Investors, customers, governments, and the wider public are putting companies under ever greater pressure to place sustainability at the heart of their business models. In this article, we look at how the mid-market is responding – and what practical steps firms can take to embrace a more sustainable approach.
Over the course of the past decade, the importance of sustainability has significantly increased all over the world – not only in terms of how individuals live their lives, but also how governments frame policy, as well as how businesses develop operating models and plan for the future. Linda Mannerby, Head of Sustainability at Grant Thornton Sweden, explains, “Companies that understand global challenges and risks, adapt their business models, and manage their business impact – both positive and negative – have a greater opportunity to survive long-term.”
Grant Thornton’s IBR research has focused on the extent to which mid-market companies are embracing sustainability. Findings show that a significant proportion of mid-market businesses are attuned to its importance: just under half (48%) believe sustainability will have a net positive financial impact on their business, while a similar number (47%) expect a sustainable approach to lead to improved operational efficiency and lower costs. Meanwhile, 43% say financial success and sustainability are of equal importance. The mid-market is clearly attuned to the growing importance of sustainable businesses, but the data also suggests that many mid-market firms are unsure of how to put any commitment to sustainability into practice. 48% agree that most companies of their size do not know where to start when it comes to sustainability measurement.
Why embrace sustainability
One of the key motivating factors for mid-market businesses to make sustainability a guiding strategic principle, is the growth opportunities this kind of approach can create. One of the leading motivations for integrating sustainability into strategy, is to obtain investment, as year on year more capital in the world is allocated in accordance with sustainability parameters. Many investors and banks also use sustainability as a proxy for a company’s approach to risk management.
Integrating sustainability into core business strategy also drives innovation and ultimate business growth. Emma Verheijke, Partner Sustainability & Impact Advisory at Grant Thornton Netherlands states that, “Sustainability is no longer a nice project on the side: it is part of your core strategy. It affects your risks, your opportunities, your long-term planning, how you deal with your people, your resources, and your suppliers, as well as consumer demand. Companies that see that and anticipate these issues will be the ones that have the most value in the future”. Indeed, the IBR found that almost two-thirds (61%) of mid-market businesses think that global sustainability trends will demand fundamental changes to operating models in their industry.
The obstacles to become more sustainable
For many businesses in the mid-market, the financial outlay required to implement a sustainability programme is a major hurdle to overcome – and one which has become even more of a problem due to the financial pressures around Covid-19. One of the biggest challenges is short-termism, whereby even if we do not want to be, we are still in a system where we are pushed to deliver on quarterly financial targets, and this is still driving the change within companies.
The IBR findings found that many firms draw a strong link between sustainability and financial performance. Markus Hakansson, Head of Sustainability Business Advisory at Grant Thornton Sweden, adds: “Your ability to create value as a company is not dependent only on financial factors. Non-financial factors – social and environmental – are connected to 80% of the company’s ability to create value and in the end, value is money. But this value – which can be the knowledge of the employees, or structural capital – can be held in the company for many years before it becomes cash. Understanding this concept of sustainability can be a problem for the board and owners.”
First steps in sustainability
The key to working out what a business’s sustainability goals is holding a dialogue with stakeholders. Stakeholders range from investors and lenders to customers, employees and the wider public. Therefore, businesses need to assess their current position in terms of the environment and society. Businesses need to be clear from the outset as to what they are trying to achieve through becoming more sustainable, since this will dictate the direction a business is going to take. Once goals and material impact areas have been established, businesses can decide which reporting and assessment frameworks fit best, rather than starting with a particular framework or methodology and working backwards.
Mark Hucklesby, director of financial reporting at Grant Thornton, says that recent developments in sustainability reporting are likely to lead to the development of a unified set of non-financial reporting standards to replace the large number of competing sustainability standards currently in operation. An integrated and unified set of sustainability standards will provide much needed transparency and comparability.
Placing sustainability at the centre of strategy
Sustainability concerns should be placed at the centre of all decision-making within the company. In the perfect situation, every decision on the tactical, operative, and strategic level should be made on the triple-bottom-line basis, taking into account its environmental, social and financial impact.
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