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Companies that successfully incorporate the sustainability agenda into their corporate strategy will gain competitive advantage, explains Robin Menzies.

The current turbulence in the financial markets, the business failure of firms which have been household names for decades, and the speed at which the health of the global and our local economy has deteriorated has taken all of us by surprise. It seems that things we take for granted can no longer be relied upon. This is forcing organisations of all shapes and sizes to examine the fundamentals of their businesses and to assess whether they will have a business at all in the near future. As a result, sustainability is now at the centre of the corporate agenda.

Many in business have long viewed sustainability – efforts to avert climate change, for example, or to improve education in under-served neighbourhoods – as a matter of corporate philanthropy, with no relevance to their corporations’ core strategies. The costs of such activities were seen as detracting from profitability and accounted for on a public relations line under marketing; their scope being perceived as limited. Corporations have come to understand that their abilities to prosper hinge upon their responses to the challenges of a carbonconstrained world and an array of other issues on the sustainability agenda. Instead of seeing efforts to increase fuel efficiency in operations and to ensure that suppliers in emerging markets provide safe working conditions for their employees as costs, corporate leaders now see these initiatives as investments in opportunities to operate more efficiently and secure a dependable supply chain.

Addressing the Challenge The first step in addressing the sustainability challenge is making a commitment to incorporating social, environmental, economic and ethical factors into a company’s strategic decision-making. It extends to evaluating how these factors affect the business – including all of its stakeholders – and what risks and opportunities these factors present. Finally, the sustainability agenda asks businesses to adopt measures to mitigate risks and take advantage of opportunities.

The Economist Intelligence Unit (EIU) found in a survey that 57% of top executives believe that the benefits of efforts to achieve sustainability outweigh the costs. Findings also confirm sustainability’s rise on the corporate agenda and its link to competitive advantage. 53% of executives surveyed by the EIU say they have coherent sustainability policies. The same percentage reports that responsibility for sustainability in their organisations has been placed at CEO or board level.

Yet, businesses know there is much more to be done. For example, only 6% of the companies surveyed by the EIU rate themselves as outstanding in reducing emissions, waste and pollution. And only a third of the executives surveyed worldwide say their sustainability policies extended to their supply chains. While the global challenges related to sustainability are evident, defining how businesses can meet the challenges can be daunting. Sustainability can encompass a broad range of issues that affect business – from pollution and climate change to education, poverty, health and human rights. It involves a connected world with a broad range of stakeholders – from employees and communities to governments and NGOs. And it includes operations in parts of the world with differing jurisdictions, regulations and standards of practice.

The Sustainability Mindset Most forward-looking businesses understand that the traditional tradeoff between sustainability and profitability is an outmoded perspective. They know that operating sustainably is a mindset with a focus on the creation of longterm shareholder value. That means adhering to the fundamental elements of good entrepreneurship – identifying the changing needs and demands of society, and responding with successful business models.

Business leaders who operate sustainably recognise that social, environmental, economic and ethical factors affect core business strategies. These leaders evaluate the spectrum of sustainability issues and respond by mitigating risks and leveraging opportunities. They also understand that the sustainability agenda requires working collaboratively with all stakeholders – from suppliers and customers to employees, shareholders and governments.

PricewaterhouseCooper’s 11th Annual Global CEO Survey, conducted last year, found 82% of CEOs believed governments should take more of a leadership role in addressing climate change, and 73% said that businesses needed to collaborate with industry peers and business partners to mitigate climate change. Indeed, in a connected world, a company’s success rides on the practices of its network of suppliers, distributors, service providers and retailers – in terms not only of efficiency, but also of reputation. One weak link could be costly for the entire network. And the sustainability agenda shapes both efficiency and reputation.

Assessing risks There are at least four broad categories of sustainability-related risks: - Scarcity of raw materials Raw materials, including everything from fossil fuels and minerals to food and water, are finite and scarcity is now a fact of life. Look no further than recent rises in the prices of commodities ranging from oil to wheat, both of which hit all-time highs in 2008, for evidence that demand for natural resources is creating scarcity. It has been estimated that if the world population consumed at the current level of membercountries of the Organisation for Economic Co-operation and Development (OECD), the rich nation’s club, at least two more planets would be required to support them. Without such an escape route, the increasing scarcity of raw materials pushes up costs that, in turn, exert pressure on margins. - Regulation New regulations are placing a cost on business necessities that have been free or inexpensive, such as water, air and waste disposal. The accelerating trend of governments placing a price on carbon dioxide emissions is the most prominent example. This trend may have an impact on a company’s suppliers, a company’s own operations as well as on the products it sells. - Reputation A company’s reputation turns on its compliance with a broad range of social, product quality and other expectations, as well as with explicit laws and regulations. A business may be operating within legal boundaries but can be punished by stakeholders whose values may be affronted, if for example the wages a company pays its production workers do not constitute living wages or if safety conditions are deemed inadequate. A local employer could arouse resentment and endure sharp criticism if it moves operations, and jobs, offshore. Companies can also seriously impair their reputations if they are linked to bribery or corruption. A flawed reputation for environmental, social or ethical factors can jeopardise a company’s image among consumers – as well as in the pipeline of top talent. - Climate change / Physical risks Hurricanes, flooding, droughts and other environmental events made more extreme by warming oceans and climatic change can destroy manufacturing plants or transportation infrastructure, disrupting supply chains as well as production, and escalate insurance costs.

“Sustainability is the single biggest opportunity of the 21st century and will be the next source of competitive advantage.” H.Lee Scott, President & CEO Wal-Mart.

Identifying opportunities Sustainability is not only about risk containment. For leading businesses, assessing the risks that all stakeholders face can yield rich opportunities. The growing number of consumers seeking healthy and sustainable lifestyles constitutes a potentially vast market for new products and services. Consumers’ environmental, ethical and social concerns, for example, mean that their definitions of quality extend to products’ lives before and after their use. They may place a higher value on digital cameras built in plants where workers are protected from toxic components, whose parts are reusable and whose manufacturers take responsibility for the recycling of those parts.

Wherever environmental, social or ethical issues can be addressed, businesses have an opportunity to innovate, differentiate, create value and attract more customers. There are also opportunities to attract and motivate employees.

Although businesses now understand that pursuing sustainability is a longterm investment, they constantly face the challenge of alleviating shareholder concerns about shortterm results that may disappoint because of the company’s longer-term objectives. Their continuing challenge is to clearly communicate that operating sustainably is an inescapable imperative for businesses that aspire to prosper.

Sustainability issues pose a unique set of challenges and afford a distinct set of opportunities to every sector. The global reach and complexity of supply chains, raw materials required for production, the nature of products and the special characteristics of a company’s workforce all determine which risks play the most significant roles in any given sector, and which opportunities exist.

Irish companies that incorporate the sustainability agenda in their corporate strategy will seize the benefits and realise competitive advantage.

Robin Menzies, FCA, is a Partner, Assurance with PricewaterhouseCoopers in Dublin.