Tuesday, February 01, 2011

Sustainability: Future-Proofing for Business

When the term “sustainability” appears in news headlines, it is usually the subject of policy debate. These debates seem to focus on the rights and privileges of investors and property owners. Debate is generally a good thing, but it’s pointless if the subject of debate is not clearly defined to all participants. This is often the case with concept of “sustainability.”

To many observers, “sustainability” is a trendy buzzword, evoking a lifestyle image of tree-hugging people wearing beads and sandals. Detractors perceive sustainability and environmental initiatives as an infringement upon property rights and economic liberty in general. However, forward-thinking business and policy leaders perceive a different meaning. In a hard-nosed business context, sustainability has practical implications for the basic pillars of business performance: revenue growth, expense reduction, and risk abatement. This alternative perception sees sustainability not as an economic restriction, but as a guiding principle for business growth and profit in spite of resource scarcity. In this context, sustainability is wholly compatible with economic growth in the face of finite resources. This post explains why.

Regardless of our political leanings, we all share universal economic constraints: limited time, limited resources, and uncertainty about the future. Nothing is constant-- except change. As the volume of economic activity grows across the globe, so does the demand for limited energy supplies. The most obvious implication: rising energy prices. Other commodities—including minerals, building materials, even food and water—are subject to the same market forces. One of those resources, energy, is an ingredient of all business activity. This is true without exception. No contracts are fulfilled or obligations met without some consumption of fuel or electricity.

Expense reduction may be the most obvious reward of applied sustainability. Energy expenses can be reduced by efficient technologies as well as smart energy behavior. When energy waste is reduced throughout a supply chain, the result is a lower cost of production and higher profit margin on final goods and services. The impact on financial performance is dramatic, especially for businesses with thin operating margins. For example, it’s not unusual for hospitals to achieve a four percent operating margin (revenue net of expenses but before debt and earnings distributions). At a four percent margin, $25 worth of revenue yields only one dollar of operating income; conversely, one dollar in energy savings is one whole dollar of operating income-- the same impact as receiving $25 in revenue!

Increasingly, sustainability provides opportunities to make revenue. In part, this is due to growing consumer demand for goods and services that are produced with a minimum of environmental disruption. Government contracting regulations as well as market alliances increasingly require suppliers to demonstrate waste and emissions reduction in their business processes. In other words, sustainable attributes contribute to product marketability. Sustainability thus becomes a driver of revenue potential.

Why not maintain the business community’s status quo? This is a paradigm in which energy and other resources are simply a cost of doing business and not worthy of conservation and resulting expense reductions. Forward-thinking business leaders understand that nature knows no status quo. Resource supplies are not static. Resources are subject to depletion as well as substitution. In either case, business decision-makers are forced to adapt to changing technologies and market conditions. Sustainability, through its consequences for waste reduction, is a hedge against the business risk of scarce inputs. By reducing the volume of energy and other inputs needed to earn each dollar of revenue, businesses are offsetting the risk of rising input prices and protecting their profit margins. In addition, the adoption of renewable fuel and power sources provides a measure of resource flexibility and independence from energy suppliers. By adopting these technologies now, businesses gain valuable experience to prepare them for tomorrow’s inevitable resource shortages and shifts in technology. Businesses that resist these changes simply fail to future-proof themselves.

For the astute business leader, sustainability is neither fad nor fashion. Sustainability supports economic growth and earning power in the face of unavoidable change. A sustainable business is one with the means to navigate technology evolution and changing resource availability.


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