sustainability agenda, but the opposite appears to be true. Early adopters whose efforts were initially underappreciated by investors — from Unilever’s long-term sustainability commitment⁵ to Tesla’s fearless focus on electrification⁶ — are now reaping the benefits. As this trend strengthens, even what were seen as niche areas of sustainability are now attracting interest. Who would have thought that the fastest growing category for a globally famous burger chain would be vegan?

Seizing the opportunity

Just as we have seen momentum build rapidly in the adoption of renewable energy and electrification, it is also happening around sustainability. Last year, ‘net-zero’ was a stretch target, now ‘carbon negative’ is the aspiration. Investors are primed, governments are supportive, consumers are on board and the science on climate change is more accurate. In such a context, it could be argued that climate change presents a better understood set of challenges and opportunities than, say, the future of digital innovation or even mobility in a post-fossil fuel world.

We are already seeing huge ‘bets’ placed in those areas while many businesses wait for greater clarity before investing in decarbonisation. This creates a great opportunity for early adopters. By seizing it companies can create value for their stakeholders. For those who don’t take the opportunity, the speed and volume with which investment is shifting away from high-carbon activities, means that capital may be increasingly hard to come by.

Perhaps the final barrier and often recognised barrier is culture. The corporate social responsibility (CSR) departments that were good for PR and self-worth, but otherwise seen only as a cost to the company, may begin to play an important role  in boardroom. Sustainability can only add value if it is part of the business, not apart from it.