Is it possible to achieve both profitability and sustainability or are businesses forced to choose between the two? No doubt profits are the inevitable target for any business strategy. But what if the key to long-term business success lies in rethinking how we balance profitability and sustainability? Enter green strategies.
Finding the Right Balance Between Sustainability and Profitability
In today’s corporate environment, adopting a green strategy is about balancing sustainability and profitability rather than prioritizing one over the other. Since striking this balance may boost long-term viability, competitiveness, and brand reputation, companies must include sustainability in their respective strategies in a way that maximizes profitability.
Businesses that put sustainability first frequently aim to enhance procedures and provide more effective goods. Early adjustments like adopting eco-friendly materials, embracing digitalization, and implementing recycling programs can be included in long-term planning to help reduce hazards before they become too expensive. Moreover, monitoring progress toward long-term sustainability goals and short-term profitability goals makes it easier to spot discrepancies and implement corrective measures.
By adopting a holistic approach that aligns environmental responsibility with business management strategies, companies can ensure steady profits over time while maintaining a commitment to sustainability. Careful consideration of these factors allows businesses to thrive financially while acting responsibly.
Nowadays, sustainability has grown to incorporate business operations, inequality gaps, shipping, transportation, and drastically reducing carbon emissions rather than just tracking them and monitoring climate change. With this, balancing sustainability and profitability has become more challenging.
This balance requires significant investments that may not yield immediate financial returns. Achieving sustainability also requires a commitment from all levels of an organization, from leadership to employees, and requires time and resources over several years.
Moreover, neoclassical economics, a philosophy associated with the technocentric paradigm, emphasizes short-term financial gains over long-term sustainability, assuming that technological progress will always offset resource degradation. This mindset, commonly adopted by stakeholders—particularly investors—continues to shape many practices and prevent the widespread adoption of sustainable approaches. However, the gap between formulating and implementing green strategies presents a critical opportunity to challenge this mindset.
Green strategies allow companies to directly confront the shortcomings of neoclassical economics by showcasing the observable, long-term advantages that come from sustainability. The implementation process shows that technological solutions alone cannot stop environmental deterioration, and that resource preservation and profitability may coexist with sustainability initiatives. Businesses are challenging the neoclassical focus on short-term benefits by adopting sustainable practices and demonstrating that sustainability over the long term is a necessary component of profitability. They also demonstrate that these initiatives could eventually generate financial success.
Sustainability Transformation Strategy
Companies with high sustainability goals require astructured transformation strategy to overcome challenges. During the transformation process, businesses need to address several issues that hinder change, such as initial costs, supply chain difficulties, consumer preferences, regulations, awareness gaps, impact measurement, reporting requirements, competing priorities, and stakeholder engagement. Consequently, triple bottom line (TBL) and Environmental, Social, and Governance (ESG) frameworks were developed to incorporate and address these multifaceted issues. They promote a balanced approach by emphasizing key factors such as transparency, credibility, stakeholder engagement, and continuous improvement.
People, planet, and profit are the three dimensions that TBL uses to evaluate a company’s success, taking into account social and environmental aspects in addition to financial outcomes. ESG, on the other hand, provides a more structured set of standards by which investors may assess a business’s long-term risks and possibilities concerning governance, social responsibility, and environmental impact.
These frameworks view sustainability and profitability as complementary rather than conflicting goals by focusing on the four pillars of sustainability. Therefore, for these frameworks to be effective, then several factors must be taken into account: transparency, relevance, credibility, measurability, continual development, and stakeholder participation. Due to a track record of proven success, many multinationals like Unilever, Amazon, Ikea, Google, and Microsoft have embraced these frameworks.
Leveraging Innovation for Strategic Advantage
Fostering an innovative culture and being prepared to invest in new technologies that promote sustainable growth are additional solutions for overcoming challenges and ensuring much-needed balance. Sustainable innovation guarantees that a company can stay competitive while contributing positively to the environment.
As a result, a contemporary notion dubbed sustainable innovativeness arose, which consists of using new solutions (new products, new technology, and new modes of organization and management) in all areas during sustainable strategy formulation. This concept led to the development of sustainable business model innovation (SBMI), which integrates sustainability into a company’s operations to unlock potential. The case study of the Unilever Sustainable Living Plan (USLP) can serve as a successful example of sustainability-driven profit through innovation.
