How to surf sustainable transformation by improving your income statement
Often the answer is no. For many companies, efforts related to sustainability are not profitable. But for many others, they are. What makes the difference?
Sustainability efforts are profitable, among other factors, depending on how much they are valued by market agents or interest groups. If these efforts are valued by:
- Customers: generate competitive advantages or price improvements (often does not happen).
- Investors: they increase the value of the company.
- Financial institutions: they reduce financing costs.
- Employees: they increase the attraction and loyalty of talent.
- Public administration: they facilitate interaction and reduce sanctions.
These agents are different for each company. A deep understanding of the company's context, its business model and the value that these agents place on sustainability is necessary to identify what efforts will be profitable for the company. In addition, the value that these agents place on sustainability has changed over time, and will continue to do so.
Today, most companies are focused on regulatory compliance. The recent regulatory 'tsunami' leaves little room for going further. However, the number of companies that improve their financial results thanks to their sustainability efforts has grown in recent years.
How do these companies manage to improve their income statement with initiatives that focus on their impact on people and the planet?
The waves of transformation and profitability
Throughout history, companies have faced various “waves” of transformation that have altered the “rules of the business game”. And for those companies that managed to ride these waves of transformation, the story has been very different compared to those that didn't.
'Sustainable transformation' does not derive from technical evolution. The business model is not changed by technological advances such as, for example, the Internet. This transformation is due to an evolution in the value given by market agents to certain aspects of business operations. Other transformations are “shortcuts” to achieving a business objective that remains intact. This transformation implies that companies incorporate social and environmental impact objectives. But the goal of generating financial return doesn't go away. That's why this can be an even more complex wave of transformation. And that is why it is essential to approach it with initiatives that pursue both objectives at the same time.
In addition, it comes at a time of great challenges for companies. The time between great waves of business transformation is getting shorter and shorter, and not all managers will be able to make their companies successfully ride these waves.
Like surfers, managers will increase their chances of success if they have:
- Vision - They identify where the waves are coming from and choose which one to go for - Among all the sustainable initiatives, which ones help to improve my bottom line?
- Preparation - Have they developed the necessary capacities to catch and surf that wave - Do those responsible for promoting sustainability find a way to do it in a cost-effective way? Do they work side by side with the business?
- Timming - They don't rush, nor are they late, choosing the ideal time to stand on the wave - Among all the sustainable improvements I can implement, which ones provide the most value to my customers, investors, employees...?
- Equilibrio - They adopt a position that keeps them on their feet and they focus on making the most of the wave they have chosen - Are projects related to sustainability viable in the medium term? Where are they taking the company?
Win-win mentality: profitability and sustainability
Surfers choose which surfboard to use depending on the type of waves and the type of beach they surf on. If there are small waves on your beach, don't pick up a surfboard for big waves. In the same way, each company “surfs” on a different beach. If your company generates revenue with a business model, sustainability initiatives have to be linked to that business model. If they are not, they will not increase the value of the company in the long term.
There are a multitude of studies that link good performance in sustainability with better economic results, however, they are macro analyses and there are those who question the causal relationship.
To evaluate if sustainability can improve your company's profitability, you have to ask yourself, what are the company's main sources of income? Can sustainability positively influence these revenues (increasing price or quantity sold)? And what about the main expenses? can sustainability contribute to significantly reducing them?
To answer, we can start from what in industry jargon is called the financial materiality. The exercise of analyzing, among everything related to sustainability, what can most affect the income statement.
Striving to improve the company's impact on people and the planet is commendable. If you want that effort to scale up, you need to do so taking into account the relationship with financial results. Focusing them on what improves those financial results makes it possible to maximize improvements in the company's social and environmental impact.
Our purpose at Transcendent is to accelerate the transformation of our clients to generate a positive impact on society. After a considerable number of years and projects accompanying companies in this transformation, we are very clear that this acceleration comes from finding initiatives that simultaneously improve results and impact on people and the planet.
We have found that, by achieving this, virtuous cycles are created where profitability advocates begin to value sustainability, and sustainability advocates understand the potential of profitability.
Companies that surfed the wave and boosted their profitability
A good surfer, when arriving at a beach for the first time, observes how other surfers manage to catch the best waves on that beach. The following are examples that we know of companies that have managed to focus their sustainability efforts on initiatives that improve their results.
A large telecommunications company had been skilled enough to link the interest on a syndicated loan to its performance in a recognized ESG rating. We helped them to improve their results in that rating and, after achieving this by implementing initiatives related to sustainability, the company began to save 1.5 million euros a year in the cost of that debt.
In another case, accompanying an infrastructure multinational in its analysis of financial materiality, it was identified that the initiatives that could actually end up having a significant effect on its results were: a) due to its low operating leverage and high financial leverage, ESG initiatives that would improve the company's financing conditions (ESG KPIs that reduce the cost of debt, actions that would allow access to new sources of financing, more relevant elements for potential investors, etc.); b) due to their dependence on public concessions, those initiatives that will affect their relationship with the granting entities (key ESG issues for decision makers, relations with local communities, etc.). Among many other actions, when defining their strategy, we included the need for an independent third party to validate their efforts, we chose an ESG rating provider of recognized international prestige and, after 2 years working with them, they achieved the best score globally, among more than 15,000 companies.
A third company, a multinational pharmaceutical company, had just successfully developed its strategic plan and told us that it now wanted to develop its sustainability strategy. We identify the social impact that achieving the objectives of your strategic plan would have (bringing your health solutions to X new countries, developing solutions for X new health problems...) and we carry out sustainability actions that contribute to achieving your strategic plan.
What do the most profitable companies achieve with their sustainability efforts?
As we have seen, it is possible to ride this new wave of sustainable transformation, improving the company's income statement, the loyalty of its employees and, at the same time, improving the effects of company activity on people and the planet.
To achieve this, it is necessary to identify the actions that contribute to both objectives and focus efforts on them.
Companies that achieve this will see their present results and their positioning in front of investors, customers, public administrations, suppliers, etc. And this in the present. Seeing the trend of the new generations, it seems that this wave is getting bigger, so that those who do not learn to surf it now will find it impossible to do so in the future.
Is your company ready to ride the wave of sustainability? Are you taking advantage of opportunities to improve financial results with sustainability initiatives?
