One of the latest buzz words found in management journals, websites, and corporate documents is “sustainability.” Some people even want to recognize it in a company’s balance sheet as an asset. Okay, let’s not go that far.
It is undeniable that sustainability is a new way of doing business, in the same way “re‑engineering” or “just in time” were in the late 1980s. Sustainability is not an asset that can be bought or sold, rather it’s becoming an integral part of many a company’s philosophy. Just as company management practices influence business value, so do sustainability initiatives. Therefore, the question is: How does it create value?
Moral motivations to invest in sustainability are not in dispute: climate change, poverty, you name it. But what companies don’t know yet is what level of investment they should make and what is the measurable benefit of investing. When the benefit is not clear enough to justify investments on economical grounds, managers easily turn to initiatives that guarantee short-term results and everyone’s jobs, especially with recession knocking on the door.
There are some direct benefits, such as: compliance with an increasingly rigorous legislation; cost savings derived from optimization of production lines and supply chains to reduce energy consumption; reduction in CO2 emissions; desire for more ethical products; and simply satisfying an emerging and cynical green consumer. But most importantly, incorporating sustainability as a business practice will not only increase companies’ brand value, but guarantee a long life for the business.
Relationship between sustainability and brand value
Although it’s hard to find consistency among definitions of sustainability it is common sense that it incorporates companies’ relationships with the natural environment, social causes, and corporate governance. In boardrooms, this translates to the “triple bottom line,” i.e., a company’s initiatives must consider environmental, social, and financial impacts. Yes, financial impacts. That means companies must make investment decisions that will benefit the environment and society, and guarantee the sustainability of the project itself. We are not talking about charitable causes – but ethical products and services that will change consumers’ behavior and help them to live a more “sustainable” life.
Brands enter the debate right about here. A leading brand translates to customers what is relevant in today’s world, influencing buying behavior. It also develops a strong relationship with customers because of its distinct offerings, leading to repeated purchasing. In other words, a brand creates value in two ways: generating demand, and reducing risk and securing future earnings for the business. A sustainability program that is consistent with a brand’s positioning will create value for companies by creating more value for its brands.
Generating demand for products and services
A study from Carbon Trust, a UK–based consultancy that helps businesses to reduce their carbon emissions, shows that social and environmental concerns can result in changes in consumer behavior. Among several factors that provoke this shift are “issues of immediate personal impact” and “realistic available choices.” That’s where brands can make a difference.
Let’s take a sector for which sustainability is a big issue: automotive. Companies such as Honda recognized that mineral fuels are limited and prices of petroleum are rising. This motivated it to adapt its product range to fuel–efficient cars. Honda was one of the first movers in this direction and this is paying dividends today. It was the only car manufacturer to report better US sales in June 2008 than in June 2007, credited to fuel–efficient Civics and Fits. While reducing dependence of gas–guzzling cars and increasing the number of fuel efficient models became a “must do” in the automotive sector, Honda was first to differentiate and is ahead of the debate. This leading behavior contributed to an increase of 28 percent in Honda’s brand value since 2004.
The same can be said about GE, which saw an increase in its brand value by more than US$ six billion since 2005, when Ecomagination was launched by then–CEO, Jeffrey Immelt. Among other goals, the program intended to increase spending on clean technologies, reduce greenhouse gas emissions, and generate US$ 20 billion in revenue from green products, including jet engines, locomotives, and wind turbines. This created a halo effect around other offers, improving perceptions about the company and making it top of mind in sustainability surveys. It moved ahead of competitors, such as Siemens and Phillips, which also have strong commitments to such initiatives. But GE led the debate and it is collecting the laurels – in the form of dividends – today.
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