New Series

Win-win: Why companies should invest in development

Five years on, a company that shows no respect for the environment and social justice may have no access to international markets. A new report from SustainAbility cites evidence from developing countries, including India, to prove that sustainability IS profitable, even in emerging markets. The greatest benefits to a company are from cost-saving and productivity, revenue growth and market access

 Developing Value: The Business Case for Sustainability in Emerging Markets overturns conventional wisdom by showing that it does pay for businesses in emerging markets to pursue a wider role on environmental and social issues.The report challenges the myth that sustainability is only for rich companies in developed nations, and does not apply to the private sector in the emerging markets. The report has been written by SustainAbility, a London and New York-based corporate sustainability strategy consultancy (www.sustainability.com), the International Finance Corporation (a World Bank Group organisation) and the Ethos Institute - Business and Social Responsibility, of Brazil.

Based on more than 240 real-life examples in over 60 countries, the study analyses the 'business case' for sustainability in emerging markets - the opportunity for businesses to achieve benefits such as higher sales, reduced costs, lower risks and enhanced reputation from better corporate governance, improved environmental practices, and investments in social and economic development.

Highlighting examples from businesses in Africa, Asia, Central & Eastern Europe, the Middle East and Latin America the report refutes the argument that the business case holds only in developed markets and pinpoints the many opportunities available to diverse businesses.

The case studies cover all types of companies, ranging from a small Latvian dairy to an eco-tourism outfit in Peru to an aluminium smelter in Mozambique.

Examining information across six business success factors and seven sustainability factors, the report finds the greatest evidence for business benefits in emerging markets in the areas of cost reductions, productivity, revenue growth and market access. On the sustainability side, environmental process improvements and human resource management represent some of the most significant opportunities for creating value.

Developing Value aims to help business people in emerging markets identify these opportunities to increase profits by making progress on sustainability - particularly owners and managers who are relatively new to sustainability. The report finds that every kind of company can find benefits but the best opportunities will depend on the particular drivers, circumstances and priorities of a business. It also provides tools to help managers assess and construct their own case.

The report calls on other stakeholders like government, NGOs, business customers and investors to strengthen the business case by putting pressure on companies with poor performance and rewarding those which make improvements in their sustainability activities.

Concerns about sustainability issues and about development among policy-makers, consumers and investors have risen dramatically during the 1990s and will continue to grow. These growing concerns, accompanied by the rising importance of the private sector, have provoked fears about the impact of globalisation on progress towards sustainable development. Contrary to common assumptions, this cocktail of concerns is often greater in emerging markets than in developed countries. It means that emerging market businesses, too, face growing risks - and opportunities - as a result of increasing public apprehension about sustainability-related issues. Businesses which were unaffected by these issues three years ago are today affected, and businesses that seem unaffected today may well find themselves affected three years from now.

This trajectory is summed up by Rafael Wong, executive vice president of Reybancorp in Ecuador: 'In five years, there will be no access to international markets for companies that do not show respect for the environment. It is becoming fundamental to international trade.'

Many opportunities exist
As in all business activities, there are no guarantees of success from improving environmental, social or corporate governance performance. Being able to identify the risks and capitalise on the opportunities will become increasingly important as the sustainability trajectory accelerates. The most significant opportunities available through actively pursuing more sustainable approaches to business are to:

- save costs by making reductions to environmental impacts and treating employees well;
- increase revenues by improving the environment and benefiting the local economy;
- reduce risk through engagement with stakeholders;
- build reputation by increasing environmental efficiency;
- develop human capital through better human resource management;
- improve access to capital through better governance.

These opportunities are documented in many examples throughout the report, as well as in four in-depth case studies from Brazil, China, the Czech Republic and South Africa.

The business case varies by region and company size
Overall, the business case exists for all companies although the specific elements may vary. While companies of all types in all regions can achieve measurable commercial return by investing in their employees and in environmental process improvements, there is diversity in the business case, with interesting differences between regions as well as between types and sizes of company.

For small and medium-sized enterprises the emphasis is very much on cost savings, although they also benefit from higher revenues and improved market access, especially through environmental products and services. National companies and multinational corporations based in emerging markets gain benefits in all areas, led by cost savings from environmental process improvement. Foreign multinationals (headquartered in developed countries with operations in emerging markets) also experience more intangible benefits such as risk reduction and human capital development. Export-oriented companies which demonstrate adherence to sustainability standards and management systems benefit from better access to markets and can sometimes apply price premiums to their products. Companies focused on the domestic market are more likely to gain from local economic and community development, which strengthens their license to operate and can deliver revenue growth.

In most geographic regions, eco-efficiency - cost savings from better environmental management - is the most significant relationship. South Asia appears to be the exception: the strongest evidence of a business case is for higher revenue from local economic growth, and community development leading to improved reputation.

These geographic differences are also a function of the different business contexts in these areas.

The business case matrix
A significant output of this study is the business case matrix which relates key aspects of sustainability to a set of recognised business success factors - demonstrating graphically where a viable business case exists. This matrix has been adapted from previous work by SustainAbility, Buried Treasure, which examined the business case for sustainability in developed countries.A comparison of the two studies shows that emerging market companies focus more on short-term cost savings and revenue gains, while intangibles like brand value and reputational issues are more significant in developed countries. Community investment and development are seen primarily as an overhead in developed countries, but in emerging markets they are shown to be important in retaining the 'license to
operate' and in reducing risk.

Developing Value - a practical guide for change
Developing Value takes this discussion a step further, suggesting practical steps companies can follow in the implementation of sustainability activities and strategies, from understanding the business priorities to implementation and monitoring. The business case is constantly evolving, reflecting changing expectations and relevance. Companies will need to be flexible in their approach to sustainability and monitor change.

Sustainability is itself a continuous process - from small activities that bring quick returns to incorporation in strategies that bring long-term competitive advantage. Companies need to choose their focus.

Enhancing the business case
While the evidence demonstrates that businesses can benefit while helping to achieve sustainable development objectives, other players also have responsibilities and can help to strengthen the business case. Governments in emerging markets need to provide good governance, regulatory certainty, and an appropriate mix of policy tools, including clear and enforceable regulatory standards and appropriate economic instruments. Investors and lenders, both local and international, could strengthen the business case by including companies' sustainability performance in funding assessments. Business customers in developed countries could work with emerging market suppliers in meeting higher technological and management standards. Consumers should act on their values - question companies' sustainability performance and follow through in their purchasing decisions. NGOs can help by applying appropriate pressure on companies, and exploring collaboration and new partnerships involving business, governments and other players.

http://infochange.dreamhosters.com/www.sustainability.com/developing-value provides information on all the case studies examined in this report through a searchable database. It also links to sustainability tools and resources.