At SAP, we often discuss the link between profitability and sustainability, asking, “Are companies that are more sustainable also more profitable?” But upon further reflection, the better question is “Can a company that is not sustainable be successful long term?”
I believe that companies that commit to their sustainability journeys today will be the ones that remain competitive and relevant tomorrow. To explore the link between profitability and sustainability in more depth, we need to consider the time frame, the way we define success, and how we measure a company’s value.
These factors accelerate the paradigm shift from profit maximization to value optimization.
As companies recover from COVID-19, business leaders must consider short-term financial profitability and maximizing shareholder value alongside environmental and social factors that could affect the business’ success in the future. It comes back to the question: “Can a company that is not sustainable be successful long term?”
Fortunately, even in the short term, a clear link exists between sustainability and profitability. For example, the replacement of business travel with remote collaboration enhances sustainability and cuts down on travel costs. At SAP, a focus on climate action has contributed to a cumulative cost avoidance of €354.3 million in the past three years. However, we achieved 92% of this cost avoidance in 2020, when we were forced to rethink business as usual, illustrating the immense possibility for large-scale impact.
Nevertheless, sustainability can sometimes require investing today in the long-run profitability of a company and incurring costs that will pay off later. Companies already make many investments with the hopes of “returns” at a future date, such as marketing campaigns or giving employees an extra day off to boost their motivation, improve well-being, and increase productivity. Employee training offers another example of an initial investment with payoff down the line.
In 2019, SAP joined the Value Balancing Alliance (VBA) to better understand the entire value contribution of our business, which will be further explored below. According to the VBA, our global employee training programs were valued at €1.3 billion, but much of this payoff will be seen years from now through employee output, retention, and satisfaction.
Broadening the time frame through which you view business success can enable more strategic decision making that sets the company up to thrive not just today, but tomorrow and for years to come.
Long-term profitability and sustainability present the opportunity to question historical definitions of business success. Profit maximization and increasing shareholder value alone will no longer suffice. The concept of shared value presents an alternative way to define success, one that uses core business processes to drive societal change.
In Harvard Business School’s Sustainable Business Strategy concept, the “wheel of change” illustrates how large-scale transformation occurs across entire industries, starting with shared value. When businesses “do well and do good” through legitimate, innovative practices, it can inspire industry-wide cooperation that alters consumer, investor, and state behavior. This encourages companies to adopt more sustainable practices, ultimately redefining success in a way that considers the entire value creation of an entity.
Consumer, investor, and state behaviors play a critical role in holding the private sector accountable for prioritizing shared value. Consumers and employees want to support and work for purpose-driven companies. Investors demand that companies disclose not only financial performance but also environmental, social, and governance (ESG) performance to properly assess risk and make investment decisions. And governments increasingly implement climate-related regulations, taxes, and policies, as well as workplace safety procedures, extended producer responsibility (EPR) schemes, anti-discrimination laws, and more.
For businesses, it will be critical to consider a holistic view of their performance, one that integrates positive and negative impacts on the economy, society, and the environment. Research shows that a strong correlation exists between ESG performance and operational performance.
Redefining success to include sustainability requires measurements that capture this element of performance. For business leaders to make the appropriate decisions and set the strategy for a company’s long-term success, they need access to comprehensive data and metrics that go beyond financial measurements. This enables holistic steering and reporting, with the visibility required to mitigate negative ESG impact and increase positive ESG impact.
As mentioned previously, SAP joined the VBA in an effort to transform the way businesses measure and value their societal impact. The VBA develops and tests methodologies that assign a monetary value to the impact of any decision, translating environmental and social impacts into comparable financial data. The VBA equips decision-makers with the knowledge to decide and act consciously.
Profitability is a necessary condition for sustainability but alone is insufficient. Business can positively impact planet and people, but not if limited planetary resources run out. Unfortunately, the earth’s resources do not align with earnings cycles or CEO tenures, and sooner or later we will suffer the consequences.
Paul Polman recognized this early on and launched Unilever’s Sustainable Living Plan (SLP) to help ensure that his business would be around 50, 100, or 200 years from now. The SLP shifted Unilever’s focus from solely meeting investor’s quarterly earnings to putting environmental and social impact top of mind. Similarly, Kering developed an Environmental Profit and Loss Account to effectively measure its environmental footprint and convert it into monetary value. Utilizing this measurement tool provides a holistic approach to reporting that guides business decisions and respects natural resources.
Unilever and Kering know that the successful businesses of the future will integrate sustainability into core business operations today.
By adopting a long-term perspective, redefining success, and adjusting how we measure it, we can inspire a paradigm shift from profit maximization to value optimization, altering the status quo at our own companies and throughout the world. Innovation, business model transformation, and cross-industry collaboration will fuel this change. Wherever your business is today, this transition is a journey.
You may not be there yet, but it’s time to start by putting this question front and center: “Can a company that is not sustainable be successful long-term?”
At SAP, we believe it cannot.