The Business That is “In It” for Profit
It is – or should be – a very obvious fact that for-profit companies are established to make money. They do so through revenues by way of selling products or services. Making revenues, however, is not sufficient. The goal is to have their gross receipts from products or services sold exceed the costs of doing or running a business. The delta between revenues made and costs incurred is called profit. This is a simplistic scenario for publicly-traded or even most companies and I shall not get into the complicated business of interest, depreciation and cost accounting valuation methods such as FIFO (first-in, first-out) and the like. Let’s keep this analysis simple.
How Does For-Profit Differ from Not-For-Profit?
For-profit business entity names usually scream their purpose of being in business (which is to make enough money to make a profit) and are usually identifiable by their ending titles including Corp., Inc.., LLC, LLP, and Sole Proprietorship to name the most common. Now (and forgive me for being didactic), for-profit companies defer from not-for profit companies in that not-for-profit businesses are in business and make money but attaining profitability is not their primary endeavor. This conclusion is clearly obvious in the fundamental business descriptor of a business structured as a “not-for-profit” entity. Where am I going with this?
The Means and the End
I state the obvious above to highlight a point I want to make about a relatively recent article written in Forbes magazine titled, Green Is Good, for Returns by Jeff Kauflin. In the article, Kauflin highlights the investment strategies of both Karina Funk and her co-manager, David Powell, of Brown Advisory’s Sustainable Growth Fund. Funk remarks that “Sustainability is a means, not an end in and of itself”, when it comes to how she and Powell determine where to invest. The duo ultimately has a paradigm they follow when deciding where to invest, often in sustainably-minded companies…but not always. Companies must fit three criteria: offer strong growth prospects (I assume for both revenue and profit), an attractive valuation (a combination of the present capital structure of an organization, present market value of its assets, and the weight and reputation of a company’s executive management), and a proactive investment in sustainability strategies – not just to reduce risks and protect against phenomena like climate change but to seize economic opportunity (italicized font is author’s emphasis).
The Value of a Corporate Sustainability Strategy
I fundamentally disagree with the statement that sustainability is a means but not an end. In fact, it should be both a means and an end for profitable companies. The definition of “means” is “the way to get there”. The definition for “end” is “the ultimate goal”. Sustainability practices, processes, methods and measures (or KPIs in corporate lingo) are the means by which a company becomes more sustainable in its way of doing business. A sustainably-minded company is still expected to be profitable and revenue-generating, and is most assuredly expected to maintain or minimize the cost of doing business over time. But the true integration of sustainability strategy with business strategy accrues value within and without a for-profit company. Yes, risk mitigation is an important factor. Yes, brand enhancement and customer loyalty are key considerations. And yes, sustainability can be seen and utilized as a strategic lever to build market advantage, outpace competitors, and open emerging paths to new product development and market capture.
Sustainability Is For the Long-Term
It is callous and short-sighted to discount the role climate change impacts increasingly play in how for-profit businesses conduct themselves. In fact, it is a pure neo-classical, capitalist viewpoint that only with revenue growth, cost efficiencies and new market opportunities does a sustainable corporate strategy exist as worthwhile. Do I believe these three business drivers are realizable when a company’s corporate strategy is aligned with its sustainability strategy? Sure I do; in spades. The caveat is that sustainability measures, which often entail developing a new way of doing business (an overhaul or reboot, if you will) often have long-term actualization timeframes. In the process of realizing the end goals of corporate sustainability, profits may have to be optimized and not maximized, cost increases incurred in the short- and medium-runs to realize bigger reductions in the long-run, and markets developed with capital investment in research & development without a quick product hit or marketing opportunity to offset the ongoing financial allocations.
Why Do Some Sustainability Efforts Lack “Teeth”?
There are several culprits to corporate sustainability endeavors that lack teeth and in the eyes of some investment managers, result in missed opportunities to drive revenue growth, cost reductions and ultimately, improved brand value.
First, let’s tackle the most difficult, entrenched culprit. Our financial markets for public companies are rigged to focus exclusively on short-term results to the detriment of long-term strategies driven with sustainability goals in mind. Companies are a product of the system in which they are embedded. To change companies, to have markets value long-term sustainability strategies, the requirements and incentives of the financial system have to change.
Second, the voluntary endeavor by corporations to publish a sustainability report based on some standardized reporting structure such as that of the Global Reporting Initiative (GRI) is admirable but not necessarily indicative that a sustainability strategy has been embedded into the company’s short-, medium- or long-term corporate strategy. Company sustainability reports range widely from the softball measures in place to provide, for instance, employee safety training on the job or bi-annual community outreach programs for youth, to hard-hitting and transformational sustainability process adoption within corporate supply chains, purchasing practices, and product design development. GRI offers strict guidance on the categories to report on and include within a sustainability report but the included content, efforts made and organizational sustainability implementation is decidedly up to the individual organizations to determine to pursue and disclose.
Third, a company’s corporate sustainability strategy has to be set at the highest levels of the organization and then meticulously shopped, knowledge-shared, and infused into the various levels of the organizational structure via empowered business unit leaders and diverse cross-functional communication teams highlighting successes, sharing best-practices, and celebrated sustainability wins. The Forbes article alludes to this realization with this quote from Powell:
“Sherwin-Williams is a fantastic paint company but its sustainability report, which mentions things like composting in the break room, doesn’t appear to make a difference to its bottom line.”
The C-Suite and most definitively, the CEO of a company must be on-board to embed sustainability within a corporation’s most strategic goal-setting initiatives. A company serious about corporate sustainability will have a Chief Sustainability Officer (CSO) reporting to, ideally, the CEO, CFO or COO of the organization. Lastly, Boards of Directors set the corporate long-term business strategy with the C-Suite. A corporation that is effectively implementing a successful sustainability strategy has recognized that having a knowledge-expert in sustainability (whether that be in product design, SCM, procurement, packaging, etc.) on its Board is a well-placed asset.
Corporations are nearing the realization that they don’t have a choice of whether to pursue sustainability or not when thinking about long-term strategy setting. Sustainability cannot be an “and” proposition; it must be the “is” of their future corporate strategy. It is the means and the end.
Contact Kate Gaertner today to see what Triple Win Advisory can do to help your business and industry increase sustainability to result in a “triple win” for company profit and long-term competitive advantage, societal well-being, and successful environmental pollution mitigation.