Sustainability Pays

A recent study confirms that sustainability boosts financial performance in developing economies, too.

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Indian villagers catch fish from irrigation canal water on the outskirts of Barikpur Bazar in Bhadrak district, 130 kilometers (81 miles) from the eastern Indian city Bhubaneswar, India, Friday, June 8, 2012.

David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.

In recent years, many U.S. companies have found that a commitment to sustainability can boost the bottom line. It's a finding that has surprised critics, who have long claimed that when a business considers any goals other than pure financial returns, profits fall. Now, a recent study published in Harvard Business Review shows that sustainability pays off, even for companies in the developing world. Sustainability pays, even though environmental standards are minimal, and most consumers don't have the luxury of buying high-end organic groceries and other lifestyle goods.

Developed sustainability. Several different kinds of business models have been proven to work for sustainable businesses in the United States and other developed countries. Some companies succeed by targeting sophisticated consumers who prefer to pay more for a product that is organic, healthier, produced in cleaner and safer way, or produced in a way that provides more benefit to the workers involved. Fair trade coffee is an example. Other companies succeed by driving their costs down as a result of rethinking their product and process design through the lens of sustainability. For example, a winery sets out to reduce its carbon output, and that leads them to change their tilling practices and redesign their facility to need less pumping and chilling, both of which are very energy intensive. As a result, the winery achieves substantial cost savings while at the same time taking action to protect the climate. Still other companies succeed because the pursuit of sustainability leads to a higher quality product, with fewer defects and rejects. Customers pay more for quality and predictability, even if they are not motivated to be "green" consumers.

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Superior growth. Sustainability experts at Boston Consulting Group, World Economic Forum, and Insead recently completed a comprehensive review of sustainability practices in developing economies, surveying more than 1,000 companies world-wide. They found that companies leading in sustainability practices have consistently delivered superior growth rates and margins, when compared to their nonsustainable peers.

A lot of the economic leverage from sustainability comes from examining production processes to find where inputs are wasted or inefficiently used. In many cases, resources such as energy or water were, until recently, very inexpensive. This led to wasteful practices and a lack of management attention to whether these resources were used efficiently. Now, as global scarcities are driving prices up for most inputs to production, efficiency matters. For example, the Manila Water Company in the Philippines found they could save so much water through repairing leaks and stopping illegal tapping of its pipes that they could save $750 million that would have been needed to build a new dam. Shree Cement in India launched a campaign to reduce its need for electricity and produce it more efficiently. Now they have become a low-cost producer of electricity in the region. Profits from the sale of surplus electricity augment the profits from selling cement.

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Further leverage from sustainability comes from the interconnectedness between developing and developed markets. Consumers in developed countries have shown a preference for furniture from sustainably-managed forests, sustainably farmed seafood, and sustainably grown cotton, and are willing to pay a premium for it. This creates an entrepreneurial opportunity in the developing world, one with higher margins and growth rates than conventional forestry.

Reengineering the supply chain. There's a crucial difference between sustainability efforts in the developing world, and those in the developed world. In the developing world, the lack of infrastructure creates both a need and an opportunity for sustainability-minded companies to work with their customers and suppliers in new and more creative ways. For example, Jain Irrigation in India provides micro-irrigation systems tailored to Indian growing conditions. Although their systems are expensive by local standards, they offer a strong value proposition to the farmer, because they increase agricultural output substantially. The challenge for Jain became one of financing: banks were unwilling to lend to small farmers to purchase a relatively new technology. Jain had to step in: they helped farmers apply for government subsidies, and they made deals to buy crops from customers and resell them into the markets. This expansive view of its role was the key to giving banks the confidence to start lending to Jain's customers.

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Strategic flexibility. Examples like this show that innovation and strategic flexibility are often needed for sustainability to pay off in full. Supply chain structures and industry infrastructure may need to be radically changed in order for the true economic potential of sustainability to emerge. An existing industry structure may have been optimal for an earlier time when resources where cheap, but it is no longer adequate today. Worse, the existing infrastructure may have been optimized to serve a colonialist-era agenda: encouraging developing countries to continue exporting raw materials rather than learning to create and export more valuable finished products.

In strategic planning, conventional wisdom says "stick to your knitting" and "don't fix what isn't broken." This works well for many companies and in many industries. However, for companies pioneering in sustainability, reinvention of the supply chain and transformation of industry relationships may be essential to capture the full potential of sustainable business companies. Companies bold enough to ask the broader questions may create greater financial returns as well as greater performance on sustainability metrics. In so doing, they may create new industry structures that are difficult or impossible for competitors to copy.

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