Sustainability is the key to business competitiveness

Sustainability is much more than a buzzword or a “nice-to-have” these days. It has been at the forefront of the Government’s plans with the signing of the Climate Action and Low Carbon Development (Amendment) Act that was signed into law in 2021, which commits Ireland to a legally-binding path to net zero emissions by no later than 2050, and a 51 per cent reduction in emissions by the end of this decade.

For businesses sustainability has also become much more important, with many industries similarly committing to net-zero measures. While it might be seen as a purely virtuous endeavour, there can be a competitive advantage for those companies who implement such measures.

Going green

Sustainability is a trend that has rapidly moved from being a niche “nice-to-have” into a mainstream “must-embrace”, says Piergaetano Iaccarino, CFA, head of equity solutions, Amundi. “Companies are dealing with both fundamental and reputational drivers that cannot be assessed in silos anymore because of their deep interconnection.

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“A business model moving more towards sustainability must look beyond the old-school return on (financial) capital, and should target a wider concept of return on capital, including social and environmental capital (i.e. two valuable sources of capital that we finally have realised are limited in quantity and quality).”

Driving the change

There are several factors that are driving the move towards sustainability, says Brian Haugh, director, sustainability advisory at BDO. “Apart from the moral case for sustainable business practices, there are a number of strategic reasons that companies are adopting sustainability strategies. Many organisations are now using sustainability to differentiate themselves from their competitors, with customers and employees increasingly concerned with organisations seeking to make sustainability central to their brand image. However, the strategic case for sustainability goes far beyond brand management.

“Large companies who have adopted science-based targets for net zero must consider the carbon footprint of their supply chain. This means that SMEs that are suppliers to these large companies will find themselves having to take measures to reduce their carbon footprint in order to ensure that they can continue to supply the company. SMEs who take early action to strategically position themselves as ‘low carbon’ suppliers will be best placed to capitalise on this trend.”

We are seeing a growing awareness of sustainability issues that are progressively putting more pressure on companies, says Iaccarino. “Scrutiny of different stakeholders is on the rise, with governments and regulators increasing their legislative and oversight pressure, investors demanding their money to be deployed in line with their values, consumers influencing decisions with their strong purchasing power, and, finally, social media in its policing of global controversies and exposure of poor sustainability practices in a real time.”

Competitive advantage to going green

Sustainability is not only about managing risk, but is also (and increasingly) about searching for opportunities, Iaccarino says. “It is important to think about sustainability as two sides of the same coin. In terms of company behaviour, we look at ‘how’ companies operate i.e. the effect of their operational conduct on sustainability issues. Think about labour relationships, and the impact on their costs, talent attraction, churn rate and potential future liabilities. We also look at ‘what’ companies produce i.e. their concrete solutions to an environmental or social problem. Think here about wind turbine companies, and the growing market opportunity driven by energy transitions.

“It is now clear that sustainability is not just about values and ethical principles, but it has a direct impact on companies’ fundamentals and financials. This is why it has become highly strategic for companies’ long-term goals, leading to potential competitive advantage in terms of growth, profitability and risk.”

Benefits abound

Haugh says there are also cost benefits to many sustainability measures. “From an environmental perspective reducing an organisation’s carbon footprint is often closely linked to reducing the amount of energy utilised in the business, and so measures taken to reduce energy consumption have the double benefit of reducing carbon emissions and also saving costs.

“The costs of achieving these measures are generally an upfront capital cost to install or replace systems within an organisation such as replacing existing lighting with LED lighting or installing solar panels. The cost of these interventions has been falling in recent years and with ever-increasing energy costs the business case for making these investments is becoming ever stronger.”

Funding the move

For those companies looking for funding support to implement sustainability measures, there is support, usually under the banner of ‘sustainable finance’ or ‘green lending’. “The term sustainable finance is a broad concept with primary focus on access to the financial system to provide solutions in the areas of climate and societal welfare,” says Mark Jordan, chief strategy officer, Skillnet Ireland. “These solutions are typically delivered through green lending, which directs capital to sustainable economic activities and projects – available both domestically and to businesses for usage in projects relating to renewable energy and energy efficiency, green building and retrofitting, sustainable water and pollution prevention, clean transportation, and a range of other environmentally-responsible purposes.”

Jordan says many of the major lending institutions are now offering green loan facilities to new and existing customers to provide more competitive and cost-effective access to liquidity – with the benefits of repayment flexibility and rates being typically lower than those of traditional loan instruments. “However, in order to qualify applicants need to meet the respective lending institutions’ eligibility criteria to ensure the funds are to be utilised in a designated project, and as we see this demand increasing we will also see an increase in regulation and disclosure requirements for banks and lenders.

“Green lending is considered to be key in achieving national and international climate action goals, and ensuring long-term environmental sustainability. All indicators predict demand for this type of loan facility will continue to grow exponentially in the coming years as consumers and enterprises place more emphasis on greening their homes and workplaces, and finding new ways for transportation, all of which will drive and adapt broader business models.”