People, Planet and Profits- Examining Environmental Impact on Economies 

Businesses have always been dependent and have an impact on the environment. From the extraction of raw materials, the management of resources, to the generation of waste, these processes perfectly demonstrate the interconnectedness of people, profits and planet – the Triple Bottom Line (TBL) framework.  The TBL is a framework used by companies to evaluate their performance in a broader perspective to create greater business value. In other words, impact on any of the TBL will create a ripple effect on the others. Australia’s bushfire is one of the many devastating effects of climate change due to human activities. Apart from the casualties, a 2017 analysis by Deloitte Access Economic revealed that natural disasters cost Australia $9 billion yearly on average and these numbers are expected to grow beyond $39 billion by 2050. According to the statistics revealed at the World Economic Forum in Davos, Switzerland,half of the world’s Gross Domestic Product (GDP), or $44 trillion, is dependent on natural resources threatened by the consequences of climate change. It is estimated in the next five years, businesses will incur nearly $1 trillion additional costs due to climatic catastrophes. The magnitude of economic consequences is a big wake-up call for the United Nations(UN) and other global leaders as they collectively identify climate change as the most defining challenge. In a race to delay climate change, many countries have pledged to cut down on carbon emissions by introducing carbon taxes and stepping up on green initiatives.     

Business Opportunities Amidst Climate Tragedy

The trickle-down effects of carbon taxes and going green initiatives from the governments have resulted in companies putting measures in place to offset levies and mitigate environmental damage. However, what businesses fail to realise are the strategic and collateral benefits which could be derived from positive environmental and societal continuity as a result of their go-green efforts. A 2014 study between high and low sustainability companies by Mckinsey & Co revealed that a $1 investment at the beginning of year 1993 would profit $22.60 for the portfolio of high-sustainability companies at the end of 2010, compared to a profit of $15.40 by the low sustainability companies. The basis for businesses with sustainable practices earning more profits is the value creation which is accompanied by thinking out of the box to embed green efforts in business practices. There are various sustainable approaches, but the following three are the most commonly adopted: 

Systemic Approach 

This approach is used extensively amongst production-heavy companies, like the agriculture and aquaculture industries. Based in China, Zhangzidao Fishery Group adopted a planting method which created a balanced ecosystem of scallops, sea cucumbers, sea urchins, abalone, and other interlinked species. This not only reduced waste as some species feed on the others, it also reduced the exhaustion of seabeds. By switching the focus of increasing profitability per unit of cultivation, rather than per species cultivated, the Fishery group had a compound annual growth rate of 40% between 2005 to 2010. This was in comparison with an industry average of just 13%. 

Low-Tech Approach 

Favored by small businesses from emerging markets, this measure uses limited resources with a series of minor adjustments to the operations. Going back to the basics, companies using this method start with tweaking their operations or production processes to ensure no or minimal wastage of resources. For instance, Shree Cement became an incidental sustainable business in India when the business had an idea to reduce electricity usage by adjusting their production processes so as to cut costs. The small savings from the reduced electricity usage eventually became a huge amount, allowing the company to invest in more advanced technologies which further helped in reduced expenses and emissions. In just four years,  Shree Cement’s revenue grew five times faster than the global average for the cement industry and had a revenue of $809 million for the year 2009.

Broader View Approach

By taking a step back and reviewing the sales funnel, companies from emerging markets have built unique business models that  increase the purchasing power of consumers, and in the process, building inter-dependencies that rivals find it difficult to replicate. Florida Ice and Farm in Costa Rica is one of the sustainable companies that pioneered water conservation processes by using sophisticated technologies and innovations. Conventionally, 12 liters of water would be needed to produce a liter of beverage. Florida Ice and Farm had it reduced to 4.9 liters, and eventually to 2.2 liters per liter of beverage. Besides that, the company also actively initiates regional conservation efforts to reduce its remaining water use, and support advancements to the national water infrastructure. Moving to a TBL system has not hindered the growth of the company. Instead, it had a compound annual growth rate of 25 per cent from 2006 to 2010, doubling the industry average.

From the above examples in the business sustainable approaches, it is clear that going sustainable is possible and likely to be a trend to stay. Apart from the profits, companies that venture into sustainable business practices have also experienced other incidental benefits which are detailed in Figure 1.

Desfran_People_Planet_and_Profits- Examining_Environmental_Impact_on_Economies 
Figure 1 – Value creation of businesses with green initiatives

Interestingly, as more research surface, it reveals that sustainability does not only concern businesses but increasingly to financial institutions and investors as well. For instance, the Environmental, Social, and Governance (ESG) standards has been around as a term since 2004 but it came to prominence in the last decade when multinational companies started adopting the practice in a serious stance on positive social impact. Commonly used synonymously with sustainable investing and socially responsible investing, ESG investing is a set of criteria for a company’s operations that climate-conscious investors use to screen potential investments. With investor demand spur and growing ESG investing — or company strategies that take ESG factors into consideration, figure 2 reveals that the ESG market has a huge potential. 

Desfran_People_Planet_and_Profits- Examining_Environmental_Impact_on_Economies 
 Figure 2 – Impact of ESG on businesses

As consumers are now becoming advocates of climate change and reduction of carbon emissions. Businesses who make an effort to reduce their waste and tackle climate change will have an increase in loyalty amongst their consumers. Further, adopting green technology in the workplace allows companies to reduce the costs of their utilities due to their displayed corporate social responsibility. Collectively, these approaches vividly demonstrate that trade-offs between economic development and environmentalism are not necessary. Rather, the pursuit of sustainability can be a powerful path to reinvention for all businesses facing limits on their resources and their customers’ buying power.

Growing Together

The complexities of businesses have grown tremendously, from socio-political to environmental politics, companies will increasingly find unexpected circumstances beyond their control which can challenge their business directions. With changing times, decisive and strategic actions can turn challenges into chances. Our team of professional analysts and consultants at Desfran are dedicated to helping our partners weather seasonal challenges, identify and maximise your business potential. Learn how we can partner with you by contacting us today.

References

An intensifying climate crisis threatens more than half of the world’s GDP, research says, CNBC.com

IMF: climate crisis threatens global economic recover, TheGuardian.com

Making sustainability profitable, HBR.org

McKinsey looks at the socioeconomic impact of climate risk, lexology.com

Sustaining the triple bottom line: People, planet and profit, CNBC.com

The business of sustainability, McKinsey.com

How is ESG affecting the investment landscape?, Am.jpmorgan.com

What is ESG?, Msci.com

Environmental, Social, and Governance (ESG) Criteria, Investopedia.com

The Investor Revolution, HBR.org

Your complete guide to investing with a conscience, a $30 trillion market just getting started, Cnbc.com

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