4 Reasons Why Investing in Sustainability Adds Value to Your Company
Running a business can be difficult – with the challenges we have seen in the economy over the last few years, it is natural to become inward-looking and focus on the day-to-day operational needs of your business above all else. There are a number of reasons why taking immediate action on your decarbonisation journey is crucial and a good investment for your business. This article will help explain some of the key areas of value…
Why is your business important?
It is pertinent that SMEs begin acting on their sustainability journey. Within the UK, it is estimated over 50% of all business greenhouse gas emissions are derived from SMEs (companies with less than 250 staff). Currently, 75% of SMEs have no decarbonisation strategy in place. Consequently, this means a significant contribution to the UK economy lacks a clear sustainable plan and decarbonisation strategy.
“Carrot and the Stick”
Some will compare the regulation implemented by the government to progress the UK economy towards a sustainable stage to the “Carrot and the Stick” metaphor. The success of these regulations are somewhat effective – larger companies in the UK and those servicing the UK Government now have to fulfil certain reporting requirements on their environmental impact through ESG and carbon accounting. In turn, this is putting pressure on SMEs that supply larger companies to provide their green and sustainability credentials.
In addition to existing regulation, new rules are on the horizon that will affect smaller companies. From more disclosures to preferential financing for companies that have better sustainability scores, following frameworks already introduced within the EU will become a necessity.
But what about the “Carrot”? this is especially important for SMEs to understand. Every investment in time and money needs a clear rationale. This is what we want to explore in this article. What is the value creation for your business in investing in sustainability today?
1. Employees choose sustainable companies, work there longer and with higher productivity
Employees are more conscious of environmental issues and demand action from their employers. So taking action and connecting with your staff to do this can have a positive impact on staff morale, recruiting and retaining staff. Sustainability is an important part of non-financial motivation for employees.
- Companies with a sustainability action plan have considerably higher employee satisfaction ratings than those without. (Marsh & Mc Lennan, 2019)
- 30%+ of Gen Z and Millennials are concerned about their negative impact on the World’s future. They expect their employers to do something about it now. Gen Z and Millennials will represent 72% of the global workforce in 2029 (Deloitte study, 2022)
- Employee loyalty has been shown to be 38% higher in companies that implement sustainability efforts, Furthermore, firms that have adopted environmental standards have seen an increase of 16% in their workplace productivity. (Harvard Business Review Study)
Those in the company with a passion for sustainability and motivation to drive change should be given official responsibilities. Giving titles such as ‘Sustainability’ or ‘Green’ Champion helps to motivate staff and accelerate your businesses sustainability initiatives.
2. Customer Choice & Brand Reputation
Ethical choices for consumer in the B2C sector has grown in importance, particularly in key areas such as retail and groceries. But, it is also an increasingly important decision criterion within the B2B sector, despite gaining less media attention. For many larger companies, the biggest impact they have on the environment is within their own supply chains from suppliers. For example, Apple Inc. recently reported that a staggering 78% of their greenhouse emissions came from suppliers they use – in manufacturing, services and delivery of products. This means that larger companies like Apple are then putting pressure on their supply chain to decarbonise leading to a huge push-down effect on disclosing and taking action.
- Larger companies asking more and more for their client’s sustainability and green credentials during procurement and renewal processes.
- Most large businesses now request their suppliers to take carbon reduction actions.
- This results in a network effect, where SMEs are required by their large clients to show reduction measures and results.
- Consumer purchasing decisions are increasingly focused on ethical business (B Corp, Fairtrade).
In terms of payback on investing in this. Some strong evidence shows that high-performing ESG companies enjoy higher growth than industry peers by a margin of 10 to 20%. (Mckinsey 2021)
3. Environmental initiatives can lead to cost savings
Companies’ environmental and carbon footprints are very much linked to company expenditure. From this perspective in most cases, some short-term positive impacts can be gained simply by reducing expenditure in certain areas.
For long-term, deep rooted changes, investment in time and finances is often needed. However, this can be funded partially or in total from savings elsewhere in the business.
- Strong ESG credentials drive down costs by between 5% to 10% from a focus on efficiency and waste reduction. (McKinsey 2021)
- Corrective action frees up financing to invest capital into decarbonisation initiatives with medium-term pay-back periods.
A growing range of green financing, tax breaks and grants are becoming available for companies to invest in sustainability initiatives, making it faster and easier to gain environmental payback.
4. Investor valuations and cheaper debt financing
Furthermore, investors and lenders are viewing sustainability as an increasingly important key criterion. This impacts the decision making process when valuing companies and also against the terms of debt financing.
Later this year, the UK will also introduce a new sustainability scoring matrix for companies, called the UK taxonomy. This system has already been used in the EU and allows a standard set of criteria to measure companies against to give their sustainability score. In turn, this score is being used by investors and lenders to rate the investments they are making and to determine loan interest rates and other financial lending requirements.
In turn, having stronger sustainability scores can give a premium value to your business as well as unlock better lending rates in the future.
- As of Dec-21, assets under management at global exchange-traded ESG funds amounted to $2.7 trillion, +53% vs 2020
- Companies with a 10-percentage point higher ESG score have an approximate 1.2x higher EV/EBITDA multiple. (Deloitte study, 2022)
What to do next?
At Zerofy, we have launched a new software platform specifically for SMEs to take action to improve their sustainability credentials and unlock the value that can be created by making positive changes. We will help you to:
– Benchmark your current carbon emissions.
– Track your progress and offer ideas to accelerate your net zero journey.
– Provide tailored recommendations in a easily accessible platform.
– Help you form relationships with innovative, sustainable partners.
