Sustainability Pays for Emerging Markets

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Improving companies’ social and environmental performance is often seen as a luxury that only the industrialised world can afford. But there is a clear business case for sustainability in the developing world, say Jodie Thorpe and Kavita Prakash-Mani

If the World Summit on Sustainable Development showed anything, it is that business will have an increasingly important role to play in delivering sustainable development.

Yet investing in social and environmental action is often seen as a luxury that companies in the developing world – where the pressures are strongest to marry growth and sustainability – cannot afford.

But a new report, launched at the Summit in Johannesburg in August, refutes this assumption. The research, the result of a collaboration between strategy consultancy SustainAbility, the International Finance Corporation (IFC), the private sector arm of the World Bank Group, and Brazil’s Ethos Institute, shows there is a ‘business case’ for corporate sustainability action in emerging markets.

The study aims to help business people in emerging markets who are struggling to find the right balance between financial pressures on the one hand and growing sustainability challenges on the other. It analysed more than 240 companies in 62 emerging markets to examine whether opportunities exist for businesses to benefit from improved environmental practices and investments in social and economic development.

These include all types and sizes of companies from small to multinational – though large national companies predominate.They cover a wide range of sectors such as agriculture, manufacturing, infrastructure and information technology all over the world.

Developing Value: The business case for sustainability in emerging markets1 finds that there are compelling commercial reasons to take action, and illustrates opportunities open to a diverse range of businesses in Africa, Asia, Central and Eastern Europe and Latin America.

The companies highlighted have undertaken a wide range of actions, from the strategic to the opportunistic, from major investments to relatively small changes in the way the business is run. In many cases, the owners or managers were not explicitly addressing sustainable development but were simply implementing what they saw as good management practices and sound business decisions.

“We believe we can gain a competitive advantage by going beyond generally accepted corporate governance standards,” notes Zarir Cama, chief executive of HSBC India.

The report finds that the most significant opportunities from actively pursuing more sustainable approaches to business are to:

  • save costs and increase productivity by reducing environmental impacts and treating employees well;
  • access new customers and markets through environmental improvements and benefits to the local economy;
  • reduce risk through engagement with stakeholders;
  • build reputation by increasing environmental efficiency;
  • develop human capital through better human resource management; and
  • improve access to capital through better governance.

As in all business activities, however, there are no guarantees of adding value by improving environmental, social or corporate governance performance. Companies must assess risks, and analyse the costs and benefits of sustainability action as they would for other activities.

A significant output of this study is the business case matrix relating key aspects of sustainability to a set of recognised business success factors – demonstrating graphically where a viable business case exists (see above). The sustainability factors are divided into three main categories: corporate governance; environmental impact; and socio-economic development.The business factors are a mix of direct financial performance measures that are key to any business (cost, revenue and access to capital) and important financial drivers (risk management, brand value and reputation, and human capital).

The seven dark orange cells identify the pairs of business-sustainability factors for which the most solid evidence exists. For example, a company making improvements in working conditions is very likely to achieve greater labour productivity.

The light orange cells, which fill the bulk of the matrix, represent links where there is some evidence of business benefits, although not as strong as for the seven clear winners. Interestingly, for example, while we found evidence of improved access to capital from all sustainability factors, there was no single factor with overwhelmingly strong evidence.

Six cells are uncoloured. In these areas, such as cost savings from environmental products such as renewable energy or eco-tourism, we did not find evidence of business benefits, although in all cases there are other benefits from the sustainability factor. Companies developing environmental products, for example, benefited from increased revenues and access to capital.

The uncoloured cells may reflect benefits that are difficult to measure in business or financial terms.They might also represent areas for governments and other players to assess –formulating policies, regulation and incentives to strengthen the business case.

This matrix has been adapted from previous work by SustainAbility2, which examined the business case in industrialised countries. Comparing the two studies shows many similarities. However, while community investment and development are seen primarily as an overhead in developed countries, in emerging markets they are important in retaining firms’ ‘licence to operate’ and in reducing risk.

Overall, the business case exists for all companies although the specific elements may vary.While companies of all types in all regions can achieve measurable commercial returns by investing in their employees and in environmental process improvements, there is diversity in the nature of the key business opportunities. These differ according to country and type of company.

For small- and medium-sized enterprises, the emphasis is very much on cost savings, although they also benefit from higher revenues and improved market access, especially by developing environmental products and services, such as organic agriculture.

Larger companies based in emerging markets gain benefits in all areas, led by cost savings from environmental process improvement. Foreign multinationals (headquartered in industrialised countries with operations in emerging markets) also experience less tangible benefits, such as risk reduction and human capital development.

In most regions, the business case is clearest for cost savings from better environmental management. Companies in Central and Eastern Europe also see revenue growth and market access from environmental improvements. South Asia appears to be an exception: the strongest evidence of a business case is for higher revenue from contributing to local economic growth, such as by providing necessary services like telecommunications and microfinance – as well as for community development leading to improved reputation.

Improved human resource management in companies in both Latin America and sub- Saharan Africa also clearly led to considerable cost savings and productivity improvements. In East Asia and the Pacific, governance and management systems, such as ISO 14001 and SA8000, were a key sustainability factor, with strong evidence that the adoption of internationally recognised systems leads to increased market access, reduced costs and enhanced productivity. In addition, some East Asian companies have started to experience the benefits of improved corporate governance, including better access to capital.

The business case is constantly evolving, reflecting changing expectations and relevance, just as with other business parameters. As stakeholder pressure grows and access to information increases, expectations will rise. Businesses will have to show greater accountability and transparency and contribute to sustainable development. It is likely that the less tangible business factors, such as brand value and reputation, will gain greater importance in emerging markets as they have in developed countries.

For many companies, meeting minimal requirements may be all that is possible in the short term. But the most successful will anticipate these growing expectations and derive value from them. Companies will need to be flexible in their approach to sustainability, monitoring changes and understanding new demands and changing values.

While the evidence demonstrates that businesses can benefit while helping to achieve sustainable development objectives, other players have a role in strengthening the business case.

Political leaders in emerging markets need to provide good governance, regulatory certainty, an appropriate mix of policy tools, including clear and enforceable regulatory standards and appropriate economic instruments. While there is some evidence of emerging market governments implementing innovative policies despite institutional capacity constraints, much more could be done.

Also, international and local investors and lenders could strengthen the business case by considering companies’ sustainability performance in funding assessments. The fact that access to capital was the one business success factor in the matrix with no dark orange cells suggests that providers of capital are failing to reward good social and environmental performance in emerging markets, even though they have begun to reward it in developed markets.

There is a tendency for international investors to make blanket decisions regarding an entire country or region without considering the merits of individual companies. Many international financial institutions, too, could do more to encourage the convergence of economic development and sustainability objectives.

Industrialised world customers could work with emerging market suppliers to encourage higher technological and management standards. And NGOs could help by applying appropriate pressure on companies and exploring collaboration and new partnerships involving business, governments and other players. Developing Value represents the start of a discussion, but it cannot offer a magic formula for success. It can contribute to the bottom line, but will not offset poor business practices or compensate for bad decisions in conventional aspects of marketing, production or financial control.

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