The term “sustainability” encompasses a broad range of non-financial metrics that affect a company’s financial condition and performance. Media attention on ESG or environmental, societal, and governance matters has increased public awareness and prompted concerns about how sustainability issues could impact value or increase a company’s risk of litigation.
What is Sustainability?
A sustainability report or certification communicates the company’s sustainability goals and how the company plans to meet them. They reflect the intangible value that has been traditionally missing from book values and financial reporting for enterprise valuations for buyers and investors and focuses on three areas:
- Environmental. This component address how the company engages with planetary resources related to climate, natural resource scarcity, pollution, and waste. For example, a company may discuss the size of its carbon footprint, efforts to replace fossil fuels with renewable energy sources, and general use of natural resources.
- Social. This section digs into diversity and inclusion policies, community engagement, supply chain, and consumer product safety risks.
- Governance. This includes boardroom diversity, executive compensation, critical event responsiveness, and corporate resiliency. It also may address policies and practices on lobbying, political contributions, bribery, and corruption.
Importance of Sustainability in Business
Measuring a business’s health and success by one variable may make things easy, but it does not reflect an organization’s actual health or ability to continue to generate earnings in an inevitably changing market. The tides are turning from shareholder value to stakeholder value. Not just operating a business on the triple bottom line, but the quadruple bottom line of people, planet, purpose, and profit, where the latter is the result of coherent strategies and investment in the first three.
The evidence of an evolving world and shift in investor focus is most visible in the financial markets and company valuations. The gap between a company’s value on its balance sheet and its market value reflected in its stock price grows larger each year.
A few of the most relevant advantages of taking your business through a sustainability / ESG framework include:
- Measuring and mitigating risk. Leveraging one of the many ESG frameworks available in the market today will allow you to measure non-financial metrics that have been traditionally hard for businesses to get their fingers around. You can benchmark your organization against others in the market which will allow you to identify at-risk areas ripe for improvement.
- Attracting talent. No matter what industry you are in, hiring talent is one of the biggest challenges in the world today. The hiring market has shifted to favor employees, and they are seeking a company with a strong, sustainability-minded culture. Knowing your business is actively trying to make a positive social and environmental change will attract top talent looking to find meaning in their careers.
- Reducing greenwashing backlash. Many organizations have been facing industry and societal backlash over their eco-friendly and society-conscious claims, particularly on social media. Investing in an ESG report or third-party verified certification for your organization can give you a better foundation to stand on, showing not only intent but measured action, accountability, and transparency.
Sustainability is the biggest disrupter in business right now. It really is not if you will need to engage with these frameworks, but a matter of when
