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Transforming sustainability from cost centre to profit centre

Transforming sustainability from cost centre to profit centre

Sgreenprofitsustainability teams in leading global companies are re-inventing themselves to move from squeezed cost centres to vital profit centres.

They have realised that they must be able to answer the question: “What is the return on investment of the sustainability team?”

Sustainability under Pressure

Many sustainability teams, including those in DJSI leaders, are under pressure. Cost cutting is shrinking staff and budgets. Sustainability reports are merging into integrated reporting. The desire to embed sustainability throughout the company is seeing sustainability budgets and decision-making handed to business units/sites. One sustainability leader also described the worrying issue of “sustainability fatigue”.

Sustainability teams focussed on compliance and reporting are nowadays being treated by senior executives as a necessary evil (i.e. a cost centre) which must improve its productivity and tighten its belt – especially with reporting requirements perceived to be reducing.

Adding Financial Value through Sustainability

We are helping a range of leading companies to move their sustainability teams from reporting and compliance to adding value within the core activities of the company.

The overarching logic is that the sustainability team is responsible for the long term future of the organisation – while just about everyone else in the company is focussed on short term targets (and in doing so may harm the long term future of the company).

Within this remit, consistently we find three major areas of financial value that sustainability teams can provide, over and above day-to-day executive management:

1. Operational cost reduction

Sustainability teams can drive company-wide non-labour resource efficiency. This includes energy efficiency, waste reduction, transport & logistics efficiency, materials efficiency, packaging optimisation, circular resource use and supply chain efficiency.

Sustainability teams can drive additional value by overseeing and intervening where necessary to accelerate improvements on these topics. This is necessary because incumbent staff set modest improvement targets that they know that they can easily achieve and therefore need objective oversight to address this conflict of interest.

In the Next Manufacturing Revolution report, co-authored with the University of Cambridge’s Institute for Manufacturing, we found that, on average, manufacturers in the UK were improving at 1% to 2% p.a. on the above topics. But best practice companies are improving at around 8% p.a. For example, over the last 16 years, Toyota Motor Europe has improved its energy, water and waste per vehicle by over 70% in total.

We found that fully embracing resource efficiency is worth an average additional 12% in profits for UK manufacturers – as well as generating substantial environmental and social benefits. For details, please refer to the Next Manufacturing Revolution report at laverypennell.com/the-next-manufacturing-revolution/.

2. Growing Revenues

We have also gathered evidence which shows that:

  1. More sustainable products can and do achieve a higher price than equivalent less sustainable products.
  2. The sales of more sustainable products grow at a much faster rate than conventional products.

Sustainability teams can boost revenues in a range of ways, including:

  • Assisting product development to ensure that products are as sustainable as possible. At one leading FMCG company, for example, the regional Head of Sustainability is the first consulted about a new product and has the last sign-off.
  • Providing product sustainability information for sales staff (and distributors’ staff) to use with consumers/customers. Sustainability reports traditionally focus on the company, not on products. We assist clients to think at a product level – which is how customers think and where sustainability information can be most effective. For example, recently we encouraged a sporting goods manufacturer to translate the 10g per shoe weight reduction (mentioned in the corporate sustainability report) into the impact that it will have on a runner’s time for a 10 km race. This will give shop floor staff a simple story to use with consumers which is a more compelling expression of sustainability achievements.
  • Enhancing relationships with current and potential key accounts. Sustainability teams can work with sales teams to build deeper relationships with potential and current key accounts. Most large customers will have a sustainability team who are concerned about the sustainability of their supply chain. Therefore your sustainability team can reach out to and meet with these teams within customers to explain your company’s sustainability activities and identify areas for collaboration which can reduce costs for both parties (e.g. through better transport & logistics; reduced packaging) as well as increase customer loyalty. Often the sustainability teams within clients are higher up the hierarchy than purchasing staff – so this can also enhance your brand within the client, influence purchasing decisions higher up the chain of command, and/or be an alternative way to crack open a new account.

We have a catalogue of such opportunities which are more or less applicable depending on the company and sector.

3. Risk Minimisation

While risk reduction is traditionally within the remit of sustainability teams, rarely is this translated into hard profits.

For example, if your company buys and/or sells large volumes of energy or commodities then it will have a hedging strategy in place. Most hedging strategies involve making substantial investments (often in the tens of millions of pounds/dollars) to buy options including puts and calls on those commodities. This is a cash payment that can be reduced by reducing the company’s exposure to price volatility through resource efficiency (to reduce the exposure to prices by reducing the amount used) and switching to more sustainable inputs which are less price sensitive (such as bio-based materials and renewable energy). Reducing the cost of hedging is a direct profit improvement.

Quantify your Return on Investment

Having a tangible impact on company profits is not the end of the story; sustainability teams must also quantify their impacts in the language of finance. Leading sustainability teams annually quantify the value that they have added (in pounds/dollars) each year and compare it to the cost of the sustainability team (including project costs) to determine their return on investment.

For one of our clients we quantified the impact of their sustainability innovation in one twelve month period. Through a combination of accelerating a number of projects by a known amount and initiating new projects, the team had a Net Present Value impact of $90M from a spend of $2.5M – a return of 36 times the original investment.

Such calculations demonstrate the economic value of sustainability even before the social and environmental benefits are included.

1 Comment

  1. Another most welcome article from Lavery Pennell linking sustainability to business success – wonderful!

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