Introduced in 2010, the USLP aims to increase positive social impact and separate commercial growth from environmental effects. The plan has driven business growth and profitability, with ambitious goals for 2030. The USLP’s success is attributed to its commitment to transparency, collaboration with NGOs, and investment in innovation. Unilever has inspired a wave of change across the consumer goods industry, with competitors increasingly embracing sustainability practices.
Another successful example is Hitachi, a global leader in innovation and technology. Hitachi’s long-term growth is fueled by R&D, sustainability, and collaboration. The company invests in new technologies, reduces emissions, and promotes ethical sourcing. Cross-functional teams drive innovation and value creation. Hitachi prioritizes talent cultivation and organizational resilience, maintaining a competitive edge and ensuring sustainable growth.
Thriving in an Eco-Conscious Market
Sustainable strategy formulation is not just about ethical responsibility—it is a smart business move that safeguards profitability and helps position leaders in an increasingly eco-conscious market. Businesses may set themselves apart by including sustainability in their main plans by utilizing frameworks such as ESG and TBL. Green strategy innovations, such as circular economy principles and eco-friendly materials, not only prepare operations for the future but also provide the groundwork for steady profitability. Businesses may maintain their competitiveness, resilience, and responsibility as stewards of the environment and sustain their profits by implementing a comprehensive strategy that combines sustainability and profitability.
Impact investors aim to achieve measurable financial returns while maintaining positive social and environmental impacts. Recent empirical research has shown that value investors consider Environmental, Social, and Governance (ESG) practices in their investment decision-making processes, although the emphasis on these indicators varies across industries.
However, impact investing is not a new concept. In fact, it could be traced back to 1928 when the first screened investment fund was established in the United States. As environmental awareness grew, the concept of responsible investing gained more traction within the investment community. This trend continued to evolve until the rise of Stakeholder Capitalism Theory in the 1950s and 1960s, which advocated maximizing value for all stakeholders, including customers, employees, suppliers, and local communities.
During the ’60s and ’70s, socially conscious investors began avoiding funds with investments in industries like tobacco or weapons. Presently, many companies are embracing balanced performance goals known as the Triple Bottom Line (TBL). Some investors are even willing to pay a premium for companies demonstrating positive ESG impacts, indicating a growing preference for environmentally and socially responsible investments.
Given the varying ESG priorities across sectors, there is no one-size-fits-all strategy or performance measures to be adopted by companies that want to attract and retain value investors and their equity capital. To illustrate this, former Forbes staff writer Kathryn Dill said, “Certain indicators are prioritized over others across industries. For example, safety rankings are not particularly important to banks, as the financial sector work doesn’t pose physical danger. But safety performance is an important measure of sustainability in the transportation industry, where physical well-being can be at stake”. Henceforth, strategists and performance management professionals may need to emphasize specific aspects of ESG based on their investors’ preferences, as shown in the figure below:
Energy Sector: Due to the energy industry’s inherently high carbonated emissions and the amount of waste generated and water used, strategists within this sector should focus on initiatives related to lowering CO2 Emissions, material use, waste production, and water usage. To measure this, they may use KPIs such as % CO2 reduction, $ Material waste, and # Water usage reduction, respectively. In this regard, the environmental aspect of ESG takes precedence.
Consumer Sector: Similar to the energy sector, there is an emphasis in the consumer sector related to reducing emissions, material use, and waste production as part of the environmental dimension of ESG. However, this is in addition to the need for further focus on decent labor practices—falling under in the social dimension of space of their ESG strategy—which could be measured using the # Labor Satisfaction Index.
Financial and Insurance Sectors: In these sectors, organizational culture, diversity, and inclusion matter with regards to the environmental dimension. Meanwhile, governance structures, advocacies, and business ethics matter in the governance dimension. The potential KPIs used in these industries may include: # Culture Profile Index, % Employees trained in business ethics and compliance, # iNPS, and # CGI.
