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Transitioning to be a conscious enterprise

2021 නොවැම්බර් 19

Transitioning to be a conscious enterprise
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In this article, we explore how firms are being compelled to shift towards conscious behavior as external trends are changing the basis of competition. Businesses should restructure operations to be sustainable, inclusive, humane and profitable– rather than choose one over the other Those that have responded to such trends are already seeing improved financial outcomes-the main motive for corporations’ engagement in responsible business practices....

Scientists and environmental and social activists have been repeatedly echoing the rising need to reduce the negative impact of businesses on the environment, society and communities. These voices have only amplified in recent years owing to multiple factors.

  1. Risk of climate change has worsened in recent years – The world has already heated up by around 1.2C, on average, since the preindustrial era, pushing humanity beyond almost all historical boundaries. Sri Lanka is experiencing this first hand with patterns of rainfall being altered drastically, water resources being impacted and biodiversity poised at risk. The Global Climate Risk Index 2019 ranked Sri Lanka second among countries that are mostly affected by extreme climate events. This is mainly because as an island with climatic and topographical variations within a small land territory, its coastlines are severely vulnerable to the impacts from climate change.

  2. Rising inequality and poverty – There has been a rise in income inequality between the rich and poor as well as rising gaps in workforce participation across different demographics. Given the concentration of higher paying jobs in the district of Colombo/the Western Province, there is a wide variation in poverty across districts. Sri Lanka’s Gini index was 51.4% in 2018, an indication of the deviation in the distribution of income from a perfectly equal distribution. COVID-19 has amplified this impact and led to a significant increase in poverty owing to widespread jobs and earning losses. The poverty rate was projected to increase to 13 percent in 2020 in Sri Lanka, from 8.9 percent in 2019.

  3. Increased concerns of risk to human life and livelihoods – Activists have requested the November’s UN climate change conference COP26 to integrate human rights protections in its list of goals given the unsafe, unhealthy and unsustainable environment corporates are creating. Residents living in industrial areas are exposed to high toxin chemicals released into the air and water. Moreover, several communities are having to risk their lives to fight the impacts of climate crisis and counteract unsustainable global warming such as clearing up landslides and floods. Employees that work in industries such as mining, large-scale agribusiness, hydroelectric dams and other infrastructure are also often working in conditions that lack adequate safety measures and health guidelines.

So, the question is, if businesses aim to combat such challenges, would their profitability be marginalised?

Shifting towards conscious capitalism – putting people and planet alongside profit

In this article, we explore how firms could try to make a swift shift to become more conscious of their activities. Conscious enterprises are those that choose to follow a business strategy in which they seek to benefit both human beings and the environment. Principles such as sustainability, humanity and inclusivity would influence the dynamics of the firms’ operations and be fundamental pillars that drive business decisions, alongside profitability.

This calls for enterprises to concentrate on the whole business eco-system, creating and optimizing value for all stakeholders involved including their employees, value chain partners, communities and the environment— rather than just their management teams and shareholders. In fact, in no way does this mean to compromise profit-seeking, rather it encourages the assimilation of all common interests into the company’s business plan, calling for ethical operations while pursuing profits.

Today, firms are being compelled to make this shift towards conscious behavior as external trends are changing the basis of competition.

Some of these growing trends include:

  1. Conscious consumerism Consumers are often demanding more responsible conduct from businesses; they are changing their consumption choices to influence businesses’ behaviours. A recent survey by Mckinsey revealed that 66% of consumers consider sustainability when making a purchase. As evidence on sustainable and socially-oriented consumption patterns keep mounting, the business case for corporate, socially and environmentally responsible behavior becomes stronger. Already, 74 countries accounting for more than 80 percent of global GDP and almost 70 percent of global CO2 emissions have put net-zero commitments in place.

  2. Socially responsible investing – Impact investors are increasingly factoring in ESG – Environmental, Social, Governance – principles into their investment decisions. The growing number of ESG indices and responsible investment assets is evidence of a shift in investor’s preferences. Capital markets are increasingly building emissions risk into asset prices and venture investments in transition technologies are at an all-time high. A study conducted by Greenwich Associates reveals that 81% of investors already take ESG considerations into account for all or part of their investment portfolios.

  3. Attractive talent seeking conscious employersAccording to Reuters, an employee survey revealed that 66% of employees indicated that they were more likely to work for a company with strong environmental policies.

  4. Instantaneous reporting – Today, business impacts on people are easily exposed on social media in almost real time and the risk to a firm’s reputation is high should they fail to ensure safety and wellbeing of human lives they are involved with. This has in turn increased the need for transparency in business activities and consistent reporting, to remain competitive. According to a 2017 KPMG Survey of Corporate Responsibility Reporting of the world’s 250 largest companies, 78% of them now integrate financial and non-financial data in their annual reports, compared to 60% in 1993.

