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Should business care about sustainability?

CONVENTIONAL thinking dictates that a business exists (merely) to generate profit. Its success depends on the ability of those who manage the business to produce an output which, in value terms, outweighs the resources used in the production process. As such, every business relies on a transactional formula, and its viability is measured in economic terms.

Sustainability, a term describing the ability of humans to coexist with their environment on earth, is more intangible. At its core, it conveys a number of ideas that cannot be easily quantified or measured, but which are unquestionably desirable - like the need to ensure that humans continue to have clean air, agricultural resources and sufficient living space. As our scientific knowledge and our understanding of sustainability improve, it is becoming increasingly common to measure sustainability and link it to economic factors. For example, we can correlate future temperature rises with a likely impact on the value of global financial assets and GDP.

However, in a business setting, sustainability goals are sometimes viewed as remote, with limited immediate relevance to profitability. Among the business community who attended the recent Singapore Fintech Festival presentations on sustainability, an initial reaction commonly overheard was: "This is topical and important. But is it really relevant to our business?"

The answer to this question is often lost in translation, because business and sustainability have historically not spoken the same language. To a business, sustainability only makes sense if its benefits can be expressed in business terms. Beyond the mainstream sustainability narrative, the following points articulate how sustainability is really relevant to business:

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It's creating new market segments. The move towards sustainability is creating new types of product and novel service offerings, thus stimulating innovation and opening new revenue opportunities. In the financial services sector, new product lines have emerged in the form of green bonds, environmental risk solutions such as insurance-linked securities, and carbon credit trading platforms. Data providers such as Sensefolio rate companies on their commitment to environmental, social and corporate governance values, using new technologies such as artificial intelligence. Sustainable production techniques now underpin a broad spectrum of consumer products, ranging from clothing to groceries.

It's a Unique Selling Proposition. While operating sustainably will one day become the norm, taking steps to support sustainability currently still has a novelty factor which can set businesses apart from their competitors. EasyJet, which has just announced that it will operate net-zero carbon flights across its entire network through schemes to plant trees or avoid the release of additional carbon dioxide, is a case in hand. Although this measure will cost the airline around £25 million (S$44 million) in the next financial year, it is likely to have a positive impact on its brand image.

Regulators like it. Running a business sustainably can be indicative of sound governance and a healthy corporate culture, as it suggests that managers operate on a long-term horizon and avoid rash decisions. This can be a compelling factor for regulators carrying out risk-based assessments of companies that are listed or otherwise operate in a regulated sector. Increasingly, regulators are also imposing specific requirements in relation to sustainability. For example, the European Union is looking to issue rules requiring financial market participants to make disclosures on the sustainability of their investments, following harmonised criteria. Other authorities around the world are following suit.

Customers care. Recent surveys conducted by consultancies such as Shelton Group, Nielsen and Horizon Media suggest that a significant majority of consumers are more likely to buy from companies that apply sustainable practices, and are willing to spend more money on products that are manufactured sustainably. For many consumers, sustainability has legitimately become a personal concern over liveability in the current world and the wellbeing of future generations. With the pursuit of sustainability now engrained in various aspects of the consumer lifestyle, it has become eminently sellable.

To say that sustainability can act as a vehicle for economic gain is not to detract from its intrinsic value. On the contrary, hardwiring sustainability into business gives it a channel of concrete expression, transporting it out of the realm of conjecture and into the real world. Savvy enterprises have realised that investing in sustainability is not an act of philanthropy, but generates a whole new world of business opportunity. Early movers will benefit the most, before sustainability becomes the new normal.

  • Hagen Rooke is Counsel, Reed Smith. Nicholas Drury is Global Banking & Financial Markets Leader, IBM Institute for Business Value.