Pharmaceutical and Medical Sectors: Strategists in these sectors need to worry about community impact and labor practices, which fall under the social dimension. They must also focus on business ethics in the governance dimension. Candidate KPIs here may include # Culture Profile Index and $ CSI spending.
All the strategic themes and underlying indicators proposed above should only be considered guides at best. A better approach is for companies to communicate with their communities and involve stakeholders in their policies, decisions, and operations to cultivate a fully supportive investment strategy implementation system.
In conclusion, performance management professionals should collaborate closely with strategists to align sustainability objectives and KPIs with strategic initiatives through cascading and appropriate KPIselection techniques, regular measurement frameworks such as the strategic scorecard, and implementation of performance improvement best practices such as regular performance review meetings which are all crucial to ensure that the company remains on track with its sustainability goals relevant to today’s investment community.
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About the Author
Tarig Malik is a seasoned Strategy and Performance Management Professional with extensive expertise in enhancing strategic, operational, and individual performance. Holding multiple certifications (SPP, C-BSC, C-OKR, C-KPI), Tarig leverages a strong academic foundation and practical experience to drive continuous improvement and foster a performance-oriented culture across various organizations.
Change is never easy. It disrupts patterns, habits, and expectations. But while it brings about a sense of discomfort, it also invites one to explore new perspectives, practices, and values. Whether at the personal, societal, or organizational level, change is an essential element of progress.
The complexity of change is no exception to sustainability reporting, which requires companies to measure and disclose their social, environmental, and economic impacts. Companies make significant changes in their operations, culture, and stakeholder relationships. When done right, sustainability reporting is crucial to achieving long-term viability, competitive advantage, and social impact.
The sustainability report, as Global Reporting Initiative (GRI) CEO Eelco van der Enden puts it, “is the end of a long journey of transactions and actions that define the company’s approach to sustainability.” With over 30 years of experience in financial and sustainability senior management roles, Van der Enden assumed the position in 2022, coinciding with the 25th anniversary of the GRI. Before becoming CEO, he was senior partner at PwC leading the ESG platform for tax, legal, people & organization, served on the GRI Board, and was chairman of the Tax Policy Group of Accountancy Europe.
In an interview with Cristina Mihailoaie, business unit manager of The KPI Institute’s Research Division, Van der Enden emphasized the growing recognition of the GRI brand among the users of the standards, from accountants to regulators. He also noted the widespread acceptance and rapid evolution of sustainability reporting in conjunction with the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG).
Why Sustainability Matters
According to KPMG’s survey in 2022, 96% of G250 companies (the world’s 250 largest companies by revenue based on the 2021 Fortune 500 ranking) and 79% of N100 (a worldwide sample of the top 100 companies by revenue in 58 countries, territories, and jurisdictions) report on sustainability or environmental, social, and corporate governance (ESG) matters. Of the top 250, 78% use the GRI standards.
Among the surveyed companies, 75% in the Americas, 68% in Asia-Pacific and Europe, and 62% in the Middle East and Africa use the GRI’s reporting standards. However, Van der Enden stressed that there is still an uneven adoption of sustainability practices across different regions. He cited Europe as an example, with the Netherlands having a low rate of 20.25%, while Italy and Turkey boast a 90% rate.
The rising popularity of sustainability reporting is driven by various factors, including capital markets and investors. Van der Enden explained that institutional investors are concerned about sustainability and managing sustainability risks and risks related to socioeconomic factors, such as workplace safety and climate issues. In addition, companies face reputational risks from society, employees, suppliers, and clients. He said that to mitigate these risks, companies must reassess their supply and value chains and adopt more sustainable business practices, especially with the current reorientation to new suppliers.
By demonstrating its commitment to sustainability, a company can establish trust and credibility among stakeholders. Other advantages include attracting and retaining talent, strengthening brand identity, and enhancing reputation. Being a pioneer in an industry will bear risks but also high rewards. When an organization engages in sustainability reporting while its competitors do not, this represents a significant competitive advantage, according to Van der Enden.