  5. Regulatory pressure – Pressure from governments and international organizations that monitor the wider implications of business operations are compelling firms to be more socially responsible.    

Those that have responded to such trends are already seeing improved financial outcomes – the main motive for corporations’ engagement in responsible business practices.

Firms that integrate the fundamentals of social and environmental wellbeing into their purpose, culture and values are earning higher returns than counterparts, seeing more traction from investors, value chain partners as well as customers through the creation of a strong reputation, trust and loyalty that is in turn building an invisible advantage for longer term success.

  1. Higher returns – Analysis of S&P 500 companies finds that corporations with sustainability strategies outperform others on the index. Specifically, corporations that are actively managing and planning for climate change secure an 18% higher return on investment (ROI) than companies that aren’t – and 67% higher than companies who refuse to disclose their emissions.

  2. Reduced cost of capitalA meta-analysis published by the University of Oxford and Arabesque Partners found that 90% of the studies show that sound sustainability standards lower companies’ cost of capital.

  3. Attract higher investmentAccording to Morningstar, ESG firms captured USD 51.1 billion of net new money from investors in 2020, compared to USD 21 billion in 2019 indicating the level of increased attention this topic has gained.

  4. Strong reputation aids during periods of crisis – Prioritizing ESG issues generates superior long-term financial performance. This is mainly because a firm’s efforts towards its communities and environment creates a positive consumer perception and generates a stronger trust, reputation and goodwill. The benefit of this invisible advantage is accentuated during a crisis like COVID-19, because investors can see ESG as a defensive characteristic. According to Barron’s, in 2020, during the height of COVID-19, ESG stocks outperformed the stock market across the globe – by 46% in the U.S., 20% in Europe, and 77% in Asia.

  5. Motivated, skilled workforce drives financial success – Firms with a commitment to take care of employees are seeing increases in productivity and employee engagement. A recent study showed that 89 percent of executives believe an organization with shared purpose will have greater employee satisfaction and engagement. And companies with top-quartile employee engagement ratings have twice the customer satisfaction and 25% higher profits than organizations with bottom-quartile engagement ratings.

So, how could firms make the shift towards corporate, social and responsible behavior.

It is crucial to be proactive than reactive!

While several firms have Corporate Sustainability Reporting (CSR) policies in place, it is vital to integrate sustainability, inclusivity and humanity into the business operations. This is because setting aside a portion of profits for corrective measures that negate the adverse impacts created by operations to environment or society may not really do enough to revert the eco-status to its previous state. Today, emissions continue apace without sufficient abatement and are not counterbalanced by removals. And there is no quantifiable measure to assess if it has managed to eliminate the trail of its environmental footprint in totality.

For example: Some of the manufacturing firms that emit large amounts of chemical waste, colour dyes and pollution into the environment are carrying out waste water treatment, planting forests to neutralize carbon emissions and are making efforts to offset environmental damage and social impact that it may have caused. However, some of this footprint is irreparable and causes consequential damage that any corrective measures cannot seem to offset or negate. Harm to marine life, reduction in good quality water available for consumption, and alteration of the atmosphere to villages in proximity is being caused first before being resolved.

Hence, it is vital that restructuring efforts to proactively reduce any environmental or social harm from operations are explored, rather than corrective measure as damage often cannot be reversed.

Businesses should restructure operations to be sustainable, inclusive, humane and profitable– rather than choose one over the other.

Some steps that global firms have taken to embed sustainability, inclusivity, humanity into their business models, while generating profits are listed below.

  1. Gradually diversify raw material and supplier base to include more ethically and environmental- friendly inputs:

  • Eileen Fisher is an apparel company that supports organic farming as it has a lower gray water footprint than conventional farming. By committing to use organic fibers, recycled fibers and sustainable fibers such as wool and Tencel™, it ensures clean air, clean water and a healthy environment for workers and wildlife. Similarly Harmless Harvest, an agri firm verifies that its coconuts are grown without the use of persistent pesticides, synthetic fertilizers or sewage sludge, and are not irradiated or produced with GMOs .Design and create product ranges that are eco-friendly, and gradually shift marketing focus to those products.

2.   Design and create product ranges that are eco-friendly, and gradually shift marketing focus to those products.

  • Rothy’s, a footwear company uses recycled material such as plastic water bottles and marine plastic to craft its shoes and also has styles that are machine washable. The boxes used to ship their products are made from 85 percent post-consumer recycled materials. They’re also vegan and biodegradable. Their durable material allows them to avoid additional packaging costs.

