How can businesses create value through sustainability?

Climate change is a critical global threat, and it requires an emergent worldwide response.

From the 1997 Kyoto Protocol to the 2021 COP26 summit, an increasing number of actions have brought different stakeholders together to accelerate processes towards the goals of the UN Framework Convention on climate change and the long-term transitions of temperatures and weather patterns.

These transitions could be due to natural factors such as variations in the solar cycle. However, since the industrial revolution the main driver of climate change and associated severe weather has been human activities, owing primarily to the overuse of fossil fuels such as coal, oil, and gas.

It is imperative to take action to transfer to low-carbon practices since the overuse of fossil fuels can cause devastating impacts on food security, livelihoods, and global health.

One of these actions is to encourage sustainable value chains which should involve improving efficiency, reducing energy consumption and pollution.

Moreover, transitions to a sustainable value chain require a shift from using fossil fuels in production to renewable energy sources. We cannot achieve the goal of low-carbon development without the full backing of corporations – the primary participants of the global economy.

Therefore, due to the urgent need for action on climate change, it is necessary to review the drivers of companies’ low-carbon practices, identify business opportunities regarding sustainability, and highlight potential limitations of the low-carbon goal.

Drivers of low-carbon practices

Before investigating how businesses generate value through sustainable value chains, we need to understand what motivates corporations to conduct low-carbon activities.

Regulations

The regulations and policies enforced by government policies drive a significant portion of corporations’ low-carbon actions.

A systematic review of 37 studies found that the overall effect on emission reductions for policies could be an average of 2% per annum. The low-carbon regulations have compelled automakers in the European Union, the United States, and other regions such as Japan and China to manufacture more energy-efficient vehicles.

Although Haites reported that low-carbon policies might have little impact on emission reduction since emissions could fall faster than the cap in every jurisdiction, the resulting oversupply of allowances could lower carbon prices and undermine the policy’s effectiveness.

Risks

Since penalties for non-compliance can have significant financial impact on a company’s earnings, corporations anticipating stricter policy requirements tend to mitigate the business risks of potential new policy impacts in advance.

Moreover, non-compliance can severely damage a company’s reputation and, thus, financial performance. For instance, Bosch was fined $100 million for its role in the diesel emissions scandal and Volkswagen agreed to pay US$14.7 billion to cope with the scandal’s costs.

Although a study found that non-compliance might not damage financial performance since corporations’ reputations related to existing perceptions of how socially ‘responsible’ the firm was initially.

Societal expectations

Corporations are responding to the growing body of regulations concerning climate change and are anticipating future policy developments in this area. Their actions on climate change also respond to rising societal expectations, including the sustainability needs of investors, consumers, international organisations, employees, and international declarations such as the OECD guidelines for multinational enterprises.

Studies show that stakeholder pressure on corporations can motivate asset owners to undertake low-carbon practices. Meanwhile, consumers’ expectations lead corporations to pursue the low-carbon goal.

Indeed, the influence of customers’ expectations may be more significant in high-intensive competition industries. For instance, a study shows that customers are more willing to purchase chocolate with simple packaging than those with ecologically unfriendly packaging.

How can corporations create new value through sustainable practices?

To become sustainable-competitive through low-carbon practices, companies may benefit from increased economic productivity associated with low-carbon business models and sustainable value chains.

Reduce energy consumption

Energy consumption and transportation are often a company’s two most significant greenhouse gas emission sources.

By applying high-efficiency energy solutions, the company can save costs and achieve cost-leadership strategy in the industry. For example, with measures such as installing more energy-efficient technology, decreasing transportation miles, and reducing packaging, Ferrero achieved a 3.4% increase in global turnover in the 20/21 fiscal year, despite more uncertainties caused by Covid-19 in 2021.

By investing in operations that reduce carbon emissions, such as less-energy lighting, producing green power, and making assembly lines more efficient, Mahindra & Mahindra Ltd saved operating costs and made it a competitive advantage.