Reporting on sustainability is more than just meeting compliance standards. It can drive changes in the organizational culture. Furthermore, Van der Enden supports mandatory sustainability reporting and legal regulations because, in his experience, it can drive systemic change. “The best way is to regulate it in. If possible, establish a global comprehensive baseline constraint, and then enact it into national law to change the mindset and behavior of companies.”
Sustainability Reporting Is Important Regardless of Organizational Size
Although larger companies may have more resources to invest in sustainability reporting, small and medium-sized enterprises (SMEs) cannot afford to overlook it. Van der Enden explained that SMEs are integral parts of the supply chain. With this, sustainability reporting is not only essential for demonstrating their own commitment to responsible practices but also for meeting the demands of larger companies and consumers for sustainable practices.
“This trickle-down effect highlights the importance of education and training for understanding the entire supply chain, especially for smaller enterprises that provide necessary goods, tools, and services to larger organizations,” he said.
According to Van der Enden, SMEs need to prioritize sustainability reporting to remain competitive in the global market, as manufacturers receive requests from clients in Europe and the US to provide information on their sustainability practices and report on their social and environmental impact. “If you cannot provide this information to your clients, you will lose the contract to those competitors that can.”
Challenges in Sustainability Disclosure
When asked about the challenges companies face regarding sustainability reporting, Van der Enden highlighted the selection of key performance indicators and data gathering. He emphasized the importance of having a data extraction system to easily obtain relevant information.
To ensure best practices in sustainability reporting, the CEO provided three recommendations. First, he suggested speaking with colleagues from other organizations who have already undergone the reporting process and used the GRI. Second, he recommended exploring the GRI Academy’s training programs. Lastly, he urged organizations not to be afraid of sustainability reporting, as it is becoming increasingly common and necessary.
“If you decide to report, do it well,” he advised. “Misrepresenting impacts is as bad as misrepresenting financial data, and we all know that misrepresenting financial data is usually seen as financial or bookkeeping fraud. Sustainability reporting is an investment, and it will prepare you for what is to come.”
Collecting and reporting is just one part of the equation, as organizations need to learn how to use data for performance improvement. Van der Enden’s point of view on education is that there is still a significant gap to close, although the topic is not necessarily recent.
“I think that the interesting part is that people who work in compliance and administration still regard sustainability as something extra, on top of what they have to do, and they do see it as a holistic model, as part of everything else they do,” said Van der Enden. This outlines the need for more education among professionals to change their mindset first and then their practices. He stated, “You need to have a good understanding of your supply chain, your manufacturing processes so that one can truly grasp the depth and ramifications of sustainability for your business.”
As businesses increasingly acknowledge their societal responsibilities and the profound impact they have on the world, Environmental, Social, and Governance (ESG) practices have become all the more essential. These are implemented not only to ensure that operations are ethical but also to meet stakeholder expectations and achieve sustainable growth—a commitment that is further underscored by businesses contributing towards the achievement of the United Nations’ (UN) Sustainable Development Goals (SDGs).
By adopting a comprehensive ESG strategy, companies can effectively evaluate and enhance their performance across governance procedures, social responsibility, and environmental impact.
What Is ESG?
ESG is a comprehensive framework that helps stakeholders evaluate how an organization manages the risks and opportunities related to the following three criteria:
Environmental
This criterion assesses an organization’s environmental effect and its risk management practices. This includes efforts to reduce natural resource consumption, control greenhouse gas emissions, and minimize waste. Key performance indicators (KPIs) in this category focus on environmental protection measures.
In this aspect, a company is evaluated based on how it provides people—including employees, customers, suppliers, and communities—with an environment where their well-being, culture, and social dynamics are respected and nurtured. This component of ESG extends beyond the company to include supply chain partners, particularly in regions with less stringent environmental and labor standards.
This aspect covers several factors, spanning leadership, ethical principles, and the internal controls of an organization. Risk management, anti-corruption laws, executive compensation, and board structure are all addressed under this ever-evolving discipline. Effective governance is the foundation of corporate honesty and equity, as it fosters accountability and transparency through contracts, innovative organizational structures, and rigorous regulation.
ESG not only highlights environmental issues—instead, it is a comprehensive framework consisting of standards for external stakeholders to monitor and compare their business performance effectively. These standards also allow them to guide internal goal-setting and prioritize actions to strive for these objectives.