3.    Power operations with renewable energy sources, shifting from fuel and oil to solar and wind.

  • Grune Erde, a furniture company is a place that is 99% petroleum free and powered by renewable energy from 100% on-site resources.

4.    Recycle, Reuse, and Reduce amount of waste dumped into the environment

  • Intel achieved a recycling rate of 85% of its non-hazardous waste in 2017, increasing it to 90% by 2020.

5.     Adopt technology to transition heavy environmental footprint processes to reduced or zero carbon processes. Technology can also carry out tasks that are unsafe for employees to carry out.

  • Aqua-Yield deploys nanotechnology to deliver liquid nutrition to crops on a cellular level, meaning lower costs for growers and better, healthier produce grown faster, without damaging soil. Aqua-Yield’s technology is one of the most significant innovations in the agricultural business in recent history.

6.     Create ventilation in working spaces, moving away from continuous air-conditioned environments to more ventilated and open concepts with greenery.

  • Grune Erde, a furniture company that specializes in designing and producing ecological products has a plant-powered systems design that introduces breathing into buildings. A sensual and atmospheric space that is literally breathing in oxygen originating from its vegetated courtyards.

7.     Ensure sustainability until product reaches customer. For example, grouping deliveries to go out on pre-scheduled days and on routes that would reduce transportation time and emissions can help avoid ad hoc journeys and carbon emissions.

  • Face drive, a Canadian ride-sharing and food delivery service company with transportation solutions that focus on carbon emissions reduction. It makes sustainability accessible to all by allowing riders to choose between an electric, hybrid or gas vehicle.

8.     Advocate for worker welfare aiming to pay above fair minimum wages. Hire from different demographics to ensure inclusivity of women in the workforce, and employees from different backgrounds and regions.

  • Lucy & Yak, an independent, ethically and sustainably made brand ensures that each and every one of its garments is made from organic fabrics and is produced by its factory in north India, where workers are paid four times the state minimum wage. All postage material and stationery are 100% recycled and biodegradable.

9.     Reduce use of harmful chemicals to reduce employee and consumer exposure

  • IBM was the first in its industry to fully remove the “forever chemicals” perfluorooctane sulfonate (PFOS) and perfluorooctanoic acid (PFOA) from the company’s chip manufacturing business in 2010, making e-waste less toxic. The exclusion of chemicals reduced consumer and worker exposure to the persistent toxins.

10.     Incentivize employees to achieve sustainability goals so that they have a shared purpose with the company.

  • Since 2008, Intel has linked the annual performance bonuses of its executives and employees to the company’s achievement of sustainability goals such as reductions in GHGs and energy use – effectively making its sustainability goals everyone’s job. In 2012, 15% of companies had sustainability pay-links, which grew to 24% in 2014.

Firms should aim to address some commonly cited barriers to transition towards becoming a more socially and environmentally conscious enterprise.

While a large number of firms have stepped up to be conscious of their activities, propelling their activities to be sustainable, inclusive and poised for growth, the extent of efforts taken in this regard have varied by size of organization as well as other factors such as the lack of a sizeable addressable market of conscious consumers in their regions, a lack of financial resources, and a mismatch with their current business model. Firms should look to dedicate resources and efforts to see how they can make the switch before their operations are rendered relevant.

External expert consulting support can help address some of these challenges – such as the lack of awareness to integrate sustainability or to help management teams view operations from an external lens. In addition to this, capability building programs can help address skill gaps in this regard. Sri Lanka@100 is a platform that provides consulting expertise and capacity building programs to support mid-sized firms to resolve similar problems.

References :

“The climate disaster is here” – The Guardian, October 2021; “Companies that want to be sustainable have to start with acting ethically” – Reuters Events, March 2019; “Why you need sustainability in your business strategy?”- Harvard Business School, November 2019; “Poverty & Equity Brief, Sri Lanka” – World Bank, October 2020; “Measuring the impact of businesses on people’s well-being and sustainability” – OECD iLibrary, November 2018; “Corporate Sustainability Reputation Matters Most During Crises” – Network for Business Sustainbaility, April 2021; “Sustainable corporations perform better financially, report finds” – The Guardian, September 2014; “Record number of environmental activists murdered” – BBC News, September 2021; “Climate-focused companies outperform peers during COVID-19 outbreak” -IEMA, April 2020; “How have sustainable companies performed during the Covid-19 crisis?” – Schroders, May 2020; “Money invested in ESG funds more than doubles in a year” -CNBC, February 2021; “Measuring and Managing ESG to Attract Financing” -GBS, October 2021.

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