April 22, 2016
Forrester is kicking off research on what it means to be a sustainable business and why it matters. In short, it matters because customers and investors care. But what do they care about? And, what does sustainability mean to them, and to the companies they do business with?
First stop in exploring the definition of something is, of course, a search for the term. “Sustainable” means that something can go on, and continue and “be maintained at a certain rate or level.” For consumers, that might mean their health, their environment, or the health and environment of others — but also their budgets. The literature on sustainability often refers to three pillars: social, environmental and economic. But how does this translate into business metrics?
In the airport last week — where I indulge myself with actual hard-copy, old-fashioned, ink-smearing newspapers — two articles jumped out at me. The first was about “investing with a conscience.” A new family of investment funds takes into account environmental, social and governance factors, known as ESGs. The funds are not about holding hands and singing kumbaya, but are instead based on the belief that companies concerned with their social and physical environment will perform better in the long run. The article, however, focused on how certain investment funds were using corporate data and a social algorithm to evaluate potential investments. The data comes from data providers such as Bloomberg, Sustainalytics and MSCI who collect and originate data from regulatory filings, sustainability reports and websites. They look for indicators of diversity, environmental responsibility, waste management, working conditions, and broad strategic measures such as commitment to the UN Global Compact. Of course, they also look at traditional metrics such as liquidity, revenues and profits. But to decide among investments who all look good on their balance sheet, algorithms turn to the ESGs to pick their next winners. According to the numbers, being “good” is good business.
The second article was about how a long-time maker of “green” household products recently launched a major marketing campaign. Having “owned” the market for environmentally-friendly cleaning products, Seventh Generation now faces intense competition from the likes of mainstream brands such as Clorox and Arm & Hammer, and even Walmart with its green label introduced a few years ago. The bottom line, the growing market for environmentally-friendly products is no longer niche. Consumers care, and companies are responding.
It’s time for more concerted research on what sustainability means for businesses. Interest is clearly there across the three pillars:
- Environmental – 195 countries adopt the first universal climate agreement at COP21 in Paris and will put money behind it – with a goal of at least $100 billion a year in climate-related financing by 2020.
- Social – Technology figures prominently in the UN Sustainable Development Goals adopted in September 2015 and with a blueprint for action through 2030. Investors pay attention.
- Economic – The theme of WEF 2016 was the Fourth Industrial Revolution – based on technology – and how it will impact health, mobility, financial services, education, inclusion… climate change… security… and just about everything.
Forrester has done research on “Green IT” in the past, but the term itself put the focus on the environment, and the technologies focused on better managing and ultimately reducing energy consumption. The term didn’t really stick, and the market for the technology lagged. One start-up working with large utilities in the consumer space recognized that “green” motivations did not necessarily drive consumer behavior, nor did economic arguments for reducing consumption. Instead, consumers were more motivated by social or peer pressure to reduce energy consumption. See my blog Energy Data Fuels Innovation.
A similar realization is happening in the corporate space. For many execs, energy management just wasn’t top of mind; they took the budget item at face value. Efforts to reduce energy use were driven by the cost side of the balance sheet. But in a world where customers count, companies are increasingly listening to them and starting to unpack the “black box” of energy costs. A growing number of consumers recognize energy-efficiency designations such as ENERGY STAR, and cities are passing laws to benchmark and regulate energy consumption of buildings. Energy management is not just about reducing cost but about demonstrating values and responding to customer demand.
A recent Forrester report looked at The Value of Company Values and the complex buying decisions that consumers face. While the vast majority of North American shoppers’ decisions are driven by price (83%), 43% report that company values factor into their purchasing decision. As one consumer noted, “Company values play an important role because they tell me what is important to the company and how I’d expect to be treated.”
Clearly both consumers, investors and the companies themselves feel that “sustainability” and “values” are good for business. Our upcoming research will continue to explore just how to get there, and what it all means for the business itself. What we do know now is that this age (of sustainability?) is about more than climate change and green IT. It is a more holistic approach to doing business. And, sustainability will increasingly be a key driver of business strategies.
We welcome thoughts on how companies drive and do business in a more sustainable planet.