It used to be organizations that made environmental objectives a priority didn't have their eye on the bottom line. It was assumed that companies producing ethical products relied on the kindness of environmentally or socially conscious customers to keep them in business.
Similarly, reducing the environmental impact of operations was seen as producing public benefits at a private cost. So, firms that invested in these programs were assumed to put themselves at a financial disadvantage.
We now know that companies that invest in CSR can, in fact, profit from their activities. Both environmental and social sustainability initiatives create tangible financial value. Consider the following examples:
- Social Sustainability Firms that invest in community projects benefit from better reputations, increased consumer goodwill and less stringent regulatory environments.
- Environmental Sustainability: Firms can benefit financially by reducing their energy costs or by creating a culture of innovation. By reducing packaging or input use, companies help both themselves and the environment.
Most businesses already have strong financial management systems, and financial metrics such as share price are available on a daily basis. So, for financial performance, the most important issue is understanding how CSR investments can translate into financial impacts.
Environmental and social benefits fall into one of three broad categories: firm processes, firm outcomes, and external outcomes.
- Firm processes: These impacts are easiest to quantify since they are based on readily available data, such as the change in the amount of an input used or of an output produced. For example, if a firm implements an energy conservation program, the metric is energy consumption. Cost savings are then determined using market costs.
- Firm outcomes: Opportunities to impact the firm internally are less obvious. Using the conservation program example, the program can improve employee satisfaction and retention, producing cost savings for the firm. It can also encourage employees to innovate. In this example, the metrics of satisfaction and innovation are less obvious, but still readily measurable. These benefits translate into costs, revenues and, ultimately, share price.
- External outcomes: The energy conservation program can also impact the firm's stakeholders. Customers may view the firm more favourably, nurturing their loyalty. Regulators may be more likely to approve future projects or take a hands-off approach to regulation. Community groups may show their support for the firm or come to its defence because of its reputation for conservation.
In each case, these outcomes translate into costs and revenues. In addition to reaping reputational benefits, the firm can benefit by extending its mandate into product development. For example, the energy conservation initiative may include R&D advancements in product energy efficiency. A more efficient product can improve perceived customer value, translating into revenues and increased market share.
For additional resources and measurement tools, download the following two-page primer on Valuing Sustainability.
An assistant professor of marketing at Simon Fraser University, Dr. John Peloza is also Topic Editor, Valuing Sustainability at the Network for Business Sustainability.
The Network for Business Sustainability produces practical insights for sustainability professionals based on the most rigorous academic research. Research topics include: climate change, socially conscious consumers, community engagement, and valuing sustainability.