The company’s $10 per ton internal carbon price also motivated its business units to apply more low-carbon technologies. Moreover, Mahindra & Mahindra Ltd reallocated funds from such carbon fees to low-carbon projects such as energy-efficient motors and zero effluent discharge, which helped the company further reduce emissions from its manufacturing.

Redesign to create new value

Unilever is an outstanding example of creating value by designing low-carbon products. The company identified a way to reduce packaging by innovating concentrated detergents with smaller caps and less plastic use, making it easier for people to use the correct amount.

The result is fewer lorries demanded to transport the bottles, thus reducing carbon emissions and increasing market share.

Corporations can also create new value by redesigning their services. Plastic recycling services may be a good start since the global plastic recycling market is estimated to produce at 6.5% annually from 2017 to 2023. The recycling market will be worth almost $54 billion by 2023.

Moreover, new entries can enter the market by redesigning business models concerning sustainability. An excellent example of business model innovation is car sharing, and the study has shown that greener mobility applied in the sharing system could help reduce greenhouse gas emissions.

Building a responsible brand image

Sustainability has become a strategy for businesses to differentiate from their competitors by building a reliable brand image. The sustainability reporting performance of the FTSE 100 shows most corporations taking low-carbon practices seriously, which is especially significant in the highly competitive retail sector.

The innovation of low-carbon products can also attract government subsidies such as the Low Carbon Innovation Fund. Moreover, there is an excellent trend in the financing needs of climate solutions in the finance sector and a desire to understand their impact.

The market of investments concerning environmental, social, and governance factors (ESG) now accounts for roughly one-third of all assets under management. Evidence suggested that considering ESG factors could reduce risks and enhance investment and business performance..

What will be the impact of low-carbon practices on energy industries?

If corporations are ambitious for zero-carbon goals, what will happen? Since the purpose of sustainability is correlated to the green energy industry, we shall estimate the impacts of corporations’ low-carbon practices on the industry.

As the supply of renewable energy has to increase to meet the massive demand for fossil fuels, it will lead to a tremendous increase in demand for metals such as copper, nickel, cobalt, and lithium, primarily used for green electricity production and storage.

The International Energy Agency (IEA) forecasts that lithium and cobalt production volume needs to increase more than sixfold than the current quantity to match the demand for clean energy production. However, rising demand will face a slow supply response.

According to IEA, copper, nickel, and cobalt mines are capital-intensive, taking more than a decade from discovery to production.

In addition, increasing production which does not go against CSR and sustainability goals will also be a challenge. The combination of increased demand and delayed supply could cause the cost of these metals to skyrocket.

The market prices of lithium, for example, could rise from $6,000 per metric ton in 2020 to about $15,000 between 2020 and 2030.

Moreover, since the transition from fossil fuels to clean energy will reduce the demand for fossil fuels, investors expect fossil fuel prices to fall and thus decrease investment.

However, a reduction in funding can lead to a deterioration in supply conditions. If the supply of fossil fuels does not match demand, fossil fuels prices will not be stable. Moreover, public policies supporting energy transitions such as carbon taxes and bans on internal combustion engines can burden fossil fuel production.

As such, higher input prices for fossil fuel production and use and accelerated demand for green energy will obstruct the road to decarbonisation.

In order to mitigate such unexpected results, large-scale deployments of green solutions and energy efficiency optimisation should be timely invested, which means that revenue from carbon taxes and capital from investors should cover spending on decarbonisation. Realising such a situation requires knowledge from future research and practices.

Simultaneous sustainable actions from corporations and all related stakeholders may address the systematic challenges of climate change.

Policymakers, investors, and customers motivate corporations to undertake low-carbon practices, and corporations can share values between business and society by identifying business opportunities from sustainable value chains.

Likewise, corporations’ responsible activities can also train consumers’ behaviour to be sustainable and give policymakers confidence to set more ambitious decarbonisation goals.

With these mutually enhancing positive actions, we are creating hope for our planetary future.

Liang Kong is studying MSc Business with Operations Management at WBS and was the winner of the 2022 Student CSR article competition run by the Council on Business and Society.

The Council is a global partnership of leading business schools, including WBS, with a focus on ethical leadership, sustainability, and CSR.