David Bent on how to make sustainability count
It was 2008, and Julius Brinkworth had a problem. As Head of Energy and Environment at Sainsbury's, he had created an investment programme which could make the retail giant's stores massively more energy efficient. It would save large amounts of carbon – and money, too. There was just one snag. The upfront costs, which ran to hundreds of millions of pounds, had to be signed off by the Capital Investment Committee. Would it get the green light? It seemed touch and go. But then Julius discovered something surprising.
He looked into how the committee calculated the net present value (one way of measuring whether an investment is worthwhile). He discovered that this completely ignored the Carbon Reduction Commitment and Enhanced Capital Allowances – two UK government schemes which reward companies for becoming more energy efficient. This may not sound that exciting – but for Julius, it was a real breakthrough moment. He realised that, by failing to take these rewards into account, the committee was in danger of turning down what would otherwise be a demonstrably sound investment. Once the monies available from those schemes were added into the pot, the decision was straightforward. Sainsbury's made the investment.
The principle that sustainability saves money is nothing new, of course. There are plenty of examples out there. Take BT. What's interesting, though, is how often the financial upside comes as a surprise. When Marks and Spencer launched 'Plan A' in 2007, its budgeted cost was £200 million. Within a couple of years, it was breaking even; and by 2009-10, the various initiatives which made up Plan A had actually added £50 million worth of net benefit to the company.
With rich pickings like these on offer, you would imagine that finance departments would have become adept at identifying savings from sustainable development. In practice, this is often far from the case. Instead, many SD specialists have similar problems to Julius Brinkworth. They want their companies to succeed through sustainability, but they struggle to express the business case for the particular product, programme or strategy. And that means they struggle to convince their colleagues that there is one.
Why is this? In essence, it's because sustainability is both complex and uncertain. And that puts it outside the comfort zone of most corporate financial decision makers. For the most part, the tools they use to calculate costs, risks and benefits assume that tomorrow will be more or less like today ('today plus 2%', as the phrase goes). That is fine for many of the decisions the tools are used to make. But these are often either blind to the wide array of potential financial dividends from sustainability initiatives – as with the Sainsbury's example above – or they simply cannot cope with its inherent uncertainty.
A new, more sustainable product, for example, might be hugely successful in the coming years, as energy and resource prices spiral, as tighter regulation kicks in along with generous incentives for green innovations, and as consumer preferences shift and markets realign. But when it comes to capturing the value of those advantages, there is inevitably an element of conjecture. The numbers are much 'softer' than financial decision-makers are used to. As a result, the sustainable innovation looks less well developed, less mature – essentially, less of a good bet – than an unsustainable alternative.
"When faced with a choice between the familiar and the fuzzy, decision-makers often play safe - too safe"
So when faced with a choice between the familiar and the fuzzy, decision-makers often play safe – as they see it. But in so doing, they take what may well be a bigger risk of missing out on future opportunities. As a result, companies get stuck in a vicious cycle: they want a cast iron business case before they will act, but they can only get the data they need by going ahead and taking a punt on innovation, which many will understandably be reluctant to do. Changing this pattern means finding ways to make what looks 'fuzzy' solid and important: making it show up on the spreadsheets, as it were. Often, this means expressing it in terms of shareholder value. At Forum for the Future, we've developed a toolkit to help do just that [see 'Making it count', below]. It is clear that specific sustainability challenges are already hitting value drivers. Any company with an agricultural supply chain is worried about security, quality and cost of supply. The Climate Act in the UK and the EU Emissions Trading Scheme are affecting the cost of energy use. Customer expectations and purchasing behaviour are shifting – just look at the rapid mainstreaming of fair trade. And as the Carbon Disclosure Project demonstrates, investors, too, are already asking tough questions of management. These and other factors are all shifting the future landscape in which companies will operate. Sustainability professionals are well placed to map out its contours, identifying opportunities to create real value for their business.
David Bent is Head of Business Strategies at Forum for the Future.
Short-term action, long-term vision
For short-sighted companies there is a standard business case about capturing known 'win-wins', which both satisfy shareholders and contribute to a more sustainable future. Some actions taken in pursuit of this, such as cutting costs by reducing waste and emissions, should in theory show up on the standard finance professional's radar. Others, such as retaining market share by protecting the brand, may be more 'fuzzy'.
For more astute companies, there is a strong business case for taking a leadership position: effectively reshaping the landscape so that there are more sustainable business opportunities to capture. Leading companies like Marks and Spencer, Unilever and GE are making long-term investments to do just that: shaping customer demand, investor expectations, the regulatory environment, their innovation pipeline, supplier capabilities and more. Such investments may be hard to quantify using today's financial tools. But their long-term value cannot be overestimated.
Making it count
Over the years, Forum for the Future has learnt a lot from working with its corporate partners on the nitty-gritty of the business case. It's distilled those experiences into a toolkit called Better Decisions, Real Value. Aimed at sustainability practitioners and enthusiastic financial professionals, it can help them find the leadership business case for their company.
For more information, contact David Bent on 020 7324 3662 or email@example.com.
Image credits: Blackjake / istock