By outlining key outcomes and expectations, ESG indicators provide businesses with the tools to concentrate on specific areas and objectives that guide their priorities and actions. Therefore, these indicators inform businesses of key outcomes and stakeholder expectations, offering clear guidance on specific areas for improvement and sustainability. Ultimately, the objective of ESG for businesses is to provide crucial assistance on how to align business operations with broader societal and environmental objectives.
A study that analyzed companies in Shanghai and Shenzhen revealed a positive relationship between ESG performance and corporate performance. It highlighted how strong ESG practices helped improve corporate performance. For context, China is currently encouraging sustainable development and actively implementing the double carbon target, which has led to the manufacturing industry being more sensitive to the environment.
Moreover, stakeholders and the public are more concerned about factors such as corporate social responsibility, environmental protection, and internal governance. Therefore, companies with better ESG performance are more likely to be favored by investors, increasing corporate value and leading to better corporate performance overall.
When a company pays more attention to its environmental impact, actively takes social responsibility, and improves corporate governance, it tends to translate into economic benefits and significantly improved corporate performance.
Similarly, another study found a significant positive relationship between ESG and financial performance in the chemical industry. The findings imply that corporations that prioritize sustainability and invest in eco-friendly activities improve their environmental credentials and long-term financial performance. This is the result of a dedication to renewable energy investments, emission and waste reduction, and green production.
Therefore, investors are increasingly likely to favor sustainable enterprises that invest in green activities— a trend that is expected to increase green finance demand and change investment patterns towards sustainability.
Investors and customers who highly value ethical principles are more likely to buy products and services from companies that demonstrate a commitment to ESG standards. In addition, disclosing ESG information helps companies become more transparent,which could reduce information gaps and attract long-term investors. This strategic transparency can enhance a company’s reputation and increase its market share, especially in industries where ethical considerations are crucial in the decision-making process. It also demonstrates a company’s commitment to sustainable development.
Good ESG practices could enhance overall organizational management, especially with employees, as they are emerging as strategic components that can bring about elevated levels of commitment and contribution. Employee engagement is bolstered through ESG because it connects individuals to their organization’s larger purpose and collective goals.
An outstanding organizational culture is cultivated when employees see their employers’ dedication to social and environmental issues—appealing to staff through identity and community. By fostering a culture that values social and environmental responsibility, modern companies strategically position themselves to achieve sustained success through stronger internal cohesion and improved employee satisfaction.
Read more articles about organizational performance here.
Nowadays, with mounting pressure on businesses to be accountable for their environmental and social impact, it is no longer optional but expected for them to develop and implement sustainable business strategies that play out across three key areas: Environment, Social, and Governance (ESG). This pressure comes from rising public awareness, tightening regulations, and increased expectations from customers, employees, and investors.
Stakeholder engagement plays a significant role in the successful implementation of ESG strategies. In this article, let’s explore its functions and effects on ESG strategies.
The power of stakeholder engagement
Stakeholders are individuals, groups, or organizations that can influence or are affected by a company’s strategy from within and outside the organization. They can either drive change or resist it. Therefore, it is critical to identify stakeholders and understand their needs and expectations to ensure the ESG agenda reflects the priorities of those who matter and support the strategy’s long-term success.
Pay Governance LLC, a firm that provides independent advice on executive compensation matters, has developed the Stakeholder Value Creation Chain model (See Figure 1) to better understand the effects of stakeholder engagement on the economic success of a business. It demonstrates how ESG strategy, the stakeholder model, and the generation of corporate value all intersect to provide various advantages for corporations.
Engaging with stakeholders during the strategy execution phase allows companies to foster collaboration, build trust and confidence, encourage support for ESG actions, evaluate how the actions are perceived, mitigate potential risks, and improve decision-making.
To know more about ESG strategy and how it exactly boosts stakeholder engagement based on a report, read the full article in the PERFORMANCE Magazine Issue No. 25 – Sustainability Edition. You can download a free digital copy through the TKI Marketplace. Printed copies are also available on Amazon. But the price may vary depending on location.
