4 reasons companies should invest in sustainable development

Leaders from 193 nations converged on New York last week for the UN General Assembly and adopted the sustainable development goals, which are not short on ambition. Beginning with a goal to “end poverty in all its forms everywhere,” they cover gender equality, food security, peace, health, clean water and sanitation, sustainable cities, among others. While the scope is impressive, the problem is that governments have already reneged on earlier commitments to the goals’ predecessors. With the even heftier price tag for achieving the goals — $2 trillion-3 trillion a year for 15 years, or 4 percent of world GDP — there is a real need for innovative alternatives to close the gaps. This is where the private sector can help close some gaps.

Why, you might ask, should the private sector — with shareholder returns to worry about — get involved in lofty U.N. initiatives? First, the private sector contributes 60 percent of global GDP and 90 percent of the jobs, and may be better positioned to accomplish many of the goals because of better reach and resources. Second, if achieving some of the goals also helps achieve shareholder interests, the U.N. summit could result in a fresh burst of innovation and creative finance.

We conducted research at Tufts’ Fletcher School, funded by Citi Foundation, to understand why companies would even consider investing in sustainable development. we found four motivating factors:

1. Mitigating business risk from potential disruption of operations, supplies or reputational damage.

2. Adhering to industry norms of transparency, traceability, environmental responsibility and other accepted standards.

3. Winning share in current markets and establishing a beachhead with future customers.

4. Building goodwill with key stakeholders.

These issues gain even more currency in the developing world, where much of the future market growth resides. Consider the example of Coca-Cola, with 75 percent of operating income from overseas and a heavy reliance on emerging markets. Also, Coke, as a heavy user of both water and plastics, has a giant environmental footprint, which, arguably, is unsustainable. It is not surprising, therefore, that Coke is an active participant in innovating in sustainable development. It shares its logistics capabilities to distribute medicines and supplies to remote African communities. Its Beyond Water partnership with the World Wildlife Fund works to maintain resilient freshwater systems in 50 countries. Its Project Nurture partnership helps farmers in its supply chain identify new opportunities and improve productivity. It has developed the first-ever recyclable plastic bottle, with plans to make the practice universal by 2020.

In other words, there is a plausible business case to be made to invest and innovate in sustainable development — and Coke is no outlier. Sometimes, the case is easier to explain. The brewer, SABMiller, switched its feedstock from expensive European imports to sorghum, a popular staple crop in arid regions in Africa. This helped cut cost and transportation time to African consumers, and promoted local farming communities, creating new generations of consumers — and sorghum beer was a hit.

In other situations, the business case is less obvious, if not downright counter-intuitive. Patagonia the apparel maker, launched an advertising campaign around Thanksgiving 2011, “Don’t buy this jacket” to focus on repairing, reusing and recycling.  While the campaign may have had its roots in the company founder’s environmental responsibility mission, it attracted new consumers. Annual sales in the following two years grew almost 40 percent.

Establishing the business case, allocating resources and executing on activities that also help achieve the goals is indeed an innovation opportunity. How different is this form of innovation from “traditional” innovation? There are many similarities. Both demand near-term investment and uncertain payoffs over the longer term. Both experience a similar set of organizational obstacles.

Our research indicated several of them: difficulties in measuring impact, identifying sustainable funding mechanisms and finding the right organizational home for such projects. There is, however, an important point of difference: “traditional” innovation is an investment in a private good, i.e. it confers benefits to the investing company, while an innovating in sustainable development is an investment in a public good, whereby the wider society, even competitors, can stand to benefit. This can create some disincentives to act, making innovation in sustainable development even more challenging.

So, here is what is likely to happen. The UN launched the goals with a media blitz and an array of stars from Beyonce to Usain Bolt encouraging us to play our part in “changing the world.” The hard reality is that without business participation and innovation these lofty goals will remain unachievable. Fortunately, it is in the interests of many highly innovative and resourceful companies to step up and participate.

If your company plans to join, there are three next steps:

1. Pick certain goals on which to focus. Translate them into recognizable commercial language to have the internal conversation. Create a home in your organization with resources, access and decision rights.

2. Define and track metrics of impact and allocate resources accordingly. The metrics should track both facets of the “shared value”: the business case and the social case.

3. Prepare to step outside your comfort zone. Get involved with suppliers and distributors and non-traditional partners, government agencies, NGOs, and local businesses, to close key gaps. You may have to re-imagine how you utilize your existing assets, e.g. Coke using its logistics infrastructure to distribute medicines.

The UN may be onto something — good for the human condition, but also good for business competitiveness. Act now, if you haven’t already. The risk is you could be left behind.

This article is published in collaboration with the Washington Post. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Bhaskar Chakravorti is senior associate dean of International Business & Finance at Tufts University’s the Fletcher School.

Image: A ship travels north on the Hudson river past the Manhattan borough of New York City. REUTERS/Mike Segar.